By Matthew Templeton
Managing Principal
KW Urban Dallas

It feels like there have been fundamental shifts in the real estate industry within the last few months. Technology is the buzz word, money is being thrown around, and CEOs of just about every top real estate-related company are out. The last few weeks’ news sums up that feeling.

September 2018: Compass closes another funding round for $400 million — money used to build more software and buy more agents.

And then …

February: Rich Barton (billionaire co-founder of Expedia and Zillow) takes the reins from Spencer Rascoff, who was CEO at Zillow for nine years.

February: Keller Williams rolls out the first artificial intelligence and data-driven platform in the real estate industry — others have been clamoring to follow

February: RE/MAX says [sic] “Our amazing technology is coming, and it will be best in class,” and makes a technology acquisition, Booj.

Last Week: Data-driven Opendoor will now show listings from rival brokerages and offer Redfin-like rebates.

Last Week: NTREIS Board holds a vote on whether to sell greater data access to Zillow. April will be a reckoning month for North Texas Realtors and their data.

We’ve moved into a new real estate era that is faster paced and increasingly powered by technology and data — more than ever before. But there’s something else afoot. It’s eerily similar to what happened with the dot-com bust. Real estate technology companies are flush with capital — in fact, 2018 was a banner year for real estate technology investment.

And yet many of the top “technology” or “platform” companies in the industry are not profitable.

Zillow? Still not profitable, and the losses are widening with $120 million in 2018. Redfin? Not profitable. Opendoor? Not profitable. Compass? The CEO strategically avoids the question of profitability, but the regular need for another round of funding speaks for itself.

What kind of stability does this spell for those of us in the middle of this industry?

Our economy has entered a new age — the digital age

This age is unlike the Industrial Revolution of the 1900s, when companies had to show profitability before they could get additional funding or be successful in the stock market. The skittish technology market of the 2000s has transformed itself back into the speculative, capital-driven gambling of the late 90s. Tech is hot, and it’s winner take all.

This time though, it’s different. It’s based on a new and very powerful asset — data and the integrated platforms to mine and house it. But regardless of how technology companies are valued and perceived, there will be winners and there will be losers. The once endless supply of money will dry up once the returns don’t come to fruition. That day of reckoning is not yet here.

So we compete in this digital age.

This new digital age has replaced the old profit age (at least for technology companies). Amazon popularized this for 15 years by regularly saying in its quarterly report that profits were not the primary goal. Instead, Amazon wanted to build an amazing platform that customers preferred. The company did amazingly though, through its years of unprofitability, even to my own chagrin.

When I should’ve bought the stock at $250/share, I passed, opting to invest in more profit-driven business models. As of today, it is trading around $1,600/share, and only in the last couple of years did it get to total profitability. One major business unit is driving Amazon’s profitability  — Amazon Web Services. It’s main business unit — selling things online — has yet to become profitable! Facebook did this, too. So did Netflix. It amounts to years of using investment to fund operations until it could reach enough users and monetize those users.

There are plenty of examples of companies who never got to profitability and eventually ran out of cash to operate on.

In the venture world, the amount of investment capital you need to operate the business is called the burn rate: how fast you burn through the cash that investors give you while you figure out how to make money on your flashy technology.

Some companies go public to raise more of this capital and then hope the market treats them like it did Amazon — giving them a pass as long as they are growing by user base/eyeballs/people.

This is the key: In order to survive in the digital age without profit, you have to convince investors to keep giving you money because you are growing.

Zillow is an example of what happens when you don’t grow fast enough. Their stock price has plummeted in the last year and the total market cap (the value of the company based on total shares and stock price) was down more than 50 percent from its peak — until Friday. Hence, the reason Zillow named a new CEO — Rich Barton saw the need to take the company into his own hands.

By the way, upon announcing the change on Friday, Zillow’s stock soared by more than 25 percent. Since it recovered, it’s valuation is back up in the $8 billion range from lows in the $3 and $4 billion range late last year, which is off its peak of $12 to $13 billion in late 2017 through June 2018. The investors were punishing Zillow.

Additionally, until its fourth-quarter earnings call, its revenue was down, the growth in its user base and views were down, and the path to profitability was looking bleak. No growth for a tech company means that you have to demonstrate profitability. So what move does Zillow make? Former CEO, Spencer Rascoff, in the third-quarter earnings call said that Zillow would continue to move [sic] “further up the funnel toward the consumer” and expand its business offerings. Rich Barton reiterated that statement on Friday upon becoming CEO:

“We’re making strategic investments to broaden the Zillow Group portfolio to move further down the home-shopping funnel, giving today’s ‘uberized,’ on-demand consumers a full spectrum of options to buy, sell, borrow and rent on their terms.”

This year will be one of “transformation and investment,” Barton added. Zillow must make strategic moves to continue its growth despite a lack of profitability. For real estate agents, that could mean a change in how they make money or how much they make in the future, and it definitely means that someone else might be your boss (enter stage left the recent Indeed ads from both Zillow and Redfin).

By the way, some of our favorite companies in other industries, such as Uber and Airbnb, also aren’t on a path to profitability, but they still have massive valuations and continue to get the cash to make it all possible.

So what does this new paradigm — the profit age vs. the digital age — mean for the consumer?

Well, nothing yet, except that every company is fighting for the monetary value of where you put your eyes. Even when service seems free, there is a lot of money being transferred behind the scenes.

And what does it mean for the real estate professional?

• You must have an understanding of technology more than you ever have. Become a Tech-Enabled Agent (more to come on that).
• Profit-based business models (like traditional brokerages and advertising platforms) are not out of style, but they are being challenged by competitors who don’t have to play by the same rules. These competitors often don’t have to treat you, the agents, your consumers, or our industry the same way that a profit-based company might. As one venture capitalist put it: It’s not about the money right now as it is about fundamentally turning the real estate industry on its head.
• Choose your alliances wisely. Wolves come in sheep’s clothing and may befriend you, pay you, and make promises to you all while they choose to change the industry right out from under you.

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Matt Templeton is a Real Estate Agent Expansionist, Speaker, Brokerage Owner, and Real Estate Guru with Keller Williams that lives and works in Dallas. He coaches top business owners on business building, lead generation, time allocation, and technology. Reach him at [email protected].