REAL Trending Episode 63
Realogy/Cartus Deal, Where Are Your Energies Invested, Third Quarter Earnings
From REAL Trends, the trusted source for real estate industry news, this is REAL Trending, Episode 63. We’re breaking down recent trends and showing how they impact brokers and agents. I’m Steve Murray, President of Real Trends and today we’re discussing what does the Realogy Cartus deal mean for the industry and for you? The challenge is when leaders are dismissive, arrogant, or distracted, answering the question, where are your energies invested? And third, some takeaways from third quarter earnings reports from the publicly held and one privately owned brokerage companies, national organizations.
So what does Realogy Cartus mean
Realogy announced a few weeks back, 10 days ago, that it was selling its Cartus Relocation Management Division. Cartus is number one firm if not only in North America, in the world, at corporate relocation, and also ran a very large affinity group business. But the corporate relocation business is a slow growth, low margin, relatively speaking, capital intensive business. Realogy’s move was acknowledging those factors, and their retention of their affinity group contracts and service business, points to where they will be investing their capital in the future, which is lead generation on behalf of the franchises of Realogy throughout the U S and potentially globally.
It’s really in line if you imagine the move by Zillow to deemphasize the future growth of advertising models and revenues, and rather get into lead generation, both through its Zillow Homes Program, which generate and have the potential to generate, enormous numbers of seller leads in addition to buying homes. But they’re shifting their entire business model to a focus on, if you will, lead generation, lead capture and the result in referral fees and commission revenues that can accrue to Zillow. So if you look at it that way, Realogy and Zillow are up to the same thing, getting out of lower growth businesses, redeploying capital and executive talent into lead generation businesses. This goes along with what we have commented on and reported on in the past, which is the value in our industry accrues mostly to the people who have the most relationship with buyers and sellers of homes.
For instance, we’ve reported in the past in our own financial studies, that where brokers on average in the United States are keeping 15 cents of every commission dollar, teams are keeping 65. 65 for teams, 15 for brokers. The difference is 50% and it is mostly reflected in the fact that most teams provide prospects for their inside agents and their buyer and seller agents.
It is worth every broker in the country to consider that if you haven’t acknowledged first that the biggest part of the value is in providing prospects, clients and customers, and being able to move them and have them serviced by agents, at least acknowledge that’s where the value is today, and it’s actually been there for 40 years, since the relocation management companies first began to emerge. Secondly, if you’re already past the point of acknowledging it, to ask the question, are you prepared to make the same hard decisions that Realogy did with Cartus, and Zillow did with its advertising business, and simply take your capital and your talent and time, and redeploy into lead generating activities.
Where Are Your Energies Invested?
Item two, three of the most deadly sins of organizations and businesses. Doesn’t matter whether it’s an individual agent practice, a team of brokerage or a national organization, is to catch yourself being dismissive of new models and new forms of competition and changes. Or to be arrogant about your own strengths, and just as bad to be distracted by trying to pay attention to all the noise that is wrapped around all of us these days, both business and personally, and if you will, nationally, with the political situation in our country at this time. It doesn’t matter what your point of view is, it’s just an abundance of chances to be distracted. So the big question everybody should ask themselves, every leader, whether you are an individual agent that running a team, running a brokerage in our business or running a national company, where are your energies invested? Are you focused on your three priorities?
As Jim Collins has said famously, and which we’ve commented on before, being dismissive of competition is every bit as dangerous. And I’ve watched in my 43 years in this industry, incumbents dismiss the emergence of people like Remax in the 80s, Keller Williams in the early 2000s. And I think to some extent the industry is trying to be dismissive of the emergence of the multitude of companies that we might refer to as flat fee or lower cost brokerages. People like, in no particular order: HomeSmart, Realty ONE Group, Fathom, JP & Associates, and others including eXp, and people seem to spend a lot of time talking about Compass, but you know they’ve acquired top producing agents and they’ve acquired some successful large brokerages as well, and they’re going to continue to try to recruit top producing, mostly high end market agents. It’s how they operate. This should be no surprise to anybody in the markets where Compass operates, that this is what they’re doing. The question is only what are you going to do? Where are you going to invest your energies in each one of these areas, to restructure and reposition your firm, to take advantage of the opportunities created by these new forms of competition?
Don’t catch yourself dismissing competition. Don’t catch yourself being arrogant about your own strengths, and importantly don’t catch yourself being distracted by the things that don’t matter nearly as much as your priorities.
Takeaways From Third Quarter Earnings
One last item, some takeaways from the third quarter results from people like the public companies: Zillow, RE/MAX, Realogy, eXp and Redfin, and the private report or the report from privately owned Keller Williams Realty International. We notice in several of them, their core businesses are at almost a dead stop, almost a dead stop. If you look at the growth of companies like Redfin and Zillow for instance, and you look at the very strong revenue growth both companies reported, in at least one of those companies, almost all of that growth came from adding the value of the homes they’re buying in their ibuyer program to their revenues, which is to say the least, a head-scratcher, but two companies are doing that, both Redfin and Zillow. Underneath the Redfin numbers, they grew again in the first nine months of the year, roughly 20% in the number of units closed through their own brokerage.
If you look at Realogy and you look at Remax, their core growth measurements, whether it’s transactions, volume, franchise fees, or in the case of Remax, agent growth, we find that they are growing a little but not nearly the kind of growth rates that will be needed to sustain their futures. Because growing it 1 to 3% a year is not going to excite wall street investors and not going to drive enough results to please not only your own affiliates, but public markets. If you look at Keller Williams results and they’re privately owned, they didn’t have to report anything if they chose not to, but it was interesting to note that they focused strongly on the results of their Keller Command platform, the 90 plus thousand agents who have now adopted the platform, the tens of millions of customer profiles that have been entered into the system according to Keller Williams third quarter report.
They also reported 162,000 agents, which is down from their peak a few years ago, but perhaps up from last year a little. It’s interesting to read all of the reports and find out from management’s discussions of results, where their focus is. Clearly with Remax and Keller Williams, technology is at the top of mind for those organizations, the very top. With Zillow, it is the entire shift in their business model focus, which we commented on earlier. Redfin continues to report both growth in their core business of brokering transactions, but also the growth of their ibuyer business as reflected in their rapid growth and earnings, again because they’ve incorporated into their revenues, the value of the homes they’re purchasing.
Each of these companies in their reports each quarter, not only reveal the actual financial and operational results, but do give insights into where these large companies are focusing their management and leadership’s time and attention and their capital. There is something to be learned by every broker in the country and many large teams or individual agents, as to a review of what these reports reveal of where the leaders of at the national level, what they’re thinking about the future of the business.
Learn more about industry trends, marketing and technology strategies, as well as listen to past REAL Trending on Apple Podcasts, Spotify, Google Play, and more. Visit www.realtrends.com/channels/. This has been Steve Murray. Until next time.