Thinking Through Platforms in Real Estate, Part 2: Contenders

In Part 1, we looked at what a Platform in real estate might look like, having been inspired by Ben Thompson at Stratechery who talked about platforms in an aggregator world. We then decided that such a platform does not exist in real estate today because of all of the disparate parts that have to be done by disparate people and organizations.

We concluded by saying that The Platform in real estate is not logistics, but transaction management. But it has to be different from what transaction management is in real estate today: The Platform delivers results, rather than tools.

In this part, we’ll look at the trends and changes brought on by the growing iBuyer movement, see how that connects to the concept of The Platform for real estate, look further at limitations of that iBuyer-based platform, and look at possible contenders.

The Market Maker as Platform

One reason I thought Zillow, Opendoor and Redfin could contend for the Iron Throne of becoming the Real Estate Platform is that market maker variant of iBuyer can eliminate most of the Distribution phase from the buyer’s perspective. That is especially true if the market maker iBuyer — as I have long theorized — is actually a mortgage play, rather than a real estate play.

Rethink the Distribution phase with a market maker involved.

Phase 2: Distribution

• The offer is accepted, after some back-and-forth, and the contract is signed. — Real Estate Agent (unless buyer can go direct to the iBuyer-as-seller, a la Redfin Direct)
• Buyer submit an application for a mortgage. — iBuyer’s seller financing division; no appraisal necessary
• Simultaneously, buyer or his agent arranges for inspection. — iBuyer guarantees home (with money-back guarantee), or arranges for inspection
• Agent contacts closing companies (title, escrow, etc.) to begin the paperwork. — iBuyer’s in-house title/escrow division
• After a great deal of paperwork coupled to an experience that ranges from merely annoying to excruciatingly painful (see, e.g., mortgage), more negotiation, and more paperwork, the buyer gets the “Clear to close” approval from everybody. — iBuyer’s in-house seller financing division
• There is a closing, which often involves a notary (or an attorney), wet signatures, and the handing over of keys. — Notary, iBuyer’s in-house title/escrow division
• The relevant government office records the deed transfer along with the mortgage. The buyer now officially owns the new home. — Government, which the iBuyer’s in-house title/escrow division handles

For the buyer, the only company you have to deal with is the market maker.

And more importantly for our purposes here, the agent who is working with that buyer, only needs to deal with one company, the market maker. That makes the market maker a Platform in much the same way that Shopify is a Platform for e-commerce: a one-stop shop that, to paraphrase Ben Thompson, “provides the infrastructure for agents to actually sell real estate.”

There are, however, at least a few problems here.

Limits of Market Makers

First, while in theory, market makers can work across the entire housing market, in practice, they are severely limited by capital.

The U.S. housing market is valued at $33.6 trillion, with a T. Even if we only look at the 5-5.5 million homes that change hands every year, at $384,800 average sales price, we’re talking about $1.9 trillion.

There is no chance that any of the market makers have enough capital to offer market making services to every home in the U.S. There is no chance that any of the market makers will have enough capital in the foreseeable future.

Second, in order to be efficient enough to do market making at all, technology and data limit the markets and the kinds of houses that market makers can take on. Luxury homes, unique markets (think New England), etc. all pose major challenges to market makers that are not likely to be overcome anytime soon.

Third, enough consumers want to use the traditional process — aided by the mostly-false narrative from real estate agents who tell sellers that they’re leaving tens of thousands of dollars on the table — that even if market making were available on every single house, we’ll never get to 100% penetration.

So the reality for the foreseeable future is that market makers will take market share, but it isn’t going to be the bulk of the housing market. Most homes will still change hands the traditional way.

Finance Industry Is Not Going Away

There is also the reality that mortgages are among the biggest of big businesses, since we’re talking about the commercial banking industry. Zillow might be the big dog in online real estate, but it is a mere shrimp next to the likes of Wells Fargo and Quicken and JP Morgan Chase and Bank of America. None of those companies are especially eager to get cut out of mortgage financing business.

If anything, the reverse is more likely to be true: the big banks will get even more involved with the Distribution side of real estate in order to protect their franchise in lending.

Companies Doing Closings Are Not Laying Down

While some companies doing closings work — especially in attorney states like New Jersey — are small mom-n-pop outfits, others are gigantic publicly traded companies, particularly in title: First American Financial is a $5.5 billion publicly traded company, and Fidelity National Financial is an $8 billion company. Stewart Information Services is smaller, but it’s still a $750 million public company.

Not one of these guys are particularly interested in laying down and rolling over. And they are already deeply integrated into the traditional real estate fulfillment process.

Franchises and Brokerages Want/Need Value

While we’re at it, we can’t overlook the fact that big national franchises like Realogy, RE/MAX and Keller Williams as well as brokerages large and small have long been facing the challenge of providing greater value to their customers (aka, the real estate agent). Their profit margins have been under assault for years and years because of trends in the industry.

Now, I doubt they have ever thought about the Distribution side of things, because brokerages and franchises tend to think about sales, lead generation, and top of funnel far more than they think about the bottom of the funnel. But many brokerages have affiliated companies in mortgage, title, insurance, and escrow which are the true profit centers. They’re not going to be excited about some Platform rising up in the Distribution side of things.

The Non-iBuyer Platform

All of the above point to the need for some kind of a Platform that is not directly tied to a market maker, a true Shopify-type of company that enables the agent to “plug-in and fulfill” the purchase of a home, but without a market maker playing a key role. That Platform must deliver all four parts of the transaction in a simple, turn-key kind of a way, just like Shopify Fulfillment Network could (with investment, as per Stratechery).

The real estate agent, upon having a signed contract, should be able to do everything else in a one-stop-shop type of environment. That means mortgage, appraisal, inspection, title, escrow, and paperwork — all the way up to ensuring that the appropriate government office has recorded the deed and mortgage. The company that can create that seamless network would be the Platform. It may be invisible to the consumer, but as Ben Thompson wrote, “you win when those on your platform win, even if customers never even know you exist.”

The key difference between The Platform, which is essentially transaction management, and the current crop of transaction management companies (e.g., Transaction Desk, Skyslope, Dotloop, etc. etc.) is that The Platform does not deliver tools; it delivers results.

To paraphrase Theodore Levitt, agents don’t want a tool to help them coordinate everything; they want everything coordinated for them.

The investment, then, is not merely into more technology. Just like Shopify Fulfillment Network has to invest in warehouses, The Platform must invest in people (or processes) that actually use the technology to deliver results.

Drives Consolidation

That doesn’t mean that The Platform has to do everything in-house, no more than Shopify Fulfillment Network has to go buy its own trucks and hire its own drivers (as Amazon does). The Platform can work with partners and vendors, just like any fulfillment company has to think about working with FedEx and UPS and USPS.

The implication is that while the Platform will have partners, it likely will not partner with every Tom, Dick and Harry out there. Big companies tend to partner with other big companies, for ease of administration if nothing else. Nobody wants to manage 3,000 different home inspectors, if it can partner with one company with 3,000 home inspectors across the relevant market area. The Platform might partner with a half-dozen major lenders, but it won’t have a network of thousands of small mom-n-pop mortgage brokers.

That in turn implies a wave of consolidation in these “fulfillment” type of services, from inspection to notaries to title to mortgage.

The big get bigger. He that hath, gets.

The Contenders

As I write this today, in May of 2020, I think there are three possible contenders for this non-iBuyer Platform: Zillow, Big Title, and Big Brokerage/Franchise. There are two dark horse contenders in Banks and the MLS. Let me explain my thinking.

Zillow

Zillow is the obvious leader in the clubhouse today because (a) it is the dominant aggregator with huge market power, (b) it is the sole remaining national-scope market maker, and (c) it has already expressed its intent to invest into the Distribution side of the transaction.

As I wrote in the Zillow Q1/2020 analysis post, Zillow sees major opportunities to accelerate their vision of the digital real estate future. Rich Barton said in the earnings call:

We are also advantaged, because we are seeing like in so many industries that you guys are looking at you are seeing really – you are seeing years of technology progress get accelerated down to a month. And as the leaders – as the tech leaders in this industry, we are in a position to lead and we are the beneficiaries of that.

As I said in my script, I said something like today’s necessity for this kind of distance shopping and buying is tomorrow’s expectations, because of course, virtual buying rich media experiences, 3D floor plans, virtual touring, electronic trafficking of documents and signing of documents that’s all exactly what people what people’s expectations  for a 2020 industry [and] how it should operate.

We already knew that Zillow has launched a title and escrow division as Zillow Closing Services.

Of course, Zillow acquired Mortgage Lenders of America in 2018 and relaunched it as Zillow Home Loans; it’s a business unit that Zillow reports on today.

Then comes news that Zillow plans to raise another $1 billion or so for a variety of reasons, including (from the press release):

Additionally, Zillow Group may choose to use a portion of the net proceeds to expand its current business through acquisitions of, or investments in, other businesses, products or technologies. However, Zillow Group has no definitive agreements or commitments with respect to any such acquisitions or investments at this time.

Given its dominance as an Aggregator, and its new pole position in the market making game, seems to me that the ideal target for Zillow’s acquisition spree would be in the Distribution side of things. Maybe we’re looking at digital closing companies like JetClosings or Modus. Maybe it’s new technology for remote notarization, or robotic appraisals or what-have-you.

The point is that Zillow is both smart enough and rich enough to make big plays in the “order fulfillment” side of the transaction because its market maker Platform can use those services, and because that lets Zillow offer Platform services to its merchants (aka, Premier Agents) to let them win with consumers.

It also doesn’t hurt that Zillow owns Dotloop, one of the most popular transaction management software tools today. Would it really be that difficult to layer on services on top of Dotloop, create something like a Dotloop Platinum where the agent doesn’t have to actually do anything with the tool — just provide the relevant information, and have it done for her? I don’t think so.

But that doesn’t mean Zillow is automagically the winner of the race.

Big Title: First American and Fidelity

The two companies that have the financial resources to compete with Zillow are First American (FAF) and Fidelity National (FNF). They’re also the two companies that would be most threatened by Zillow developing a non-market maker Platform for real estate agents to plug into.

They’re also very, very smart — I have reasons to believe that Dennis Gilmore at FAF might be one of the biggest brains in the real estate industry.

If they see a real threat coming, they have the capability to contend with Zillow. And they have two advantages over Zillow.

First, they have a far friendlier relationship with brokers and agents than does Zillow. To be sure, Zillow has made major progress over the years (credit Errol Samuelson and his team over there for doing the heavy lifting) but it still remains the most hated/feared entity in real estate. Neither of these companies are seen as any kind of a threat to brokers, agents, MLSs, REALTOR Associations, or anybody in the industry.

Second, they don’t have a mortgage operation. That makes it easier to think that they might find big lenders willing to partner with them more than they might with Zillow, which has its own mortgage lending operation.

Where they fall behind Zillow is in technology. Both FAF and FNF are capable companies with solid technology teams, but I think it’s safe to say that their DNA is not in technology the way it is with Zillow. But they both have the capital to acquire that talent — think about something like FAF acquiring Opendoor with all of its software engineers and data scientists. Or opening up a major tech center in Silicon Valley or Austin. They’re behind, but they can catch up.

Big Brokerage/Franchise

A distant third has to be the crop of big national-scale brokerages and franchises, such as Realogy, RE/MAX, Keller Williams, and HomeServices of America. I suppose you can throw Redfin into the mix as well as Compass to some extent. eXp is trying to get there too, but it’s still a bit too young and a bit too new to say for sure.

HomeServices aside (because they have Daddy Warrenbucks), it isn’t clear to me that these companies have the capital to contend with Zillow and Big Title. They certainly lack the technology DNA that Zillow has.

Yet, they will contend because they have to contend.

Many brokerages — especially the larger ones like HomeServices — make most of their profits from affiliates businesses like mortgage, title, escrow, and insurance. They simply can’t allow someone else to build a Platform that lets their agents (all independent contractors, don’t forget!) plug in and “fulfill” the customer’s home purchase order using other companies. That’s direct, and it’s financial.

Less direct, but no less important, is the fact that the creation of a Platform for fulfillment makes those franchises and brokerages less valuable to the real estate agent.

The agent already gets all the leads from her own efforts or from one of the Aggregators; the Discovery phase is dominated by the Aggregators. The agent might generate all her own leads from her own farm or sphere; she doesn’t need the brokerage for that. But it seems highly unlikely that the agent is going to create a title company, or stand up a mortgage lender, or put together an appraisal network. Some do, hodge podge out of personal contacts (which the title reps and mortgage brokers assiduously foster), but that’s not the same as having a Platform. Larger brokerages do offer all of that in-house, plus administrative assistance to help with the drudgery of paperwork and such.

If the agent can also get all of the Distribution needs taken care of by the Platform… what exactly does the agent get from the franchise or brokerage? Liability insurance… and a “brand” that has precious little consumer impact. That’s not a formula for success for the franchise or brokerage.

Which is why they have to contend.

Trouble is, they all compete against one another. I don’t know that they will ever find a way to collaborate enough on The Platform, rather than trying to launch their own individual ones for the sake of recruiting and retention. That automatically gives an edge to Zillow and to Big Title.

Banks/Lenders

Depending on how things play out, I do think there’s an outside chance of one or more of the big mortgage banks deciding that rather than partnering with The Platform (whoever that ends up being) they would rather become The Platform.

Their massive advantage is capital: they have it. Quicken Loans and United Wholesale Mortgage are privately held, but Wells Fargo, JP Morgan Chase and Bank of America are public. And Wells Fargo has a $108 billion market cap, JP Morgan Chase has $292 billion, and Bank of America has a $211 billion in market cap. Obviously, these guys can simply acquire Zillow, FAF, or FNF if they so chose (at least, in a friendly acquisition).

Quicken Loans in particular has some technology chops as well, as evidenced by its successful Rocket Mortgage product, and as a private company, it could do some things that the public companies might find more difficult. Like launching The Platform for real estate fulfillment.

I still see it as an unlikely dark horse play, however, since all of those guys will be highly sought after partners on any Platform that emerges. Why buy the cow when you can get the mortgage milk for free? And going looking for competitors in a segment that they don’t really understand very well doesn’t strike me as particularly savvy strategy, unless the rewards are worth it.

Multiple Listing Service

Finally, there is a case to be made that in the past, the MLS was the Platform for real estate. It was the thing that agents “plugged into” in order to help people buy and sell houses. The advent of the internet changed that, but old habit die hard and just about everybody not named REX still thinks the MLS is absolutely necessary to do brokerage services.

The MLS has already lost out in the Discovery phase to the Aggregators (sole exception being HAR, for now) and it was never all that relevant in the Distribution phase. So why might the MLS contend?

Because the MLS was the Platform in the past, and continues to exist largely because the infrastructure of real estate data (and all of the rules that govern that data) was built around the MLS. Those rules are under attack, both from within the industry and from without: lawsuits, government regulations, and so on. We have talked about all of these threats here at Notorious for a few years now.

The advantage of the MLS is that it has the best chance of being perceived by the real estate agent as being the neutral party. Zillow is a player in the housing market now. FAF and FNF are well-known entities, but they’re also directly involved in the transaction today. Brokerages and franchises, of course, fight against one another fiercely. The MLS has its problems, but most in the industry do think the MLS is (or at least can be) a neutral arbiter.

That’s the thesis of the paper I wrote with David Charron, former CEO of BrightMLS anyhow. (Free download, by the way, if you’re interested.)

So there is a plausible scenario where the MLS puts together the network of fulfillment companies such that the agent simply needs to plug in to take care of the Distribution phase of the transaction. The agent is already plugged in to the MLS, after all, so simply expanding the set of services to encompass the post-contract closing services would be a simple expansion. And companies from lenders to title to escrow to appraisal and inspection get on the MLS as the Platform simply because the MLS is not a competitor to any of them.

But… this is quite the dark horse contender for a few reasons.

One, the MLS has no capital. Most are nonprofit, or operated like one.

Two, there are too many MLSs: roughly 550 at last count. Even the largest MLSs like CRMLS or BrightMLS are regional companies at best, and most of the other large MLSs are single metropolitan areas, like Phoenix and Dallas-Fort Worth and Seattle. In the internet age, could you even call yourself the Platform if you’re not national (or even international) in scope? Is Facebook Facebook if it only existed in one city?

Three, they have no technology chops. At all. Most are reliant on vendors like CoreLogic and Black Knight for everything, and even those who do have a technology team pale in comparison to the real contenders like Zillow and FAF and some brokerages, like Compass or Redfin.

Four, most MLSs are still in 2020 owned by REALTOR Associations, which is similar to being owned by local city governments. Some of the better CEOs of better MLSs with better boards are able to get things done quickly, but others move at the speed of government bureaucracies and with the temperament of government bureaucracies. That’s not really a formula for winning a race.

However, should an MLS somehow manage to overcome these issues, its neutrality and existing role as the organizer of the marketplace might be a powerful plus.

Conclusions

The Platform is coming, because it makes life easier for brokers, agents, and consumers. It has been coming for years, but the pandemic accelerates that trend.

The iBuyer-based Platform is a powerful force, because it can get started sooner. However, it is limited in various ways and I think it ends up looking more like Amazon Marketplace than it does Spotify. The market makers will of course try to generalize the transaction management platform into the industry as a whole, but that’s the race, isn’t it?

I do think Zillow is in the pole position on the race to be The Platform, because (a) it already has made enormous progress on its market maker based Platform, and (b) it appears to know that the race exists, and (c) it is making moves consistent with knowing that the race is on.

I see no way that Big Title does not enter the race and get involved. So I expect to see First American and Fidelity both enter the fray.

Large brokerages and national franchises also have to get involved, so they will. I expect that most will attempt to do so via partnerships and alliances, likely with Big Title, as brokers and franchises have historically shown an unwillingness to take on risks. See, e.g., Keller Williams with Offerpad, Realogy with HomePartners of America, etc. But intramural competition between brokers and franchises all but ensures that they won’t actually be The Platform when it’s all said and done.

There are scenarios in which banks/lenders and the MLS get involved in the race, but those remain very outside-expectations at the moment for a variety of factors as discussed above.

And generally, the move towards The Platform all but ensures greater and greater consolidation in technology, in appraisal, in home inspections, in notaries, etc. All of the pieces that make up the transaction today are headed for consolidation, simply because The Platform has to scale up fast and can’t really afford to spend a ton of time trying to build networks of thousands of suppliers.

We live in interesting times, that’s for sure.

-rsh