Keller Williams Concierge: New Wine in Old Skin

One of the more interesting things that happened last week was news that Keller Williams will roll out a new “concierge” program in California, Georgia and Texas. Designed to compete against similar offerings from Compass (note that KW says they pay no attention whatsoever to competitors, but I do think the lady doth protest too much), the new KW Concierge would front the cost for repairs, renovations, staging, painting, etc. to get a home sold for the most money in the least amount of time. The seller would repay the loan at the closing from the proceeds of the sale.

From the Inman story:

“We will front the finances required to allow a homeowner to make improvements and modifications to their home to maximize their listing value,” [Josh Team, President of Keller Williams] said. “They only have to pay that back when their listing sells.”

I think this is a very good move by KW. It will help KW agents (kinda sorta) fend off competition from Compass agents on listings, and therefore help with recruiting and retention.

But there is a critical difference between the two programs which is worth looking at, because it is the difference between playing by the old rulebook of real estate business and playing by the new rulebook of real estate business. I understand why companies like KW continue to play under the old rules, but it points to a fundamental weakness of traditional real estate companies that they must address if they are to remain competitive in the new landscape emerging around them.

The Importance of Concierge

Until recently, when I had a chance to have a couple of long conversations with Compass agents, I did not realize just how important Concierge was to Compass’s value proposition. The industry likes to bash on Compass because of its signing bonuses, low introductory splits, and so on. “They’re just buying agents!” is the common refrain. I confess that I kind of wondered as well.

In speaking to actual Compass agents, however, it quickly becomes apparent that they think that the most valuable tool that Compass provides is the Concierge program. It allows the Compass agent to walk into a listing appointment knowing that she has thousands or tens of thousands of actual dollars she can offer to the seller if they list with her. I’ve heard that the official Concierge program guidelines are supposed to be capped at 3-5% of the home’s value, but agents routinely report that Compass corporate will approve far higher limits depending on the property and the situation. So in one case I’ve heard of, the amount of money the Compass agent was able to offer the seller was north of $90,000. Not a single competing agent could offer that kind of a special renovation loan.

So it makes perfect sense for KW to offer its own Concierge pre-sale home improvement financing program. It lets KW agents not have to walk into a listing appointment with empty hands, when they know that Compass agents are going to be bringing a wheelbarrow of cash with them.

(As far as I know, Redfin’s Concierge program is a bit different, in that Redfin will pay for staging, painting, minor landscaping, etc. but not all the way to actual renovation work, like a new kitchen or a new bathroom… which the Compass program definitely does and the KW program likely does given the language above of “improvements and modifications”.)

But there is a small but all-important difference between the KW Concierge and the Compass Concierge.

The Critical Difference

The difference seems like a minor one at first, and so it got only a brief mention in the Inman story about the KW Concierge rollout:

Currently, a small amount of interest is charged for upfront costs, but the goal is to get that fee down to zero.

This is one of those small differences that make all the difference in the world.

In contrast, the Compass Concierge program proudly touts, “No hidden fees, no interest charged—ever:”

See, that tiny difference makes all the difference.

Speaking as a consumer, when Compass offers me money to do renovations with no fees and no interest… it’s a no-brainer. It doesn’t matter how small the interest payment would be for the period of the renovation/home improvement. 30 days or 45 days, it’s still using your money for free. That feels like you are investing in me and my home, because… well, you are. I assume that you’ll make that small interest back from the commission you’re charging me, and I’m just fine with that.

Conversely, when KW offers me financing with a “small amount of interest”, that’s not a no-brainer. Now I have to consider whether the price of your money is worth it or not. I might shop the deal around. I might think about using my own cash instead of paying you to use your money.

But more importantly, that no longer feels like you are investing in me. No, it feels like you’re just trying to sell me some money, in exactly the same way that banks, credit card companies, auto loan companies, or any other consumer finance company wants to do. It almost doesn’t matter how low the interest is: it still means that I have to pay to use your money, which means you’re going to make a profit (however small), and your agent is still going to charge me the full commission. That feels different.

Is it better than some other company’s agent who can’t offer me jack-diddly? Of course it is. And if I can’t get a Compass agent interested in my house, will I consider the low-interest offer from KW? Of course I will.

But the point is that it will feel different to the consumer, because it is different to the consumer: free vs. nominal fee is a real difference.

Plus, we know that KW knows that there is a real difference, since KW has a goal to drop that small amount of interest and make it 100% competitive with Compass’ offering. They know just as well as we do.

The Old Rules vs. the New Rules

I think the fact that KW knew that and still rolled this program out is actually more significant than the small difference between “free vs. nominal fee.” Because it points to the old rules mindset vs. the new rules mindset.

One of the most oft-heard criticisms of virtually all challengers to the traditional real estate models is that they’re not profitable, they’re not making any money, and they’ll all go away once investors get tired of putting money into a losing proposition. We have heard that complaint about Zillow, about Redfin, Opendoor, Offerpad, discount brokerages, alternative brokerages like REX, and anybody else who threatens the old way of doing things.

And to be sure, that criticism is 100% valid. No company can just go on losing money forever and ever and hope to have investors keep pouring money into a bottomless pit. There has to be some kind of a path to profitability.

If you hold to the old rules, which says that any business venture must first be a business and therefore generate a profit (or at least not lose any money), then making interest-free loans to get listings is a terrible idea. You essentially have to write off the opportunity cost of that money (which could have been earning you interest for those 30-90 days until the closing) as a type of marketing expense. With the razor-thin margins at brokerage and at franchises, especially one like KW where the franchise fee is capped, it is nonsensical to do anything like that.

More rational would be to charge at least some kind of low money-market account type of rate for that money so you’re not actively losing money with each listing.

That is the path that KW took and is taking. It is extremely sensible, and one would normally nod one’s head and say, “That’s a good businessman right there, that Gary Keller.”

The new rules, however, are different. The new rules say that capital is cheap and plentiful, and what matters is growth and market share. Compass is playing by those new rules, spending like a drunken sailor on leave in Bangkok, because they understand that getting to their magic goal of 20% market share in top 20 markets by 2020 is worth whatever small opportunity cost they’re leaving on the table by making interest-free loans.

Uber did over $11 billion in revenue last year; it has yet to post a profit. Tesla is losing money hand over fist. AirBnB might or might not be profitable depending on the metrics, and whether you trust the company’s memos.

You are free to pooh-pooh those companies as well, since many of us have lived through the first Dotcom bubble and where are those companies now?

You know who is making profits? Realogy. Realogy posted $70 million in net income in Q2, paid dividends, paid down debt… and their stock price dropped to record lows.

Here’s the thing: suppose Compass charged for those Concierge loans. Just how much revenue could they have generated from that? According to RealTrends, Compass did 34,644 transactions in 2018; let’s be generous and say half of that was from listings. 17,322 listings. Let’s be further generous and say that each and every one took out a $20K Concierge loan at zero interest. Say that Compass decided to play by the old rules and charged a 2.0% interest rate instead of giving away the money for free. Over a 90-day period, that’s about $92 in interest earned on a 1 year term. Compass might have left $1.6 million on the table by deciding to give away the money for nothing.

Wouldn’t you pay $1.6 million to have sellers feel like your agents are investing in them? To have agents clamor to join you to get access to such a program? To give your agents the ability to beat out the competition?

How much of Compass’s growth can be traced to the fact that it offers this incredible “no fee, no interest-ever” program to its agents? We don’t know, of course, but we do know that Compass is worth over $6 billion while Realogy is worth about $500 million.

That’s playing by the new rulebook.

The Age of Capital

In the January Red Dot, a 2018 retrospective, I wrote:

The new basis of competition is based on deploying huge amounts of capital, which means that access to capital is the key to success. Everything that the companies that will dominate the future of real estate will do will be based on and around acquiring and deploying large amounts of capital.

I stand by that statement.

Keller Williams did the smart business thing… by the old rules. Because it either did not have or chose not to go after access to capital.

Compass did the dumb business thing by the old rules because it raised billions of dollars in equity, not debt, and knew that it could spend that capital to launch seemingly idiotic (by old rules) programs that lose money on purpose in order to drive consumer awareness, differentiation, brand loyalty, transaction and sales volume growth… all of which drive agent recruiting and retention, which drives transactions and sales volume, which drives… you get the point.

What brokerages, agents, teams, and franchises in the real estate industry of today need to realize is that the rules have changed. It isn’t that the old rules are obsolete, because they are not. But they have to put into the proper context, and read from the perspective of the new rulebook. Yes, profitability and a path to profitability remain important as ever, but you might need to ask “What am I willing to pay for growth?” and follow through to the conclusions.

If you cannot follow through because of a lack of capital, then the answer isn’t to keep trudging along; it is to try to get access to capital, which requires a growth story not a profit story in 2019.

And as you launch your own programs, whatever they are, you need to ask whether you’re doing it to make a profit or to grow your business. At some point, the two will converge, but these days, they will often diverge. Make your decisions accordingly.

-rsh

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18 Comments

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  1. So what happens if/when the house doesn’t sell? We interviewed for a listing in Pleasanton, CA and the home needed a lot of work. There was an ugly fence through the middle of the front yard, home was painted orange, landscaping was crap, and both bathrooms were half remodeled. They wanted us to pay for the upgrades plus stage the house. The price they wanted was a joke (way overpriced!) so we passed. Seller didn’t seem to care if the house sold. If they got their price they would, if not no big deal, afterall they bought it at the absolute bottom of the market after the recession. A Compass agent got it, next thing you know the home is painted blue, fence removed, new front lawn put in, bathrooms finished, landscaping upgraded, and home staged. Been on market 90+ days now and may not sell. Does Compass eat the $ if the home doesn’t sell?

    https://www.redfin.com/CA/Pleasanton/1251-Vintner-Way-94566/home/1321166

    1. I’ll let someone from Compass answer the question. I’m led to believe that has never happened for a variety of reasons.

    2. Notice how Ty Webb used Redfin’s link, not Compass or KW, to show the house. Redfin has the best Internet/mobile experience. Independent real estate agents and forward thinking brokerage should negotiate with Redfin to license their tech and begin advertising on RF website.

      1. Why would Redfin do that, if that’s one of their best assets for their own agents?

  2. We see agents accusing Zillow of inaccurate estimates, yet, in my neighborhood, the percentage of homes listed by agents, 25%of them did not sell. Homeowners don’t care nearly as much if the home doesn’t sell if it is someone else’s money. Almost every real estate company used to have a Guaranteed Sale program, and now they don’t. Terms of the guarantee program were that the brokerage would purchase for 80% of the appraised value, the agent would hold the note and pay the mortgage until. Why do you think that didn’t work out?

    1. Not sure what you’re asking… are you responding to the right post? About Concierge?

      1. “Homeowners don’t care nearly as much if the home doesn’t sell if it is someone else’s money.”

        I think MJ is saying that, if the loan is “free,” why not do it as both an agent and a seller? Even if it’s a dumb financial decision for the seller, if a free loan is the only thing that will get the agent the listing (even though, as you said, no one else in the market is offering this to sellers) and it’s HQs money, not the agent’s — of course they will do it. It doesn’t mean it’s smart for the seller and the agent to undergo the reno. And certainly doesn’t make it a good use of capital for the company.

        Same as people with corporate expense accounts spending far more than entrepreneurs who are paying directly out of their own bank account. B/C, what do they care? It’s not their money. They’re on a cushy salary. Doesn’t cost them a thing to splurge for a $500 dinner when they could get away with $50 instead.

        The real question is what will actually sell the house, for the most $$ possible? Is it the agent or the seller deciding the details of what is/isn’t renovated and in what way/color/etc (and at what cost)?

  3. The answer to Ty Webb question is that if the home doesn’t sell and the seller cancels the listing the seller would be responsible to pay the total costs of the Compass Concierge back to Compass within a certain amount of days. The seller would be made aware of this when they initially sign the agreement as well. As a Compass agent myself I’ve used this program several times and really like this tool.

    1. I know Curbio requires the seller to sell. And continually lower the price every 30 days until it does.

  4. These comparisons are being made by companies that are simply “apples and oranges.”

    KW has an installed presence of more than 150,000 agents doing what is close to 20% of the nationwide transactions and Compass is a company that now seeks that level of presence and is doing a fraction of that number of transactions.

    Compass is openly spending tons of growth capital and KW is in the business now to make money on its past growth. And to adopt new and innovative strategies that will help prevent others from reducing their presence in the market..

    And then there’s this difference. KW is not going public anytime soon, or so we are told, and Compass is, so we are told. By doing what they are doing at Compass to grow the company fast, Compass has its eyes set on a far different strategic target, known on Wall Street as an “event.”

    One looks long and the other only focuses on short.

    So what and how they are doing things with their capital makes all the sense in the world for Compass. And after they do their IPO, someone else will need to worry about how much revenue they make, the capital they need to sustain what they have grown and how much profit on this strategic path they will likely never make.

    Game, set, match.

    1. Well, it would be “Game, set, match” if KW were to straightforwardly say, “We charge a small amount of interest, because we don’t believe in losing money” But since they did not, and in fact said they’re looking to drive that cost to zero exactly like Compass… I don’t think it’s as cut and dry as you seem to suggest, Ken. 🙂

  5. Hi Rob – There’s got to be a catch? Does this apply to a six month listing? Does the seller have to extend the listing, if not, what? What if the seller lists with another company? Does KW loose the money? Got to be a catch. Will they require a 12 month or 18 or 24 month listing?
    I did not read the entire article.

    1. Extend, and lower the price is my guess.

  6. There’s an even bigger point to be made here. Both Compass and KW are basically offering financing. Neither company is solving the bigger problems related to pre-sale renovation. Neither company actually does any of the project work or improves on the archaic renovation industry. Have you ever waited weeks for a proposal, had contractors tromping around measuring, spent days selecting finishes or months herding contractors? That is just a non-starter if you want to get your home on the market. Also, the “concierge” services don’t seem to include the type of major renovations that can actually return big profits to homeowners. If they start doing larger projects than we’re stuck again on the unwieldy process. This is why a bunch of hard-core software execs launched Curbio – to use technology to fundamentally re-invent pre-sale renovation. Sure – our customers also pay at closing – for projects of any size. No we don’t charge any interest, fees or other hidden charges. Honestly – thats the easy part. The hard part is using technology to actually improve the customer experience . We’re using tech to tackle same day proposals, homeowner ROI modeling, rapid project completion and real-time project dashboards. This is the excitement and promise of real-estate technology and this is how realtors will ultimately help their clients avoid low cash offers, renovate before listing – and keep more profit for themselves.

    1. The rapid project completion and reliable/experienced contractor labor are the hard parts, at least from my vantage point here in Seattle. Renos are a hugely operationally messy biz. That said, I’m certainly bullish on the opportunity in front of Curbio… brokerages far and wide will realize they need that tool in their quiver in order to compete in the new world order of brokerage.

  7. Great analysis. What’s missing is the fact that because of the Compass Concierge program, agents have a higher chance to get the listing, sell faster because of the renovation, but also tend to get a higher commission (6% vs 5%) therefore bringing additional revenue.

  8. KW Concierge does address the the contractor/renovation timeline by having a dedicated crew of subcontractors and a dedicated project manager for these renovations. Additionally, it is my understanding (and maybe a Compass agent can set me straight on this understanding if it is wrong) that each Compass agent has some of their own skin in the game which is an inherent conflict with the seller when it comes time to sell the home as the agent does have influence on suggesting price and reductions. While KW Concierge uses an outside company for its concierge services/financing that has no ties to the transactional side of the real estate deal (it is also my understanding that there is no percentage charged to the seller so I think you may be wrong on that point Rob – I am verifying now which is why I am saying MAY be wrong). The contract between the seller and the renovation is not directly linked to KW. This creates an arms length transaction that protects both parties, which you don’t have with Compass
    At least this is my understanding, which I am happy to be corrected on if it is not true. With the KW model if the home doesn’t sell or the contract is canceled the seller must pay for the renovation work and/or staging (KW Concierge offers this as well) per the agreement.

    I think offering this service is a win for both the seller and the agent. For me, I spend a lot if my time helping to supervise and push renovation work to completion so I can put a property on the market. That is not a good use of my time, no is it something that agents should be engaged in.

    Just my two cents!

    Babs out 🤙🏼🦄🌈🛸

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