Zillow’s Transition to “Super App” Driving Revenue Growth

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Zillow’s latest momentum is a manifestation of its strategy to diversify revenue across the transaction as it transitions from a lead gen platform to a housing “super app.”

Why it matters: As Zillow scales new revenue streams, including Zillow Home Loans, Rentals, ShowingTime+, and Seller Solutions, it is planting important seeds for its next phase of growth.

Context: After a pandemic bump, Zillow’s overall revenue declined and has remained flat since 2021 – during one of the worst real estate markets ever recorded.

 
 

Over a challenging two years, Zillow’s residential and mortgage businesses have shrunk (on par with the declining market), while its rentals business has ticked up from strong organic growth.

 
 

Even with flat revenue, Zillow has significantly outperformed the market during this period, with the magnitude dependent on whether you consider Zillow a lead generation platform or a housing “super app.”

  • While revenue growth at Zillow, the lead generation platform, has slightly outperformed the market, revenue growth at Zillow, the housing super app, is outperforming at a much higher rate.
     

  • This is a result of new products and services that are generating additional revenue across more of the transaction. 

 
 

Dig deeper: For years I’ve used the following framework to think about real estate portal growth strategy.

  • Zillow’s evolving strategy sees it getting closer to the real estate transaction (Zillow Flex and Zillow Home Loans) and expanding to more parts of the transaction (Mortgages, Rentals, Seller Services, Agent Tools).
     

  • Typically, services closer to the transaction are higher revenue, while services further from the transaction are higher margin and more scalable.

 
 

Zillow asserts that its strategy to grow transaction and revenue share is working.

Zillow’s mortgage business is growing, but, counter-intuitively, revenue is dropping as purchase volume nearly doubles.

  • This is a result of a shifting product mix – Zillow is funneling leads from its mortgage marketplace to fulfillment by Zillow Home Loans.
     

  • It’s shifting from an asset-light marketplace to an asset-heavier mortgage brokerage operation, with much higher revenue potential.

 
 

Last year I claimed that Listing Showcase was Zillow’s most interesting product, and now it’s probably Zillow’s most interesting slide in its investor presentation.

  • The mid-term revenue potential is spot on based on my earlier calculations, representing a significant revenue opportunity as a new, sell side product.
     

  • But the most interesting opportunity is long-term, where Listing Showcase could be rolled out as a mass market product for all agents.

What to watch: Zillow’s future growth aspirations hinge on a few key factors.

  • Expansion into 40 markets – as early “enhanced markets,” Atlanta and Phoenix are useful data points, but not necessarily representative of all 40 markets.
     

  • The last mile problem – Zillow remains completely dependent on local real estate agent teams to drive adoption of its new products.
     

  • Zillow Home Loans is driving revenue, but it’s unprofitable, lower-quality revenue – the business needs to demonstrate an ability to grow revenue faster than expenses.

The bottom line: Zillow is diversifying its revenue along the transaction – what it calls its super app – and is outperforming a depressed market.

  • Zillow will almost certainly miss its $5 billion in revenue by 2025 goal, but like many plans that were laid in early 2022, things have changed.
     

  • While early signs are promising in a few key markets, the path forward hinges on the stubborn realities of conversion rates, profitability, and – as always – partnering with agents.

Positive Signals for Compass & The Market

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Compass’s for sale listings are up 15 percent compared to the same time last year – just one example of rising activity across the U.S. real estate market.

Why it matters: An increase in for sale listings is a welcome sign of more sellers coming to market, good news for businesses in the real estate ecosystem, and a promising start to the year after a depressed 2023.

  • Compass, the nation’s largest brokerage based on sales volume, currently has 2,000 more listings than the same time last year – and that number is increasing.

 
 

On a year-over-year basis, the number of Compass listings has gone from down 8 percent in July to up over 15 percent at the end of January – a significant change in fortunes.

  • Aside from being good for buyers, this is good news for Compass – more listings should lead to more sales and more commission revenue.

 
 

New listing volumes and revenue are indirectly correlated (because of the time lag between a listing and a sale). 

  • In Q3 2023, Compass’s listing volumes were down 5 percent and revenue was down 10 percent year-over-year (YoY).
     

  • But things are looking up: Compass listing volumes were up 3 percent in Q4 and are currently up 13 percent in Q1 – positive signs that won’t appear in Q4’s financials but will land in Q1 2024.

 
 


And Compass is not alone; according to Redfin’s national data, new listings are up significantly across a number of major U.S. markets.
 

 
 

The increase in activity appears to be driven by – wait for it – interest rates.

  • With the recent drop in rates, mortgage demand has spiked to the highest level in six months.

 
 

The bottom line: From a transaction volume standpoint, 2024 is off to a promising start.

  • From a business perspective, more transactions means more commission income – the $90+ billion that fuels so much of the industry, from agents to brokerages, from portals to tech vendors. 
     

  • It’s still very early, but these are signs that would signal a positive shift in the market and, therefore, good news for the ecosystem of businesses that surround the transaction.

The Great Disruptor Hibernation Continues

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When the market turned in mid-2022, many real estate disruptors began the long and painful process of reducing expenses, laying off staff, and reorienting their businesses to a new, challenging reality.

Why it matters: A year and a half later most disruptors are still around, but remain a shadow of their former selves and have yet to show signs of emerging from hibernation.

Dig deeper: The pre-2022 low interest rate environment was a breeding ground for real estate tech disruptors that relied on a financial component as the core of their product offering and business model – using cheap money to solve consumer pain points (iBuying, Power Buying).

  • Because of this, many disruptors operate in the mortgage space and hired mortgage loan originators (MLOs) to service their customers.
     

  • And as these companies rightsized to a high interest rate environment, they slashed their MLOs anywhere from 50 to 85 percent (and in Opendoor’s case, down to zero).

 
 

Zillow has been the outlier, accelerating the hiring of MLOs for Zillow Home Loans since February ‘23, at the same time its smaller peers have been shedding the same.

  • This is both a clear signal of intent around Zillow’s plans to build Zillow Home Loans, and a powerful demonstration of the benefits of having a strong balance sheet.
     

  • Read more: Zillow Still Crazy About Mortgages.

 
 

Arch-disruptor Opendoor, meanwhile, has embraced reality by significantly reducing the amount of homes it’s acquiring – all in an effort to streamline the business.

  • Opendoor’s purchases have stabilized at around 1k per month – orders of magnitude lower than the highs of ‘21 and ‘22 – but with a recent uptick as the company aims to double its monthly acquisitions. 
     

  • The goal appears to be refocusing the business on the core iBuyer proposition after years of adjacent distractions (like Opendoor Home Loans).

 
 

The bottom line: For many disruptors – private companies that don’t publish much data – MLO count remains the best leading indicator of demand for their services.

  • For the time being the disruptors are still in hibernation mode, but if and when the tide begins to turn, MLO count should begin to tick upwards.
     

  • And by that time, the surviving disruptors will be battle-hardened with more nimble and streamlined operations, better product-market fit, and on stronger financial footing with more rational business models.

Scout24: Growing a New Consumer Revenue Stream

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Real estate portals around the world have been trying to diversify their revenue streams for years – with mixed results – but one portal’s efforts stand out as a success.

Why it matters: Leading German portal Scout24’s consumer subscription product is a rare example of a new revenue stream that’s undoubtedly working – and a novel offering that directly targets consumers.

  • In addition to consumer subscriptions, Scout24 offers the usual suspects of adjacent revenue streams, mortgages and seller leads, neither of which are growing.

 
 

Scout24’s consumer subscription business offers property buyers and renters (pictured below) an enhanced experience, including early access to listings and priority messaging, for a monthly fee.
 

 
 


The product is resonating with consumers in a meaningful way; revenue is up 20 percent year-over-year and it will generate over €60 million for the year.

 
 

Growth is being driven by a steady increase in subscribers; Scout24 has likely passed the 400,000 paying subscriber mark.

  • Average subscription revenue is around €16 per month, with a 3 month minimum term. 

 
 

Context: The consumer subscription business represents a substantial 14 percent of Scout24’s total revenue.

 
 

The bottom line: Successfully diversifying revenue streams in a meaningful way is hard, especially for real estate portals.

  • While most portals have focused on the false promise of mortgages – the siren song that has lured so many – Scout24 has built a valuable subscription business that directly targets consumers.

  • Yes, but: Just because a consumer subscription product is working in Germany doesn’t mean it will work in other markets!

Redfin: High Debt, Low Cash, and Unprofitable

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Redfin’s latest results reveal a worrying financial trend – and raise questions about the sustainability and viability of its business model.

Why it matters: A lot of debt, dwindling cash, and an unprofitable core business are a challenging collection of attributes for the business to deal with, which may force a larger strategic change.

  • It all started with Redfin taking on a substantial amount of debt in 2020, eventually rising to $1.2 billion by 2021.

 
 

Redfin then made a pair of expensive acquisitions: In 2021, it bought Rentpath for $608 million, and then acquired Bay Equity Home Loans for $138 million in 2022.

  • Since 2020, Redfin’s available cash balance (cash and liquid investments) declined sharply, from over $1 billion in 2020 to just $173 million at the end of Q3 2023.

 
 

Redfin is using its cash to gradually repay its debt, but the challenge is that the business itself is unprofitable (as measured by Net Income/Loss).

  • Redfin has incurred a net loss since at least 2018 – it doesn’t appear that the business has ever been profitable.

 
 

Over the years, Redfin has assembled a collection of unprofitable business lines.

  • Redfin’s real estate brokerage is unprofitable, its now-closed iBuying business, RedfinNow, was unprofitable, its rentals business is unprofitable, and its mortgage business is unprofitable.

 
 

To say Redfin’s problems are a direct result of the market would be incorrect – it’s not the market, it’s the business model.

 
 

This leads to a strategic dilemma: Redfin is significantly under-resourced in a challenging, competitive market.

The bottom line: A receding tide reveals, and the current market is highlighting Redfin’s various challenges.

  • Strategically, it appears that Redfin is overstretched with limited resources, and up against well-funded competitors with cost advantages, something it cannot compete with.
     

  • This is a galvanizing moment for the business; one way or another, something has to change.

Portal War ‘24

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2024 is shaping up to be the year of the PORTAL WARS in the U.S., with CoStar Group, owners of Homes.com, leading the world’s largest effort to unseat a #1 real estate portal.

Why it matters: This multi billion-dollar game of financial chicken will certainly shake up the portal landscape and will force competitors to change strategy – if they can – or risk the specter of irrelevancy.

The primary driver of CoStar’s Homes.com growth is the near doubling of its annual advertising spend to almost $600 million, a massive investment that keeps increasing.

  • Keep in mind this advertising spend also includes brands like Apartments.com and other commercial real estate portals – but the big increase is being driven by Homes.com.

 
 

Comparatively, CoStar’s advertising spend – all to drive consumer traffic and build awareness – dwarfs its real estate portal peers.

  • In 2022, CoStar outspent Zillow by a factor of two, and is on track to outspend Zillow by 3.5 times this year.
     

  • Momentum is important: While Zillow and Redfin have been slimming their advertising to cut costs, CoStar continues to increase its investment.

 
 

Competition between portals is a marathon, and cash in the bank is not only a requirement to play the game, but a critical prerequisite for success.

  • CoStar has an enormous war chest of over $5 billion in cash, enabling it to outspend the competition, while Redfin simply does not have the resources to compete at the same scale.
     

  • Note: News Corp is the media empire that owns realtor.com and dozens of other businesses, including TV, newspapers, publishing, and more.

 
 

The ability to invest with cash flows from a profitable core business is another key factor in this race.

  • Once again, CoStar outstrips the competition with its cash-generating core business, as opposed to Redfin and Zillow, which both posted a net loss in the most recent quarter.
     

  • As a massive media conglomerate, News Corp generates a good deal of cash, but also pays a dividend and is more conservative with its investments.

 
 

An effective strategy should be simple and straightforward – and as I like to say, Compete Where You Can Win.

  • CoStar is demonstrating clarity in its strategy; it knows what its unique advantages are and is leveraging them to the fullest.
     

  • And it’s targeting a gap in the market: the 97 percent of real estate agents that aren’t buying leads from its competition. 

Critically, CoStar is focused on ONE key point of difference for each of its two main audiences, agents and consumers – in areas where it is betting that it can win.

  • For agents, Homes.com offers “Your listing, your lead,” which prominently positions the listing agent to collect leads directly, instead of being auctioned off to the highest bidder.
     

  • And for consumers, Homes.com is building exclusive content that’s actually good for consumers: rich media on over 20,000 neighborhoods across the U.S., including custom promotional videos, created by a team of over 1,000 human employees.

 
 

The bottom line: At its core, this is a case study in the importance of a clear strategy and focused execution. 

  • Love or hate it, CoStar’s strategy is crystal clear and its tactics aligned with its strategy and competitive advantages, while some of its peers are stuck in reaction mode with disbelief, discredit, and distraction – which is not a strategy.
     

  • Without a cogent strategy, CoStar’s competitors (especially realtor.com and Redfin) are at risk of being stuck with a waning value proposition, decreased relevancy, and not enough resources to mount an effective defense.

Dig deeper: On my podcast, David Mele, president of Homes.com, and I discuss Dunkin Donuts coffee, post-acquisition growth, lead gen hell, the 97% opportunity, innovator's dilemma, exclusive content, strategic clarity, what's in Andy's head, and what he would do if he were Zillow's CEO. Give it a listen!

Agent Migration and Brokerage Transformation Continues

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As 2023 grinds into the final months of the year, agents are continuing to migrate from legacy brands to low-fee, cloud-based brokerages.

Why it matters: A receding tide reveals, and the current market dynamics are revealing clear agent attraction trends – with implications that may affect the industry for years to come.

The data: Between the second and third quarter of the year, agents continue to flock to the low-fee / high-split brokerages where they are able to keep more of their commission dollar.

  • This is at least the third straight quarter of declining agent counts at the large legacy brands: Anywhere, RE/MAX, and Keller Williams.
     

  • The noteworthy outlier is Compass – which acquired Realty Austin and its 630 agents – which operates as a legacy brand but has the growth rate of a low-fee brokerage.

 
 

Since the beginning of the year, 10,500 agents have left the big legacy brands, while the exact same number of agents have joined the low-fee brokerages. 

  • Agents are voting with their feet, and moving from one brokerage paradigm to another.

 
 

Agent migration is shaping transaction volumes and brokerage market share.

  • Between Q2 and Q3 of this year, the number of U.S. existing home sale transactions was down five percent, with some brokerages over- and others under-performing the market.
     

  • Low-fee models Real, United, and eXp Realty continue to outperform the market and grow during a down market – a remarkable achievement.

 
 

Yes, but: While this metric shows momentum, it’s not perfect; one down quarter can result in a subsequent up quarter, which appears to be the case with Compass – it didn’t have a bad Q3, it just had a great Q2.

The bottom line: As measured by agent count, there is an undeniable shift occurring across the industry in this time of upheaval, uncertainty, and change.

  • It’s worth noting that the low-fee / cloud-based brokerage models have another important attribute: low operating expenses (no offices!).
     

  • That fact, coupled with growing agent numbers, is laying the groundwork for a transformational shift in the industry that may set the tone for years to come.

Note: Thank you to Keller Williams, United Real Estate, and RealtyOne for trusting me with their data. As private companies they don’t have to share. Certain data for RE/MAX and Berkshire Hathaway HomeServices is not publicly available, which is why it is not included. 

Zillow Pressures Flex Teams to Perform

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Zillow continues to double down on its mortgage business, this time by compelling Flex teams to send back leads that have expressed interest in learning more about Zillow Home Loans – or risk getting kicked out of the program.

Why it matters: Zillow is leveraging its immense market power and forcing its partner ecosystem to change behavior, all in an effort to meet its revenue goals.

The following chart, provided by Zillow to its Flex partners, clearly outlines its performance expectations.

  • Underperformance, in terms of not converting buyer leads or not sending leads back to Zillow Home Loans, can result in “disengagement” – no more leads.
     

  • While Flex teams that convert leads and send customers back to Zillow Home Loans are eligible to get more leads.

 
 

Zillow asks Flex agents to send back leads that have expressed interest in learning more about Zillow Home Loans.

  • Consumers “express interest” through a checkbox on the initial contact form, which is checked by default – so it’s really an option to opt-out rather than opt-in.

This is another clear signal of the critical importance of Zillow Home Loans to Zillow’s long-term strategic plan to double revenue.

Perspective: While Zillow is strongly leveraging its power on the market, it only affects a very small percentage of agents and transactions.

  • Less than five percent of the U.S. real estate agent population works with Zillow (with far fewer Flex agents), and Zillow only touches around three percent of U.S. real estate transactions.

The bottom line: Zillow is curating a small, exclusive ecosystem of agents that are willing to play by its rules, which now includes tight integration with Zillow Home Loans.

  • Zillow continues to lean heavily into mortgage as part of its broader strategy, even though Zillow Home Loans has lost $283 million since 2017.
     

  • At the end of the day, there is only so much Zillow itself can do; it is reliant on its agent partners, and Zillow is exerting immense pressure on those partners to achieve its goals.

Zillow Flex Fee Rises to 40 Percent

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Zillow recently raised the success fees on its Flex program – from 35% to 40% – for the completion of a successful transaction in six markets.

Why it matters: Zillow, like every other leading real estate portal around the world, has tremendous pricing power, and is able to flex that power to squeeze more revenue from agents and the multi-billion dollar commission pool.

Dig deeper: In early 2022, Zillow set itself lofty revenue goals, including generating an additional $1.5 billion per year from its Premier Agent program.

  • This revenue stream, paid for by agents, taps directly into the $70+ billion annual commission pool.

 
 

A key component of Zillow’s strategy is growing its Flex program – Next Gen Lead Gen that monetizes transactions on a success fee model.

  • That success fee has been 35 percent for years, but has recently risen to 40 percent in a half-dozen markets.
     

  • Zillow Flex accounts for around 25 percent of Zillow’s entire Premier Agent revenue, a percentage that has yet to materially change in 18 months.

 
 

The pricing change quietly occurred in September (there was no press release, for obvious reasons) in six markets: Denver, New Haven, Cape Coral, Reno, Oklahoma City, and Greenville.

There is a graduated referral fee band, but in all but two markets the average home value (as computed by Zillow) falls within the highest, 40 percent fee band.

 
 

The bottom line: Zillow’s market dominance, coupled with the exclusive nature of its Premier Agent and Flex programs, gives it unprecedented pricing power.

  • As outlined in my Real Estate Portal Strategy Handbook, most revenue growth at real estate portals around the world comes from raising prices.
     

  • Despite talk of new revenue streams and super apps, the easiest way for Zillow to increase revenue may be to simply raise prices on a captive audience.

Visualizing Existing Home Sales

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A collaboration between Mike DelPrete and Aziz Sunderji

There is an abundance of data about the U.S. housing market – and for every metric, there are an infinite number of ways of slicing and dicing the data.

Why it matters: What’s needed is a way of simplifying the data – ultimately, data should tell a story and provide meaning.

  • This week I am teaming up with real estate data visualization specialist Aziz Sunderji of Home Economics to contextualize yesterday's existing home sales report.

 
 

401,000 homes were sold across the country in August, and we think the best way to contextualize the data is to compare these figures to the same month in prior years. By this measure, home sales last month were the lowest since August 2010.

 
 

Sales in the West have declined against the long-run average more than in other regions (though the Northeast is not far behind). Transactions are holding up better in the Midwest and in the South.

 
 

Momentum in home sales over the past six months has been sluggish, and well below historical averages.

 
 

And sales are consistently falling below the historical average, especially during the past five months -- although August was a slight improvement over July. 

 
 

The current downturn shows signs of similarity to past housing downturns, both in velocity and duration.

 
 

Our ask: Use these charts! Include them in your own research and use them to educate consumers, board members, and peers.

  • The more we collectively understand the data – and make meaning from it – the better decisions we’ll make to move forward with clarity.

Zillow Still Crazy About Mortgages

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In a down market with historically high interest rates, Zillow continues to invest in its mortgage business – Zillow Home Loans – and is the only company among its peers that is adding mortgage loan originators (MLOs) to its headcount.

Why it matters: While other real estate tech companies are shedding mortgage headcount, cutting expenses, and closing their mortgage operations, Zillow’s investment is a clear sign of strategic intent and a reflection of its ability to invest for the long-term.

Zillow’s real estate peers, including iBuyers, Power Buyers, digital brokerages, and mortgage start-ups, have all shed MLOs over the past 18 months.

  • Some companies, like Opendoor, have shut down their entire mortgage operations, while others have cut MLO headcount by half (or more).

 
 

The number of Zillow’s MLOs has fluctuated over time, but there has been a sustained and noticeable increase throughout 2023. 

  • Zillow’s MLO headcount is up around 40 percent since February ‘23.

 
 

Better Mortgage, which recently went public via a SPAC, presents a very different story of MLO headcount. 

 
 

Zillow Home Loans is still relatively small compared to industry peers, including Redfin’s Bay Equity and Prosperity Home Mortgage (a subsidiary of mega-broker HomeServices of America).

 
 

Zoom out: And as I’ve written in the past, these companies are a drop in the bucket compared to mortgage industry behemoth Rocket Mortgage.

 
 

Remember: Zillow’s recent financial reporting changes have removed an informative layer of transparency from its business.

  • After six years of losses, it’s no longer possible to track the profitability and operating expenses of the mortgage business unit.

The bottom line: The number and growth of MLOs is an important leading indicator of a company's firepower and strategic intent.

  • With continued struggles around profitability and uncertainty around adoption, Zillow Home Loans is far from an unequivocal success story – but the company continues its heavy investment.

  • The depth of investment stands out by going against the grain of other mortgage companies, real estate tech disruptors, and the overall market – which highlights the importance of mortgage for Zillow.

Industry Evolution Continues During a Receding Tide

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At the close of the first half of 2023, key metrics – agent count, transaction volumes, and overall profitability – highlight a brokerage industry evolving along two paths.

Why it matters: In my recent Inman presentation, I unpacked what a Netflix vs. Blockbuster moment in real estate would look like, and how a receding tide reveals business model resiliency and clues about future growth.

Earlier this year, I suggested that “to identify the brokerage business models of the future, one simply needs to follow the agents.” (Read more: Agent Migratory Patterns.)

  • There is a clear split between the low-fee brokerage models that are attracting agents, and the legacy brokerages that are shedding agents – a trend that continues in Q2.

  • The notable change is Compass, which once again grew its agent count after shedding around 400 agents during Q1 – putting the company back on the growth side of the ledger.

 
 

The net change in agents is correlated to brokerage transaction volume; in general, more agents yield more transactions.

  • The overall market was up 37 percent in Q2 compared to the previous quarter, which can be attributed to seasonal growth.
     

  • The most notable outliers of the past quarter are Real and Compass, which both significantly outperformed the market.

 
 

And transaction volumes directly correlate to brokerage revenue.

  • Overall brokerage revenues are depressed in 2023, and continue to follow seasonal trends.
     

  • Compass has maintained its revenue leadership position, with eXp making significant gains over the past two years (while industry incumbent Anywhere has lost its top spot).

 
 

Overall brokerage profitability, a function of revenue and a company’s operating expenses, is clearly split into two camps.

  • The legacy brokerages had a much better Q2 (including Compass being cash flow positive), but are still unprofitable at a Net Income level for the first half of the year.
     

  • With significantly lower fixed costs and operational overhead, the low-fee brokerage models continue to have a structural advantage, and are operating much more profitably than legacy brokerages in the down market.

 
 

The bottom line: In my recent Inman presentation, I outlined what a Netflix vs. Blockbuster moment in residential real estate would look like.

  • Incumbents would have a stagnant market share with high fixed costs and a limited ability to evolve, while disruptors would be exponentially gaining market share with an easy to define unfair advantage.

  • The shifting market – the receding tide – is revealing these changes across the industry, leading to a bifurcation of business models with key differences in market share, growth, and profitability.

The Last Mile Problem

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Real estate has a last mile problem. Despite advances in online lead generation, tech platforms, emerging AI assistants, and disruptive new models -- an agent is still the necessary bridge to a consumer. Watch a clip of me outlining this phenomenon during my Inman Connect keynote below.

The last mile problem is a concept that comes from logistics and transportation.

  • Getting goods from a factory to a warehouse, and from a warehouse to a distribution center, is the easy part.
     

  • The difficulty comes with the final delivery -- the last mile -- where the experience is uncertain, complex, and expensive.

 
 

Real estate's last mile problem is similar -- you can buy thousands of online leads, invest millions into building a tech platform, and use predictive analytics to score how likely a lead is to transact.

  • But you still need an agent to pick up the phone, make a call, and build a relationship with a consumer.

 
 

And that's why the biggest players in real estate are working with agents, and not trying to disintermediate them.

  • Zillow's Premier Agent and Flex programs keep high-quality agents at the center of the transaction.
     

  • And now Opendoor is pivoting back to agents with a significant marketing and partnership campaign.

 
 

Online real estate companies probably wish agents weren't necessary and that they could go directly to consumers -- and agents probably wish the online disruptors would just go away.

  • But both forces operate in a tentative equilibrium, not necessarily liking each other, but able to work together to achieve a common outcome.
     

  • Which leaves real estate agents as the last mile solution -- the unavoidable, indisputable, and irreplaceable central part of the transaction.

Watch my enitre keynote, Pandemonium, to hear more about the industry's Netflix vs. Blockbuster moment and what a receding tide reveals about business models and true intentions. Enjoy!

Compass’ Cash Crisis Closes

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After 15 months of cost cutting, Compass is free cash flow positive, making more money than it spent in Q2 2023.

Why it matters: With a high cost base and dwindling cash reserves, Compass was forced to cut operating expenses as it pivoted to a profitable, sustainable operation – which it has done.

Dig deeper: I first wrote about Compass' cash burn problem in May 2022, and it's been a busy 15 months.

  • Over the past year, the company has cut expenses by about 35 percent – or $500 million – through three rounds of layoffs.
     

  • Compass’ annual operating expenses have dropped from $1.45 billion to $950 million, with a goal of getting down to $900 million by the end of the year.

 
 

A declining market is an especially challenging time to achieve profitability.

  • As of Q2 2023, Compass’ trailing 12 month revenue was $5 billion – down from $6.7 billion a year ago.
     

  • Which means cost control is the only realistic option available to get cash flow positive.

 
 

Compass’ cash balance has stabilized at $335 million – and, in fact, has increased for the first time in years.

  • Management clearly has confidence in the business: in July, it repaid the outstanding $150 million draw from its revolving credit facility.

 
 

What to watch: Compass isn’t entirely out of the woods yet, but it’s on a much more solid foundation.

  • This past quarter is the high-water mark for revenue; from here seasonality kicks in with progressively lower revenue for the next nine months.
     

  • It’s likely that cash flow will remain relatively flat for the rest of the year – the question is whether it will limit the company’s ability to invest for future growth (M&A and organic).

The bottom line: Compass’ turnaround has been an instructive case study in managing a business through a turbulent market. 

  • Like many businesses, the company was caught flat-footed last year when the market changed, but it executed a necessary turnaround to sustainability.
     

  • The broader lesson is around adaptability – it matters less how you got to where you are, and more how quickly you can adapt to a rapidly changing environment.

Zillow’s Listing Showcase Opportunity

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As Zillow's Listing Showcase rolls out, it’s becoming clear that it will play a central role on the seller side of the business as it unlocks new premium revenue streams.

Why it matters: Zillow’s goal is to double its revenue and customer transaction share by 2025 – a significant undertaking – and Listing Showcase appears to be a foundational component of that strategy.

 
 

Listing Showcase is sold to agents on a subscription basis, and each geographic “zone” has a limited number of subscriptions available.

  • One subscription includes five new Showcase Listings per month (which include photos, a 3D tour, interactive floorplans, and enhanced visibility).
     

  • Subscription prices vary by thousands of dollars depending on the market, but the average appears to be around $3,000 per month.
     

  • Exclusivity is an important cornerstone of Listing Showcase: It’s possible for one agent or team to purchase all of the available subscriptions in a zone.

The revenue opportunity is significant, measured in hundreds of millions of dollars per year.

  • Assuming six million total listings per year, converting five percent of them to showcase listings at an average subscription of $3,000 per month, the revenue potential is $180 million per year (Zillow’s existing premier agent business is about $1.2 billion).

 
 

And by the way: Listing Showcase doesn't cannibalize Zillow's existing business – listing pages still have tour requests which are routed to paying premier agents. 

 
 

Perhaps most importantly, the launch of Listing Showcase gets Zillow’s paying customers on the premium product flywheel, a concept very familiar to its international portal peers.

  • Once customers start paying for premium placement (listings and exposure), they usually end up paying more and more over time.
     

  • This is ARPL (average revenue per listing), and it keeps going up, driven by consumer demand and agent exclusivity – it’s the growth engine of international real estate portals like REA Group in Australia, Rightmove in the U.K., and Hemnet in Sweden.

 
 

Zillow's goal is to double its customer transaction share – a transaction that Zillow monetizes – from three to six percent of the market.

  • Zillow reported that it had five percent of buyer customer transactions in 2021, and, as outlined above, if it's able to capture five percent of seller listings, the goal of six percent of all buyer and seller transactions is within reach.

 
 

The bottom line: Up until now, the path to Zillow's lofty goals hasn't been entirely clear – but Listing Showcase is providing tangible clarity. 

  • Listing Showcase doubles down on what the business actually is (a high-margin online advertising platform) and not something it isn’t (an unprofitable, low-margin iBuyer or mortgage company).
     

  • In other words, Listing Showcase is strategically aligned to Zillow’s DNA and sustainable competitive advantage; it is competing where it can win.

Zillow’s Most Interesting Product

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In a year dominated by a confusing market, major advances in AI, and disruptors fighting for survival – Zillow has arguably released its most ambitious product since iBuying: Listing Showcase. 

Why it matters: Listing Showcase represents a new business model – from pay-per-lead to pay-per-listing – which is aligned to how Zillow’s very profitable international peers monetize their market-leading positions.

 
 

The Listing Showcase product promotes a specific listing with larger photos, enhanced agent branding, and premium placement in search results.

  • It’s also exclusive in each market, providing participating agents a unique advantage over other agents (“only my listings are enhanced in this market, making your property stand out”).
     

  • The result is a high profile listing with strong agent branding, ideally leading to more seller leads for partner agents.

 
 

Dig deeper: For years, seller leads have been the mythical holy grail of online real estate – incredibly valuable, but very difficult to generate at scale.

  • One surprise of the last five years was iBuying, which despite its challenges, turned out to be a great way to generate high quality, high intent seller leads (read more: Zillow's billion dollar seller lead opportunity).
     

  • Before it was shut down, Zillow Offers was generating tens of thousands of valuable seller leads per month.

 
 

Like its overseas peers, Zillow is using the concept of scarcity to increase the value of Listing Showcase; if it were available to any agent willing to pay, it would confer no unique advantage – but offered on an exclusive basis, the value becomes exponentially higher. 

  • Without an MLS, nearly all international portals charge agents (or home sellers) on a pay-per-listing basis, with multiple tiers of enhanced exposure.
     

  • Australia’s REA Group is masterful in the art of premium listings, which always include larger photos, premium placement in search results, and enhanced agent branding – all of which are features of Zillow’s Listing Showcase.

 
 

Yes, but: By only promoting the listing agent, Listing Showcase will cannibalize Zillow’s existing buyer lead business – but that’s not necessarily a bad thing.

  • Listing Showcase is a hedge against any potential impact from the various lawsuits that may restrict or change buyer agent commissions.
     

  • It also neutralizes the threat of CoStar's "your listing, your lead" product offering.

The bottom line: Listing Showcase is a serious, credible attempt by Zillow to expand its business from selling leads to selling exposure.

  • Modeled on its international peers, Listing Showcase has the hallmarks of a classic pay-to-play premium product, which, on a per listing basis, is a significant endeavor for the company. 
     

  • At its best, it’s a potential premium revenue stream that’s good for agents (the ones that pay), consumers, and Zillow's bottom line.

Brokerage Profitability

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A common response to my previous analysis, Agent Compensation at the Top U.S. Brokerages, is that the brokerages paying the most out to agents couldn’t be profitable or sustainable – but, perhaps counterintuitively, the evidence suggests otherwise.

Why it matters: In a shifting market, the low-fee brokerage models are structurally designed to thrive, and are operating much more profitably than legacy brokerages.

  • To recap, the low-fee models are paying out a significantly higher percentage of their revenue to agents than legacy brokerages. 

 
 

Those same low-fee brokerages are also profitable or closest to profitability: eXp Realty, United, Real, and Fathom (RealtyONE declined to share this information with me).

  • The only companies that were profitable in Q1 2023 were eXp Realty and United Real Estate, and the largest legacy brokerages were really unprofitable.
     

  • Note: This analysis uses Adjusted EBITDA (think of it as Adjusted Earnings) as the metric of profitability – it allows a company to portray its earnings in the best possible light by backing out expenses like stock-based compensation, one-off legal or restructuring charges, and other non-cash expenses.

 
 

To account for variations in brokerage scale, we can look at Adjusted EBITDA per transaction, which yields similarly revealing results.

  • It’s worth directly comparing the two fastest-growing models of the past five years, Compass and eXp: in Q1 2023, Compass lost $1,900 per transaction, while eXp generated a profit of $130 per transaction – quite the difference.
     

  • The outlier is Douglas Elliman, which has a much smaller transaction volume (4,600 in Q1 '23, compared to 36,000 at Compass), so its loss per transaction is much higher than its peers.

 
 

The next most common response to this analysis asserts that the low-fee models don’t provide as much support to their agents. 

  • Therefore, while agents are able to “make more money,” they’re on their own and, without brokerage support, are less productive.
     

  • Once again, the evidence suggests otherwise.

Across the nine brokerages in this analysis, the average production was one transaction per agent in Q1 2023.

  • The average for the legacy brokerages (Compass, Anywhere, Keller Williams, and Douglas Elliman) was 1.03 transactions per agent, while the average for the low-fee brokerages (eXp, Real, RealtyONE, United, and Fathom) was 0.98 transactions per agent – effectively the same.
     

  • In aggregate, agents at low-fee brokerages, with “less support,” were just as productive as agents at the legacy brokerages with “lots of support.”

 
 

Variability in the number of transactions per agent over time provides further evidence: between Q4 2022 and Q1 2023, the average number of transactions per agent dropped 10 percent across the same nine brokerages.

  • Four low-fee brokerages (eXp, Real, Fathom, and RealtyONE) were at or below that average – meaning that their agents saw less of a decline in transaction volume than agents at legacy brokerages.
     

  • Support or not, agents at low-fee brokerages were more resilient and saw less variability in production during a changing market.

 
 

Yes, but: These are averages, and as with all averages, there will be overs, unders, and outliers.

  • Not all low-fee brokerages and legacy brokerages perform similarly.
     

  • Furthermore, inside of each organization, there is significant variability in individual agent performance and compensation. 

The bottom line: The dual hypotheses that low-fee brokerages aren’t sustainable, and that their agents are less productive due to less support, are false.

  • Low-fee brokerages are in fact more profitable than the legacy brokerages, even after paying out a significantly higher proportion of their revenue out to agents.
     

  • This is classic Innovator’s Dilemma: while the legacy brokerages are racing to cut costs, the low-fee models – built from the ground up with a lower cost operating model – are taking market share and competing where they can win.

Agent Compensation at the Top U.S. Brokerages

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Agent compensation structures at U.S. real estate brokerages vary, with some firms paying out a significantly higher percentage of their revenue to agents than others. 

Why it matters: Commission and fee structure is foundational when it comes to agent loyalty and recruitment; as agents seek to maximize their earnings, they're naturally drawn to brokerages offering higher splits and lower fees.

Dig deeper: Brokerages generate revenue from the commission on the sale of a house. 

  • The brokerage and agent then effectively split the commission, through a varied combination of commission splits, fees, and revenue sharing.
     

  • Once added up, the result is a percentage of total brokerage revenue that is paid out to agents – ranging from 77 to 96 percent in this analysis.

 
 

The low-fee / high-split brokerages like eXp Realty, Real, RealtyONE, Fathom, and United end up paying significantly more of the commission out to agents.

  • Compass, which famously offered agents high commission splits as a recruitment incentive, is, on aggregate, closer to traditional industry stalwart Anywhere (home of Coldwell Banker and Sotheby's) than the others.

Compass is paying its agents less over time, through a combination of reducing existing agent splits, recruiting new agents with lower splits, and higher fees.

  • The one percent reduction in revenue paid out to agents over the last two years represents about $9.5 million retained by Compass and not paid out to agents in Q1 2023.

 
 

Compass highlights this achievement, which it is clearly proud of, in its quarterly earnings, declaring that its “commissions expense as a percentage of revenue” is “improving.” 

  • In fact, Compass is so pleased with this achievement that it is the first data point in its earnings press release and the second financial highlight, behind total revenue, in its investor presentation.
     

  • Enjoy it while you can; after this article, I doubt Compass will be highlighting these numbers so strongly in the future – and it certainly won’t kick off its agent gatherings with the same metrics.

 
 

Agents like to make money, so it’s unsurprising that as natural entrepreneurs they flock to brokerages where they can maximize their earning potential.

  • It’s no coincidence that the top 5 brokerages that grew agent count over the past quarter are the exact same brokerages that paid the most out to agents: eXp, Real, Fathom, RealtyONE, and United.

 
 

The bottom line: It’s a simple equation: More money attracts more agents, and more agents sell more houses.

  • Brokerages paying a smaller proportion of revenue to agents is an effective strategy to improve short-term financials, but the long-term implications around agent recruitment and retention are significant.
     

  • In a period of fewer transactions and overall belt-tightening, it's more important than ever for agents to carefully consider commission splits when deciding where to work.