In January, I wrote about 7 fintech and real estate trends driving convergence of real estate services in 2018. This goes way beyond mortgage. As the end of Q1 approaches, let’s look at some companies who may take all of housing.
Jeff Bezos the bookseller got laughed at more than once 20+ years ago as he pitched Amazon as the everything-retail seller. We all know who’s laughing now.
Amazon dominates the retail economy because it showed us it can meet most of our retail needs for ease, service, technology, speed, and price. It did so with a combination of partnering and competing, and now competitors are falling away as the retail trend matures.
Now the same story is underway in housing. Real estate brokers, lenders, builders, and contractors are all transactional companies, each selling their units like so many books. These firms take good care of consumers, but the housing vendor maze is still confusing and frustrating to consumers, as this research my firm did in January confirms:
– 97% of U.S homeowners are frustrated working with multiple vendors during the home ownership experience
– 96% of homeowners were not fully confident in choosing the best vendor for their home ownership needs
– 97% expressed appeal in the concept of a trusted/branded network of vendors to choose from for home ownership needs
Consumers will win in the end as certain single-service fintech and real estate companies expand to create a one-stop-shop for home buying, financing, improvement, title, escrow, insurance, etc. When we look back in 10 and 20 years, the Amazon/Walmart winner-take-most retail scenario will have played out in housing as well.
Fintech and real estate disruption originates from four different spaces, and 2018 will be the year key players emerge from these spaces to start providing more of a one-stop-shop for homebuyers and owners.
Space 1. Media/Tech: Zillow is a media/tech firm well-positioned for convergence of real estate services. At Zillow’s 4Q Premier Agent Forum, they said someone is viewing a home on Zillow mobile 300 times per second and that more people Google “Zillow” than “real estate.” They make money by selling realtors and lenders access to their 187m monthly consumer users. In 2017, they made $910m and $96m in revenue from realtors and mortgage lenders, respectively. Consumers trust their brand, which makes them a trusted recommender of various real estate businesses. They dabble in home improvement referrals with Zillow Digs, but it doesn’t seem to register on their financials meaningfully, and in this area, you’ve got other recommenders like HomeAdvisor and Amazon Home Services. Players in this media/tech space acquire the customers, but don’t provide the actual services, they just make a fee for connecting consumer to service provider. So convergence here is to start providing certain services in the ecosystem that don’t harm your primary referral business (because you’d then be competing with your customers). Or maybe you leave things alone. In Zillow’s case, $1.1b in 2017 revenue is nothing to scoff at.
Space 2. Real Estate Brokerage: Tech-first Compass and Redfin are good examples of residential real estate brokerages poised for convergence. Redfin went public last year and has a roughly $2b market cap, and Compass recently raised $450m from Softbank at a $2.2b valuation. Redfin is already into other real estate services, having launched a mortgage division, and we’ll soon see whether Compass uses its new funds to continue expanding their local agent footprint and agent technology, or whether they also expand into other services. It’s important to note that adding lending to a real estate franchise is harder than it looks. Of Redfin’s $370m in 2017 revenue, only a fraction was mortgage. They no longer disclose unit count for mortgage operation, but if we take this statement from their financials (“Q4 loan volume grew by nearly 40% over the 13 loans we closed in the third quarter”), it looks like they closed less than 20 mortgages in Q4. Compass brass is surely watching trends like this closely as they decide how to invest their SoftBank haul.
Space 3. Instant Offer firms: Another area where real estate brokerages can diversify is by buying homes to list instead of pushing their agents to acquire listings. Firms like OfferPad and OpenDoor let a home seller fill out a quick form on their site, and sell the home to them within days. The seller pays a slightly higher fee, and some argue the sale price could be lower due to automated valuations, but the seller is done immediately without having to list their home. A few convergence signals so far: (1) Zillow is also getting in on this by taking these seller inquiries and sending them to these instant offer investment firms in the same way they’d send a consumer to a real estate agent or lender in a traditional transaction. (2) OfferPad and loanDepot (my firm) have done a joint venture where OfferPad will have a lending division powered by loanDepot so they can offer financing for sellers to buy their next home. (3) Redfin is also dabbling here with a $10m initial investment that they’re increasing to $20m. This business is very similar to mortgage banking in that it’s very capital intensive and you take an asset on your balance sheet for a certain period (in this case, the house instead of the loan). A key question here is: who’s going to be better at managing this process, mortgage firms or real estate firms?
Space 4. Lending: It’s easy to acquire customers at scale doing non-mortgage loans, and the loans themselves are pretty easy for lender and consumer alike. Firms like SoFi and Marcus by Goldman Sachs have taken this approach to add customers fast, and are now adding services like asset management. But they’re quiet on the housing play, ostensibly because it’s harder. Mortgage is the gold standard of difficulty in consumer finance because of multi-faceted regulatory burden, extreme competition, and intricate technology. If you can do this at scale, it’s easier to move into other areas of consumer lending: personal loans, home improvement, etc. Marcus has begun home improvement, and Green Sky has got an early lead in this area (and also a $4.5b valuation after their $200m fund raise from PIMCO in January), but they also don’t do mortgages. So Marcus and Green Sky will touch the homeownership ecosystem, but without mortgage, the consumer experience is still fractured. loanDepot (#5 U.S. retail lender) and QuickenLoans (#2 U.S. retail lender) are coming at the convergence from the mortgage side, and the mortgage customer is the same customer for the rest of the homeownership lifecycle. So if the mortgage firm acquires them first, they can be the connector to the rest of the services that customer needs as a homebuyer and owner.
Obviously I’m biased, but for now I think large mortgage lenders who’ve mastered customer acquisition at scale and have proprietary technology are most likely to win the one-stop-shop game and become Amazons of housing. To give an example of adding customers fast, my company loanDepot has become the #5 U.S. retail lender in just eight years. The first four are Wells Fargo, Quicken, BofA, and JPM Chase—all firms that have been at this for decades.
Also don’t ever forget about Bezos. His approach of partnering-then-competing in retail is now extending into consumer finance, with news this week Amazon may partner with JPM Chase on checking accounts.
So if none of the convergence notes above convince you that all consumer finance, tech, and real estate firms are now collaborating-slash-competing, this latest Amazon move might.