It’s been a while, hasn’t it? I apologize to you all, but I’ve been neck-deep in a very important project that’s taken months of my life to setup. The last few weeks have been pretty intense. I’m not quite ready to unveil it just yet, but soon… soon….
But having found a couple of hours to actually engage in out-loud thinking, I thought I would try to make sense of a series of relatively recent news stories.
- Opendoor and Offerpad become traditional brokerages.
- Redfin retreats from iBuyer.
- Knock stops being a brokerage, and becomes a “platform” instead.
Taken together, the overwhelming impression one gets is that real estate cannot be disrupted. It appears at first glance that all of the venture capital funded “disrupters” are going out of business, or becoming something that is proven to work: independent contractor agents working under a brokerage that recruits and retains, based on a sales commission that is uniquely high in the developed world.
There are, I think, two broad ways to look at this:
- Real estate has been perfected through decades of bottom-up consumer preferences; or
- Innovation in real estate will always be a matter of two steps forward, one step back.
FWIW, I am open to the idea that residential real estate has in fact been perfected over decades and decades of market dynamics. Despite all of the technology, all the web stuff, all of the AI and algorithms and smart phones and whatever else, the human relationship between client and agent that underlies the entire thing is as fundamental as eating and drinking. So we might have small improvements, slight evolutionary changes, but disruption is impossible because human nature cannot be disrupted.
But as of now, based on the insane research I’ve been doing for the past couple of months, I think I’m leaning towards the idea that innovation in a stable, old, time-tested industry like real estate is always going to be a matter of advance and retreat.
Let’s think about it together.
Opendoor, Offerpad, Redfin
I have already written about all three companies at some length. I wrote about Opendoor’s pivot here. And VIP members know I’ve been writing about Redfin’s convergence for quite some time now, starting in Q4/2019. Offerpad… I didn’t write about specifically, because I’ve come to regard them as a home flipper, rather than an iBuyer, but… you can read about their pivot at The Real Deal.
Bottomline is that Opendoor and Offerpad are trying to become Redfin 2.0, at the same time that Redfin is trying to become Realogy 2.0.
And when you look at what all three companies are offering — things like “free” home prep services, renovation assistance, etc. — you can’t help but realize all three look a whole lot like every other brokerage of any size and value in North America today. I mean, ever since Compass started offering its Concierge service, brokers and agents everywhere have been adding that kind of pre-sale renovation capability, whether in-house or with vendors like Curbio and ZoomCasa (I interviewed their CEO’s on a podcast, located here.)
From where I sit, all three efforts look more or less doomed to fail, because none of the three companies are setup to compete effectively over in Traditional Brokerage sandbox, as I detailed in my take on Opendoor’s pivot, but hey, I could be wrong. Time will tell.
But when I wrote the Opendoor post, I thought they had a chance to redefine what brokerage means:
If we zoom back up to the 30,000 feet level and look at what this could mean, I do think there’s a chance that Opendoor could redefine what brokerage service means entirely. Whether that happens or not depends largely on Opendoor surviving the cash crunch and managing to get more capital… but… say it does.
Now a real estate brokerage is far more than just somebody playing the middleman, helping buyers and sellers find the home of their dreams, providing advice, then helping with the transaction paperwork. It means there will be an element of underwriting the transaction involved.
Consider a future a few years out. Opendoor is now actively in the market not just as a principal, but as a brokerage.
You, the seller, can choose to list with Opendoor and have Opendoor underwrite your next home entirely in cash. That way, you get to move out, enjoy your new dream home, and all of the pain and hassle of buyers walking through your house, touching your pillows, sitting on your couch, etc. go away. And in these pandemic times, it means you don’t worry about some COVID Mary touring your home.
When I wrote that, I had Knock and Flyhomes in mind — two companies who were doing iBuyer in a different way: a bridge loan model, as opposed to the market maker model that Opendoor pioneered, and Zillow took to the next level.
Then comes news that Knock is changing its model to no longer to be underwriting home purchases at all.
Knock Goes Mortgage, Kills Off Brokerage
So the news from Knock is that it is introducing Home Swap, which the press release bills as an “even more convenient and less expensive way for homeowners to buy before they sell.” The key grafs:
Offered exclusively through agents who have been trained as a Knock Certified Agent, consumers receive home financing directly through Knock to make a strong, non-contingent offer on their new dream home. They have the benefit of immediately taking ownership and earning equity in their new home while avoiding the hassles of living through repairs and showings, and have home prep taken care of for them prior to listing.
The Knock Home Swap includes a fully integrated and competitive mortgage. It also includes an interest-free bridge loan to cover the down payment on the new home as well as mortgage payments and up to $25,000 for home prep and repairs on the old house so it can sell for the highest price possible on the market. As part of its Home Prep Concierge, Knock provides access to its approved contractor network and manages the payment of all bills upon completion of work. Additionally, Knock provides a backup offer on the old house in the unlikely event that it doesn’t sell within six months. Ninety percent of Knock homes sell in 90 days or less.
So if I understand this correctly, the old Knock Home Trade-In involved Knock using its cash to buy the new home outright. There was a strong claim that because you’re using cash, you’ll get a discount on the purchase since there is zero contingency of any kind (except maybe an inspection/due diligence period). And as the seller-buyer, you would move into your new home, then put your old home on the market using Knock’s team of agents, and once your old home sells, you settle up with Knock.
Here’s a video from 2018 of Sean Black, Knock’s Founder & CEO, explaining the program:
The new and improved Knock Home Swap, on the other hand, skips the “we’ll buy your next home for cash” thing. Instead, it is now a “you will be pre-approved for a mortgage for your next home” deal. Home Swap includes some interest-free bridge financing so you can make a down payment, do renovations (and Knock will supply you with a list of approved contractors), and so on. And Knock will include a “backup offer” in case your old home doesn’t sell for six months.
I guess this is good? It is new and improved for Knock. I’m not sure if it’s new and improved for the consumer, since he’ll be paying two mortgages (albeit, one will be at no interest… but he’s still making two principal payments, no?) until his old home sells. Plus, if there is any advantage to making a cash offer on the next home, that’s gone buh-bye, so… I don’t know if that’s new and improved.
But I am pretty damn sure it’s not new and improved from an innovation standpoint. Why do I say that? Here’s a video from 2011 — almost a decade ago — talking about a very similar trade-in program:
Granted, this guy is talking about new home construction… but all of the elements are the same: fully underwritten pre-approved loan, backup offer in case, etc. etc. and so on.
So Knock is becoming a mortgage lender and copying much of what some were doing in 2011. Nothing new under the sun, I know, but to call going back to 2011 as an innovation is a bit of a stretch in my book.
To do this, Knock is getting rid of its brokerage operations:
Effective immediately, consumers can work with a Knock Certified Agent at Atlanta Communities Real Estate Brokerage, JP & Associates Realtors in Dallas-Fort Worth and Berkshire Hathaway HomeServices Arizona Properties to leverage the Knock Home Swap to purchase their dream home before prepping and selling their old house for the best price on the open market.
With these partnerships, Knock will no longer market directly to consumers, underscoring its commitment to partner with the industry and the value a local agent brings throughout a real estate transaction. Knock plans to expand the program to 11 markets by year-end and operate in at least 21 markets by the end of 2021.
So much for all of those “dozens of five-star reviews” that Sean Black mentions. Granted, every agent seems to have dozens of five-star reviews, so it isn’t as if consumers will know the difference between a Knock agent and a JPAR agent going forward… but it’s an interesting departure.
Why This Isn’t Proof that Real Estate Can’t Be Disrupted
Given all of the above, don’t we have proof that real estate is near-perfect as it exists today, having evolved through natural market forces and human nature, and that the status quo is pretty much the best way to buy and sell houses? To the extent that there can and will be innovation in real estate, it will be small improvements at the margins, because the overall system works so great.
That may be true, but I’m not ready to go there yet. Because I really think three of the four companies just ran into a cash crunch issue. I’m fairly certain of that for Opendoor and Offerpad, whose market maker model required immense sums of cash to operate. Knock required far less capital with its bridge loan model, but it was still having to pay cash for houses and put them on its balance sheet. It seems likely that none of the three were finding sources of capital out there to keep operations going.
Since you can’t change the world if you’re dead, all three accepted reality of the situation and adopted the “what makes money right now” models that are already out there.
[Note: Redfin did not have a cash crunch issue, so their moves are more of a mystery to me.]
One piece of data I’d like to share that might be relevant here, and because this is part of what I’ve been working on so hard for the past few months, is this:
Yeah, baby! I got my hands on comprehensive iBuying activity data from over 50 major metro markets. And you know me; get data in my grubby little hands, and I can start doing some real analysis. 🙂
As you can see, the retreat from iBuying was not a COVID thing. Offerpad was already decreasing its purchases in Q2 of 2019, a full year ago. Opendoor was riding high… until September of 2019. Since November of last year, Zillow has been the leader for market making and the gap is getting larger and larger.
The difference between the three is simple: cash. Zillow has it, and the other two don’t. That’s particularly noticeable when you look at Opendoor, the category pioneer and category leader for years and years. Suddenly, they go into free fall in September of 2019?
Yeah, of course they do, because the WeWork implosion happened in September, which led directly to the implosion at SoftBank, which was (is?) Opendoor’s biggest backer. Without cash, there’s nothing else to do.
Meanwhile, Zillow is sitting on some $2 billion in cash, successfully offering bonds to the capital markets, and just riding high.
I spoke with a Zillow spokesperson a couple of weeks ago asking about Zillow Offers on the record, and he confirmed that they were making no real changes. In some markets, impacted more by COVID than others (and I think by that, we’re talking about government restrictions on showings and such), Zillow is charging more in fees and such, but they haven’t changed their model, haven’t slowed down, and the “pause” notwithstanding, they are going full steam ahead. And Zillow’s market cap has gone from $3 billion and change in 2016 to over $13 billion as of this writing… and likely headed higher.
So. What conclusions about disruption and innovation can be drawn from the fact that three startups who ran out of cash chose to become traditional model companies?
I don’t know, but I’m thinking the logical conclusion is not, “Real estate has been perfected.” Seems to me that the more logical conclusion is that disrupting a settled and ancient industry like real estate is going to take a lot of money. A LOT of money.
Two Steps Forward, One Step Back
And more generally speaking, it seems to me that innovation in a settled and ancient industry will always be a case of two steps forward and one step back. Human beings are resistant to change. We don’t much like it. It takes some real concrete benefits to get us to change our behavior.
Think about email. I still remember when “electronic mail” was AOL’s “You’ve Got Mail!” and was not real mainstream. How many years did it take before everyone had email?
Car dealerships still dot the landscape, despite all kinds of efforts at disrupting that business model. TrueCar pricing or not, people still like to haggle, like to go into showrooms, like to talk to a salesperson, then talk to the manager, then the finance guy (who will sell you warranties and such), then go on forums and find out if they got a good deal or not.
It’s going to take time, advances and retreats, and progress followed by regress, then breakthrough, followed by more of the same. Two steps forward, one step back.
So why do we care?
Because Change Happens Slowly, Then All At Once
It has been a favorite saying of mine on Notorious ROB and elsewhere that change is not gradual; it’s a step, like falling off a cliff. The classic quote from Hemingway fits in perfectly here:
And we’re seeing this dynamic play out in society and business today.
Forbes has a fascinating article on Zoom and technology adoption that is worth reading. And two charts that are eye-popping:
Here’s what that looked like for Zoom from 2014 through the end of 2019:
Not bad! The company was clearly growing its user base and moving nicely along the adoption curve.
Here is that same purchase intent chart, but extended through the beginning of the COVID-19 quarantine movement in March of 2020:
Absolutely jaw dropping.
Let’s wrap this up. As I see it, innovation, like change, will happen in fits and starts. I think it is naturally a two steps forward, one step back thing during “normal” times. Whether something is truly innovative or not, I think, depends on a lot of factors but the most important, I think, is to ask, “How does this change the consumer experience?”
Carvana might change the consumer experience… but is it a big enough of a difference over the traditional? I don’t know. I just know that I bought my car through a traditional dealer and had a traditional experience… although, more of it was over the web than before COVID.
iBuying definitely changes the consumer experience; all of the reviews, all of the evidence, all of the people on the ground who are actually working with buyers and sellers say so. Logic itself says so. Is it for everyone? Maybe, maybe not. But I’m not sure that’s the point. After all, did everyone in 1998 need to have electronic mail? How many of us really needed to carry around our entire music collection on a small iPod back in the day?
I’m already experiencing Zoom fatigue… but it’s hard to deny that videoconferencing is vastly superior to teleconferencing.
What I can conclude, however, from the Opendoor, Offerpad, and Knock stories is that if you have something truly innovative in an industry as settled and as time-tested as real estate, not only does the innovation itself have to provide a far superior consumer experience, but the company trying to innovate has to have boatloads of capital available in order to cross the chasm of consumer experience… and do it against the resistance of entrenched incumbents. Opendoor, Offerpad, and Knock did not have the cash. It appears that Redfin didn’t have the cash either, though I’m really not sure about that one.
We don’t know yet whether Zillow does or not, but $2 billion and counting seems like a decent start.
PS: I have numerous fond (and not so fond) memories of this song from my NYC clubbing days in the 90s… I’m sure some of you do as well.