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An Inside Peek at Knock, and Zillow’s Entry into Purchasing Homes

Editor’s Note: Below is the Geek Estate Mastermind newsletter #18 from February (this week’s edition was #24). Prospective members often ask for a sample newsletter, so thought I’d post a past edition publicly as an example — particularly given the relevance of Knock’s model to yesterday’s Zillow announcement that they will begin purchasing homes directly.

Those of you who know me, know I’ve been advocating for the consumer since I entered this industry as a 23 year old graduate from the University of Washington. “Win the consumer” is what I’ve been harping on since Geek Estate Blog’s earliest years, which came from my role as the “voice of the consumer” at Zillow. The topic of this week’s newsletter is a company I have been intrigued with for awhile.

Knock.

What’s driving my interest? First and foremost, buyers/sellers are delivered an extremely clear win; certainty, convenience, and decreased risk. Knock’s primary value proposition: Trade-In Your House Today. Knock will buy your new house and move you in before listing your old house.

Second, my girlfriend and I recently started watching HGTV’s Fixer Upper (with Chip and Joanna). I know we’re late to the party, but we love the show. Third, I grew up fixing and remodeling homes. My dad is a self professed do-it-yourselfer, as were both grandfathers. All enjoyed teaching me (and I enjoyed learning); I’ve stripped homes down to the studs, and pieced them back together. Fourth, I’ve recently started consulting on a new offering that shares a few characteristics.

I had the pleasure of speaking with Knock’s CEO Sean Black for 30 minutes a couple weeks ago to learn more about what they’re working on, and the business model behind it. Let’s get to it.

Knock, which started operations in Atlanta and recently launched in Charlotte, is a home trade-in platform offering the ability to sell a home with more certainly and less stress/risk. They help homeowners buy a new home, move them in, and then sell their old home for them. The team was founded by Sean Black (early Trulia), Jamie Glenn (Yahoo! RE & Trulia), and Karun Sakhuja (homeASAP). Point being, they have a wealth of industry experience, as well as sizable funding.

Consumer Win: I showed Knock to my mom after a discussion about real estate over dinner a couple months ago. After reviewing the website and watching the video, she emailed me back and said Knock is exactly what my sister and broker-in-law need to upgrade. They have equity in their home (Greenwood neighborhood of Seattle), but the prospect of buying and selling at the same time is beyond daunting (especially with two children). They can’t purchase without selling first to capture and liquidate their equity. Thus, the pickle. Knock solves this barrier by purchasing a new home for the buyers, and settling after their old home is sold. If Knock operated in the Seattle market, my sister and her husband would be clients tomorrow. Another friend of mine and his wife are in a very similar “wanting to upgrade but don’t have the down payment” situation.

Operational Complexity: Their concept is complex and impressive (I’d encourage you to watch the video on that page). Here’s all the steps Knock coordinates for the buyer (who also ends up a seller):

  1. Submit home for a free market price estimate.
  2. Phone consultation.
  3. Licensed Local Expert (Knock) will help find a new home. They get the buyer fully underwritten for a new mortgage.
  4. Buy new house with KNOCK’S CASH.
  5. Manage and pay for improvements on new home. Up to $10,000, which can be rolled into the mortgage.
  6. Move into the new house.
  7. Only pay one set of bills.
  8. Manage and PAY FOR repairs on old house to maximize offers. Up to $10,000, and settle at closing.
  9. Transfer new house into buyer’s name as soon as the old house sells. They guarantee a sale within 6 weeks, or they’ll buy the home themselves.

That’s a lot of moving pieces, but handling all of them adds considerable value to a buyer/seller combination.

Business model: Knock earns their commission by being the buying agent on the new home, and the selling agent on the old home. They aren’t making money on the construction/renovation costs. That said, their volume is significant and as a result are able to execute construction projects at a sizable discount compared to the market.

Differentiation: First, Knock agents are on salary (W2s), not independent contractors (1099s). That means they won’t have the “agent adoption problem” most of the industry has. If an agent doesn’t do things the “Knock way”, they will cease to receive a paycheck. Not unlike Redfin, this gives them a strategic advantage delivering consumer wins not necessarily in a commissioned agent’s best interest.

Second, they are fronting the cash (up to $10,000) for improvements. They are taking the burden off the buyer. It’s worth noting that $10,000 is enough to do cosmetics and repairs, but generally not a structural renovation. I understand the need for a cap since they are financing everything. That said, when thinking about adding significant equity to a seller’s home, what’s truly needed are often fairly major renovations costing well in excess of $10,000.

Third, and this is important, Knock has plans to let anyone use their platform to buy and sell directly, without an agent, in the future. They are building a platform for the whole transaction, for anyone to use, for free. And if, as a buyer or seller, you can’t find homeowners to do a deal with, you’ll be on Knock’s platform. More likely than not, you’ll end up using Knock as an agent. That’s the thinking anyway.

Knock & the Broader iBuyer/iSeller Landscape: It’s no secret the most well funded iBuyer/iSeller players are Opendoor, Offerpad, and Knock. Of course you can’t ignore Redfin and Zillow in that race, either. I agree with Sean that, at some point, the leaders will be so far ahead in technology, funding, and brand that it’ll be a losing proposition for new entrants to compete.

To me, it’s blatantly clear Knock delivers a far superior experience than a traditional agent/boker is able to offer their clients. The ability to actually move into a house prior to selling your old one is a game changer in terms of convenience.

If you boil down Knock’s business model, everything serves as lead generation into the commission for two transactions. 6% total. Think about all the aspects of the deal Knock is handling, to get 2 sides. They are financing the new home, guaranteeing the sale of the old home, and fronting the costs of renovations on two homes (as well as handling project management). That’s way beyond what a traditional agent can deliver to their clients. Heck, it’s way beyond what most brokerages can reasonably deliver (I’ve heard rumors Windermere is doing some of this here in Seattle, but haven’t confirmed).

Complexity. That’s my real takeaway. As an agent or broker, the required service level complexity to attract leads & satisfy buyers and sellers is increasing at a rapid pace. Sure, the rise is funded by VC dollars, may not be profitable, and you don’t have a business model that warrants funding to compete. Unfortunately, none of that matters. Agents/brokers either need to figure out a strategy to compete or die trying. You can no longer expect to simply handle negotiation and close the deal and take your 3%. A comprehensive approach to winning your clients over is the best way to compete against the iBuyer/iSeller tech titans. You have to bring something unique to the table. Offering sellers guaranteed offers like FlyHomes (their co-founder Steve is a Geek Estate member) will rapidly become table stakes to winning deals. Beyond that, I predict a rise in teams and brokerages helping with rentals, property management, renovations, home security, interior design, real estate investments, travel planning (see here), and even personal finance.

How are you going to compete? How are you going to deliver “better” to your clients?

Editor’s Note: That marks the end of Geek Estate mastermind newsletter #18 from February. Below are a few fresh thoughts related to Zillow’s Instant Offers announcement and how it changes the iBuyer landscape.

First, watch this video to understand the way Zillow is thinking about Instant Offers:

From Zillow’s perspective, they are able to offer partner agents/brokers more value in terms of leads/clients. By acting as a friendly financing partner, agents can utilize them to help win listing presentations. That makes those partner agents more likely to continue their relationship with Zillow as Premiere Agents (which means revenue for Zillow). Buying homes directly also gets Zillow closer to the traction, which increases their ability to monetize by moving buyers farther down the decision making process on their platform.

Like Knock, Zillow has upped the complexity level by agreeing to actually buy homes with their cash. If you’re buying homes as an investor, you’re going to need to renovate and sell them quickly if you are to make a profit (or you can hold for the long term — though I’m certain that’s not the path Zillow will take). Renovating homes, even if it’s just cosmetics, is a “messy” business requiring operations/logistics (to be good at it). Flipping homes is a completely different business to be in than the media business that Zillow claims to be, and my main question is how much of that operations/project management/logistics work Zillow is offloading to partner agents.

The weakness I see in the video is they are seemingly deviating from their fanatical consumer focus that has gotten the company to where it is. For instance, a “problem” mentioned is agents aren’t able to participate in the seller process enabled by iBuyer startups (Opendoor, Knock, Offerpad, etc.). Granted, this is an industry facing video and certainly not the message put out to consumers (nor should it be) – but an agent not participating in the selling process is not a problem consumers care about. They care about selling their house. If there is a better way that doesn’t involve an agent (and saves them money), so be it. Zillow said it themselves, “The approach we’re taking is agent first and broker first.” I 100% understand why they’re taking this approach, and working WITH the industry rather than against it is a strategic choice that will benefit them in many ways. That said, an “industry first, consumer second” mindset is what got Realtor.com to where they are (no longer the category king). Don’t get me wrong, I’m not by any stretch of the imagination saying another company is close to disrupting Zillow. Their lead in brand, distribution, scale, and tech is mind-blowing, and is going to take years for anyone to surmount a major challenge.

From the partner agent/broker perspective, this is a major win. They are now able to go into a listing presentation WITH an instant offer in hand rather than having to compete against those offers. Whether the seller decides to list the house traditionally or take the instant offer, the agent still participates in that transaction. Beyond that, more leads is a good thing (if you have the capacity to serve them of course). Zillow being an investor in their Instant Offers marketplace should drive lead volume up.

What does this mean for the iBuyer landscape from the consumer side? Well, this is an obvious win over the current Zillow seller experience in terms of certainty. That said, Knock’s value proposition of actually closing on and moving you into a new house prior to putting your old house on the market is still a clear, clear win compared to what Zillow’s partner agents/brokers are able to offer their clients.

Net-net, this is a huge ballsy move by Zillow Group that extends their strategic moat, making them extremely, extremely hard to compete with. I like it.

That’s a wrap…until the next member newsletter.

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About Drew Meyers

Founder of Geek Estate Blog / Geek Estate Labs. Zillow Alum. Travel addict & co-founder of Horizon. Social entrepreneurship & microfinance advocate. Fan of Red Hot Chili Peppers and Kiva.

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