Is it possible that CoStar could venture into the residential real estate domain, potentially redefining the industry and posing a substantial threat to established players such as Zillow, Realtor.com, the National Association of Realtors (NAR), and others? At SpringRamp Consulting not only believe it is possible – we think they are likely to succeed.
When we speak of a “threat,” we don’t merely mean increased competition. Rather, we envision the possibility of these companies and organizations struggling to sustain their existing business models and fading from prominence. While we acknowledge these claims may seem audacious, our strategic analysis of CoStar’s initiatives, CEO statements, and recent industry developments fortifies our opinion that we’re on the right track.
To be clear, when we say CoStar is a threat to the industry we do not mean they are doing anything illegal or immoral. To the contrary, CoStar believes they have identified a weakness among their competitors’ go-to-market model and as a result, they can build a better consumer experience. The threat is that CoStar believes the current models of connecting buyers and sellers of homes using online portals are inefficient and ripe for disruption. The threat is that they have hundreds of millions of dollars available to be disruptive.
This article is the initial installment of a four-part series that will help explain what we believe the CoStar residential strategy will be and how it will impact the industry and existing players. The next three articles in this series include:
- The Real Reason Why CoStar Considered Acquiring Realtor.com
- Why Homes.com Achieving 100 Million Unique Users Isn’t What It Appears
- The Strategic Maneuver That Positions CoStar as a Genuine Industry Threat
You can receive these articles promptly upon publication by subscribing at no cost on our website, www.SpringRamp.com. Now, let’s dive into the important and pivotal subject of buyer’s agents.
What would happen if buyer’s agents had to negotiate their commission with, and be paid directly by the home buyer instead of having that commission set by the home seller and listing broker at the time the MLS listing is created?
We believe this could lead to a significant reduction in the role of buyer’s agents in residential real estate transactions. Legal and regulatory actions currently in progress make this scenario a tangible near-future possibility.
If you’re a real estate agent who is a member of the National Association of Realtors (NAR), you’re subject to the Participation Rule. This rule requires listing brokers to offer compensation to buyer’s agents as a prerequisite for listing a home on the Multiple Listing Service (MLS) database.
You are required to enter some offer of compensation even if that offer is $0. This requirement was the focal point of an antitrust trial that the National Association of Realtors lost recently. Without offering in-depth legal analysis, the plaintiffs essentially want to end the NAR and MLSs’ requirement of including a buyer’s agent commission when a home is listed on the MLS.
So now that the plaintiffs won the collusion case against the NAR, what happens next? To put it simply, this will have serious adverse implications for buyer’s agents. It is the worst-case scenario. The court effectively decided that the buyer’s agent needs to be paid directly by the homebuyer rather than the home seller. If the case survives the appeal process, this will put buyer’s agents in a difficult position because now they would have to justify a 3% commission coming out of the pocket of the home buyer. Many home buyers have a hard time coming up with down payments, let alone having to pay a buyer’s agent out of pocket. Also, the current mortgage rates hovering around 8% also do not help with affordability.
A buyer’s agent would have to answer the very tough question “What exactly are you doing that is worth me paying you a 3% commission?” With the proliferation of online portals, homebuyers can now locate properties, schedule viewings, find financing, hire an inspector, and make offers without a buyer’s agent. It’s reasonable to assume that many homebuyers would be very hesitant to pay out of pocket the traditional 3% buyers agent commission, which translates to $12,480 on the median U.S. home price of $416,000.
What is likely to happen is that buyer’s agents would have to truly compete for home buyers, and this type of competition usually ends with a race to the bottom for commission rates. In addition, many non-real estate licensed professionals could offer services to home buyers at a much lower cost. A real estate lawyer could offer document and contract review, a home inspector could help you during a showing, and an “advisor” could hold the buyer’s hand during this complicated process and tell them everything will be alright. Being a buyer’s agent is hard work, and many agents would rightfully decide the compensation for that level of work is no longer acceptable.
Now, let’s get to the important part of this article: what does this have to do with CoStar and their residential real estate strategy with Homes.com. Though CoStar would never say it, we believe that CoStar perceives the diminishment of buyer’s agents as a favorable outcome that aligns with their strategic objectives.
Let’s dive in.
CoStar’s business model is to monetize a relationship with the listing agent. Homes.com is going to market with a “your listing, your lead” business model. All leads generated by Homes.com are routed directly to the listing broker, not the buyer’s agents. The CoStar CEO, Andy Florance, has stated repeatedly that they have no intention of selling leads to buyer’s agents.
To put it simply, if there were a significant reduction in the number of buyer’s agents, it would have almost no effect on the Homes.com business model because they do not seek a significant amount of revenue from them.
However, a reduction in the number or compensation of buyer’s agents does hurt Zillow and Realtor.com. Zillow and Realtor.com make the vast majority of their revenue from selling home buyer leads to buyer’s agents. If, in the worst-case scenario, there were no more buyer’s agents, who would Zillow and Realtor sell leads to?
Could those companies pivot and sell leads to listing brokers – maybe, but they would have to catch up with Homes.com and develop products and services that resonate with listing agents. CoStar has hundreds of millions of dollars to defend its position and make a competitor pivot very difficult.
CoStar has decided to bet all of its chips on offering subscription-based products and services to listing brokers while its main competitors are betting on buyer’s agents. Any weakening of buyer’s agents’ commissions strategically helps CoStar and hurts Zillow and Realtor.com. It is possible that the weakening of buyer’s agents in the U.S. was the opening that CoStar was waiting for to enter the residential real estate market? The CoStar strategy is not to compete with the other main real estate portals but to eliminate them.
So, if the weakening of buyer’s agents helps CoStar and hurts Realtor.com, why was CoStar interested in buying them for several billions of dollars? The answer lies in a nuanced understanding of what Realtor.com possessed and what CoStar critically needs for its strategy to work. We will delve into this topic in our next article in this series.
Warren Walker is the Managing Partner of SpringRamp Consulting and has over twenty years of strategy consulting and analysis and was previously the Senior Director of Strategy for Realtor.com. Connect with him by email at info@SpringRamp.com or www.SpringRamp.com
SpringRamp Consulting Disclaimer:
The views and opinions expressed in this article are those of the author and do not necessarily reflect the views or positions of any of the companies and organizations mentioned in the article, or of any platform that publishes this article. This article represents an opinion on the possible actions, activities, impact, and results of various companies and should not be considered statements of facts.