Aaron Norris is joined this week by Rob Hahn, the founder and managing partner of 7DS Associates. They are a strategy consulting firm specializing in creative solutions rooted in strategic analysis and data. He has one of the most varied backgrounds you could possibly imagine, from finance corporate law technology to product development, media and entertainment, startups, fashion, and even a professional card player. He said the game was called Magic for Gathering, which is like poker for nerds and was introduced back in 1993. You may be familiar with Rob’s work as he writes on the well-known blog The Notorious R.O.B, where he talks about real estate technology, marketing, and strategy. You will find him at numerous industry events, including the Inman Connect, T3 Summit, and local state and national association events.
Episode Highlights
- How are most tech companies worth today?
- What are syndicators, and what is their part in dealing with real estate data?
- What is the difference between the MLS and CMLS?
- How has Realtor.com been fairing in terms of rankings and worth since being bought by News Corp?
- What has been going on with Zillow recently that has put them in the news?
- What are instant offers, and could they become a permanent product in the future?
- What is Open Door, and how are they important to the real estate industry?
Rob was actually on the radio show a year ago, and they got to talk about News Corp. versus Zillow. Aaron had just done some research for this week’s interview, and he saw an article where Morgan Stanley says Realtor.com is now worth $2.5 billion. News Corp. bought Realtor.com in 2014. Aaron was really wondering what tech company is not worth $1 billion these days. Rob said he supposes that nowadays, if you are not worth $1 billion, then you are not worth anything. Aaron asked if the National Association of Realtors has any ownership, which Rob said no. He thinks before when Move Inc. was its own company, NAR had some stake in it. However, when New Corp. bought them out, NAR’s stake was retired. He does not know how the financial structure was, but they are still important because they have the realtor brand. Realtor.com’s brand and everything is done under license, which is very important. However, as far as he knows, they have no equity stake, and this is scary.
News Corp. purchased Realtor.com back in 2014, and now they own a lot of different websites. Aaron was curious what else they owned, which Rob said in the real estate space is realestate.co.au. It is essentially a dominant real estate portal in Australia. They may also own some real estate operation websites in the UK, but the two big ones are Realtor.com in the states and realestate.co in Australia. Zillow has close to 165 million users on its website monthly and owns Zillow, Trulia, Street Easy, Hot Pads, and Naked Apartments. Aaron was afraid to visit the last one’s website while at work and has never visited it ever. Zillow is still the dominant player; and most importantly, they have a huge share of the mobile market at over 70%.
The other two things they talked about last time were syndicators and the MLS. He was very surprised to learn that there is an organization called the CMLS, which is an association of MLSs all across the United States. You also have syndicators, which push the data out to all these smaller sites. They used to be much more important, but for the last few years they have really lost their value. One reason for this is the biggest syndicator, List Hub, was owned by Move Inc. Zillow decided not to take a fee from this tub anymore because it was owned by their largest competitor. When you are no longer syndicating to the number one brand and number two website, the value does not really last.
Another factor is the syndication technology is not rocket science. A lot of MLSs can do it directly, and a number of them have implemented this. They are not unimportant, but the value of the syndicators has fallen dramatically. Aaron said when he looks at real estate data and where it is getting pushed out to, it seems this landscape has changed as well. When he first discovered List Hub back in 2009, he was so excited. Without it, he was having to individually go into every single website and update things manually, and it took hours. When he was tracking back actual conversions, he got none.
The California Association of Realtors produced data based on what buyers are looking at; and Aaron said he laughed because a broker or agent’s website always ranks last on being helpful to the end buyer. Aaron realized we are spending a lot of money and time on things the buyers do not even care about, although maybe it is a seller expectation. Aaron wondered if syndicators’ value had disappeared, and he asked Rob his thoughts on this. Rob’s thoughts was there is not really any value in syndicators anymore. Others disagree and think it is really important to control the pipeline of data to the worldwide web, but he just does not see this. Syndication, for one, is not that hard to do. Any MLS that wants to do syndication directly can do it, especially in 2017. If they do not do it, it is not because of the lack of technology, they just do not want to do it. The same thing goes for brokers and agents. If they want to get something out to the web, they can.
This year, it is hard to imagine some industry or organization deciding they are not going to put information on the web. He does not see how this will not get the government involved. For a while he had killed off the debate on syndication, and apparently it has come back from the dead like a zombie and still needs to be discussed. Agents may be getting a little smarter, or buyers have their preference of sites they will visit. When you do a search on Google, there are really only a handful of sites that are not paid and end up popping up. It is very rare that they go beyond the same page, and all of these are the same players over and over again.
In California, Realtor.com has increased in its rankings in the last year, which is good. They are doing a good job following News Corp. and the injection of some more capital and talent. At the same time, he remembered writing about how all the hype about websites is outdated considering the mobile is here now. We can keep talking about website syndication; but at the end of the day, if you do not have a mobile app in the app store or Google Play Store that is not in the top 5 then you are out of the game. For a lot of agents, it is not very practical and is very costly and expensive, even at the brokerage level, unless you are working with a major chain that is investing in these kinds of tools. A mobile-friendly website is the one thing they can do, but if their data is being correctly displayed then sites like Zillow and Trulia shouldn’t have to worry since they have everything covered for the most part. Rob believes this whole fight has been over for years, but it just keeps coming back from the dead.
A lot has been going on with Zillow, particularly in the last couple months. We have a lawsuit against the Zillow Zestimate where homebuilders are claiming that by displaying a Zestimate of their property, they are being forced to use an agent to represent their home. Lawyers are going to make the best possible arguments, but Rob just does not see a case with this. Rob spoke with some people at the Appraisal Institute, and none of them believe an AVM is some kind of appraisal. We will see what the court says, but he does not see this going that far.
We also have a $1 million competition to improve the Zestimate. They are hiring anybody who can provide code to make their AVM model work even better and give $1 million. What is $1 million to Zillow since their revenue is $1 billion a year. If they get some smart Cal Tech grads to put some brain power behind it, good for them. The question this brings up is whether Zillow is profitable yet or not. Rob said they were profitable for a couple quarters, although he does not know if they were for the entire year. Everyone asks this question, but he does not think it is important. They do not care to make profit like that since they are still doing market share and branding. At some point when they get tired of this, they will start to monetize and make a profit.
The biggest iron in the fire that caused the most controversy was the instant offers. Rob described an instant offer as somebody going on Zillow, surfs around, and gets some call to action. They then click the button and receive an instant offer on their house. They have to go in and fill out a form listing their house, address, and appliances. When you hit submit, that information gets sent to 1 of 15 institutional investors that were selected by Zillow as well as one or more agents who work that market. This is a test that Zillow is doing in two markets: Las Vegas and Orlando. At the end of it, the consumer receives an offer and says they will buy their home for a certain price. You then give the fees and terms, and if they decide they want to take it then the investor works with them to buy their house.
At the same time, they would get a CMA (Comparative Market Analysis) report from a realtor in the area who says they will sell your home for a certain amount. This would then lead to a listing appointment where the realtor comes in, visits your house, looks around, and gives you the whole pitch. If you decide to list with them, then off you go. If the testing is successful, Zillow starts generating leads, and homeowners start saying they want to list their house, it will be the most successful product they have ever had. Unfortunately, the industry just went completely crazy.
Rob wrote two rebuttals to the meltdown, and Aaron wondered what the response has been. Rob said most of the people commenting think differently for the most part as he does. There were some disagreements and some people who do not trust Zillow. They think they are just dipping their toe into the brokerage waters and want to cut them out. For something like this, he would say you are free to not trust Zillow. He trusts them because they have always behaved in a self-interested manner like any corporation would. Everything they have ever done has been to try and make more money and raise their share price. He would expect this from all corporations, whether they are Zillow, Apple, or General Motors. None of them are in business for charity, so he trusts them in that sense.
A lot of folks have a real fear. Unfortunately within the real estate industry, he feels sometimes it has gotten to the point of irrational hate. Rob had done an earlier podcast with Greg Robertson, and he likened it to Trump mania. Some people, no matter what Trump does, hate it. It is the same with Zillow where people hate it, no matter what they do. Aaron gets concerned when a large part of the income they are making is directly from advertising. There is the feeling you are dipping your toes in the brokerage waters and you are paying for the benefit to take business from another party.
Aaron said if one of his rentals he bought a few years ago is going to be sold to a realtor, they were not even going to entertain this possibility since they were not going to have a realtor walk through their house. It is an interesting way to find out how motivated the seller is and how valuable a lead they are if they are giving that information. There is something interesting about an online application as people may be a little bit more willing to tell you something where they may have a harder time in person. They may also be able to land the lead and know a little more of the motivation behind looking into selling it quickly.
Open Door launched in 2014, and Rob has been talking about this from the very beginning. These guys are potentially the most important company in real estate. The consistent comments he would get from people would be things like, “These guys are just We Buy Ugly Houses and flippers who have been around forever.” They couldn’t take him seriously and didn’t see what the big deal was. They saw anyone who wanted to leave $30,000 on the table to an investor as morons. All of a sudden, Zillow did the instant offers and people were saying it was a threat to the republic. Rob was saying it cannot be both, it’s either one or the other. If Open Door is just We Buy Ugly Houses, then Zillow’s instant offer is just a way for We Buy Ugly Houses to get more leads. The question is “who cares” since none of them were going to sell to a realtor anyway.
If people are not familiar with Open Door, it is really fascinating and like the Car Max of Real Estate. Aaron asked Rob when Open Door started and what their game plan is. Rob said he is not privy to their ultimate plan and strategy, but he knows they started in 2014. He remembered reading an article where the founder said the process of buying or selling a house is so painful. He wondered if there was a way to make it easier through using technology, and they have come up with an interesting take on trying to do this. Just walking in and offering cash is one way to do it. There is no mortgage contingency or anything else. Open Door walks in, writes you a check, and says they will close in three days.
Rob thinks Zillow is really on to something. The market is not going to be at 100% any time soon, and most people are not willing to leave money on the table for their home the way they would with a car. This could change if selling to an investor only meant one or two points versus 9 or 10 points. Everything really comes down to the finance and economics of it.
Aaron had just read some articles on what they have going on, and in some ways it reminded Aaron of the auction industry. A lot of people like to do the auction because there is a definitive close date, you know when it is going to be done, financing is not an issue, and it is done that day. You drive up with your house, drop it off, know what price you will get, and walk away. They have these partnerships with builders like Lennar, so they have this trading valuation. Right now in a market where the inventory is tight and mortgages are really hard to get, being able to roll over and them being able to expedite that process and make it easier is really an important service in this market right now.
One of the more interesting things that Open Door is doing is the whole trade-in concept. If you sell them a house and buy a house from them, they do it like an auto trade. This is very interesting since most people are not moving across country, but rather staying in the same town. They are just moving to a different neighborhood or into a bigger house. Aaron said it seems for the houses they purchased, the goal is to fix it up and resell it. They are not necessarily holding onto them. Rob said from everything he read about Open Door, this was also the sense he got as well. They are flippers, and this is their model.
For real estate investors, which is the Norris Group’s main market, Open Door and Zillow Instant Offers are competitors. Aaron asked who the fifteen hedge fund buyers would be, which Rob said he does not know. He did read about a couple, and Offer Pad was one. This is interesting considering they are a competitor to Open Door. His sense is they only chose the 15 as a test. Rob asked Aaron if this were open to everybody, would they stop being a competitor and start being a marketplace? He asked Aaron if he would go in and see what offers there are, which Aaron said he would. Our community tends to be behind the 8 ball when it comes to technology, especially in this market.
In California, we have gone through the cycle of short sales and REOs, and this is a very small portion of what is occurring. A lot of the Norris Group’s network is getting leads directly from equity sellers. This comes from people going through a death in the family, divorce, job change, anything where they have to get out quickly. It could also come from a landlord who is looking to retire and does not want to deal with kicking out tenants. It is not like you are buying an REO with free and clear title, it is more complex than this. If they were to open this up and somehow pre-qualify the investor and know they had funding behind them, this becomes another avenue of leads. It is very competitive, and a lot of the mom and pop real estate investors will not be able to buy at some of the numbers where these hedge funds are buying. It is a little disappointing since there is the sense that some of these hedge funds do not necessarily care anything about the local market. It is all about numbers where mom and pops are going to be located in the jurisdiction. Unfortunately, you still have your politicians who hate landlords, so what are you going to do?
Rob said they are running tests in only two markets, and it is not clear whether this will become a full-blown product. He suspects it will since Inman put up a post within a day saying that one of the agents participating in this got 48 listing leads off of Instant Offers. When Rob thinks about how desperately the realtor on the ground wants listings, it is sick. There will be a line of people around Zillow’s office yelling for them to take their money. He suspects it will become a product, but we will have to see what the full product looks like when they come out with it. It could be one of those things that is open to all investors as long as you qualify and can prove you have the money.
Tune in next week as Aaron continues his discussion with Rob Hahn of 7DS Associates.
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