Crystal Ball Time

These are not hard and fast forecasts for the industry, just possible future scenarios with a percent probability (assigned by yours truly) based on the previously noted factors in Part 1.

Two huge disclaimers:

• The pending legal actions could magnify, distort, or minimize some or all of these scenarios.
• If the economy stagnates or goes south along with the industry, this will distort the outcomes over the next few years as well.

Having said that, let’s consider these scenarios:

• Compass and/or Opendoor don’t figure out how to make a profit before they go public – 50% possibility
• Compass continues to make acquisitions – 100%
• Redfin continues to post quarterly losses or miniscule profits in the near term under the banner of “investing in their model” whether it’s pumping at least $40 million into marketing in 2019 (page 4 at the link) or building technology solutions from scratch (page 12 at the link) – 90% probability
• eXp posts an annual loss for 2019 and 2020 under the banner of “investing in their model” – longer than that, according to this publication and this note from a year ago talks about the same profit margin issues that eXp is still having today – 90% probability
• Redfin converts to an all-iBuyer business model – 50% possibility
• Zillow successfully grows its iBuyer initiative while maintaining its core advertising/lead gen business – 80% probability
• Agent commission splits will continue to climb albeit maybe at a slower pace. Agents will continue to get perks from brokers such as larger marketing allowances, more free services and, in a couple cases, stock grants and options from brokers willing to offer them – 100%
• Agent teams will continue to grow in size, count and influence across the country – 100%

While these last two scenarios may be viewed as obvious, inevitable, or maybe just not that big a deal, this easily leads to an endgame described as “BaaS” – Brokerage as a Service. The industry has seen this before – it was called the 100% commission brokerage years ago. Side, a VC-funded provider of brokerage services to top agents, is an example of its current incarnation. Top producing agents and teams have the freedom to self-brand and focus on the consumer while having the drudge of back office functions and services handled by the broker.

The bigger question is how would this scale profitably on a nationwide basis? Or does one broker really need to scale to the size of a Realogy in which these BaaS services are centralized for the most part. After all, such an operation needs to have “boots on the ground” even if only on a regional basis. The good news is that the need for a brick-and-mortar presence in a given region would be a tiny fraction of the office footprint of a comparably sized traditional broker, keeping those kinds of costs to a minimum.

The consequences of this forecast (using Side as the template for a super-regional BaaS) lead to some interesting observations:

• Whether or not Compass or Opendoor makes it to profitability makes little difference to the BaaS model.
• Continuing Compass acquisitions will make little difference to the BaaS model but may indicate to Compass over time the need to convert to a BaaS model.
• Whether or not Redfin converts to an iBuyer business model makes little difference to the BaaS model because the iBuyer model doesn’t really conflict with the Baas model.
• Zillow’s success in the iBuyer arena could lead to a future in which Zillow becomes a leader of the BaaS model.
• The continuing rise of agent commission splits actually plays to the advantage of the BaaS model.
• With the exception of moving services, affiliated services could be added on easily as a part of the BaaS model as long as the BaaS companies achieve reasonable capture rates in those business lines.

Endgame

Does this mean that some of the larger brokers will eventually view the BaaS model as a way out of their collective commission split/company dollar/brick-and-mortar dilemma? Possibly.

Does this mean that Zillow may start building its own BaaS operation after its iBuyer initiative really takes off? It has already crossed the street over to the broker side and the BaaS model practically ensures a steady customer base for its existing operations.

Other factors such as recession, a housing downturn, DOJ rulings and lawsuits along with the continuing influx of VC money will only push the speedometer needle one way or the other. But this vehicle will continue to motor down the road – the question is what’s further down the road?

The only true given is that agent commission splits will continue to rise and company dollar will continue to fall. It may take a while for it to emerge, but the only reasonably objective endgame is an industry based on the BaaS model.

If so, who will eventually sit on the Iron Throne of real estate? A large super-regional or nationwide BaaS (Realogy?) formed by a series of acquisitions? Zillow? Compass? Whoever does, as in “Game of Thrones”, that occupant probably should not plan on a long reign. Disruptors (invaders?) will continue to appear and alliances will continue to form and unravel.

And how long will it take for the endgame to reveal itself? Like “Game of Thrones”, the answer will be years in the making. But it is coming.

[GoT logo via Variety.com]