Some readers here may be a bit concerned that some of the writers here on BloodhoundBlog don’t find and report enough negative comments about various discount real estate companies. Relax. There is more.
I received the following email today from Dave Marron. As you will see, he is a former executive for Zip Realty.
I saw that you posted on bloodhound about zipRealty awhile back. Did you see their earnings release the other day? I’m an ex-zip exec (and ex-KW broker) and I put my thoughts down on paper about the state of their company (see attached). Do you have any use for this? If not, it’s OK. I just thought I’d shoot it over to you in case you thought it was bloggable.
What’s Wrong with zipRealty?
Last week zipRealty released their “preliminary” fourth quarter results. I’ve been interested in this company since 1999 when I went to work for them. I
spent over four years at zip performing numerous jobs including VP of Sales. A couple of things popped out at me during their “preliminary” earning release conference call that just don’t make sense. Here are my observations.
One of the initiatives zip’s leaders gave for how they are going to improve in 2007 was an increased effort on training. Stock analyst Wendy Snow asked the team what they intend to do differently in the training arena that will make a difference in 2007. To this, Management answered that their “ideal candidate” would have the qualities of a strong trainer and strong real estate skills. They’ll also consider someone with strong training skills who could be “pick up the real estate craft quickly”. Are they kidding? They would hire a trainer who can “pick up the real estate craft quickly”. Would Pilsbuy, Madison and Sutro hire a legal trainer who could pick up the law craft quickly?
After leaving zipRealty I sold real estate for several years and I’m now an owner in a real estate technology company. The way that I learned the “real estate” craft was by going out and selling lots of homes. It’s not something that you can teach someone to do unless they are willing to actually do it. If they are willing to hire a trainer without real estate sales experience, I sincerely doubt that their new training initiatives will have any positive impact.
Recruiting and retention is critical to zip’s success. The company said that they will “…focus recruiting efforts on specific candidates and areas…We’ll take a lasered approach to recruiting as opposed to a shot gun approach.” This is going to be a huge challenge for the company.
Here’s the problem the company has created, unsuccessful agents leave because they’re not making any money. Successful agents also leave because they’re not making enough money. Let’s break down the compensation plan of an average zipagent:
Avg Net Revenue/Transaction $7,400
Avg zipAgent Commission 50%
Avg Agent Commission/Transaction $3,700
Avg Monthly agent income $2,220
Buzz Lightyear couldn’t laser in on a quality agent with that compensation package.
High turnover has also been a big problem. Zip agents are employees of the company, not independent contractors. The company believes that as employees, their agents should do whatever the company wants. Things like working weekends, weekdays, holidays, nights, mornings, and sucking up to management is expected. The reality is that the agents may be employees, but they don’t get salaries and they pay their own expenses (board dues, mls fees, phone bills, gas, car payment, etc.). The promise of a steady lead flow and good technology (plus maybe 200 stock options) isn’t enough to compensate a good agent to make the kind of commitment zipRealty asks – not even with the $2,200 per month cash flow!
Now, I don’t like it when people criticize without offering solutions (I’m also not a big fan of anonymous critics). So, here’s what I think zip should do to improve performance:
1. Acknowledge that you are a real estate company and start behaving like one. This company has 1,796 agents (as of 12/31/06) and they spent over $15,000,000 on operating expenses during the FOURTH QUARTER. Here’s my take on their “preliminary” results:
Q4 Revenue 23,000,000
Cost of Sales 10,350,000 (about 45% as reported on the call)
Gross Profit 12,650,000
Operating Expenses 15,150,000
I had to back into some of the numbers because their “preliminary” (what’s the reason for “preliminary” results again?) results lacked detail. Why is a real estate company with fewer than 1,800 agents spending $15 million per quarter on operating expenses? They completed roughly 3,100 sides in Q4. To give you a frame of reference, they complete about as many transactions as Prudential Carolina Real Estate who has about 900 agents and completed about 12,000 sides in 2005. Do you think Pru Carolina spends $60 million per year on operating expenses?
According to zipRealty.com, the company operates in 40+ markets. Each market is generally staffed by a district director, a broker and a staffing manager. That’s about 120 people managing 1,800 agents. Those managers and directors report up to the following team:
A VP of Business Development
An EVP of Operations and Business Development
An SVP of Planning and Operations
A VP of New Market Development
A VP of Online Marketing
A VP of Real Estate Sales (who has never sold a home)
An SVP, Chief Accounting Officer and Interim CFO (they’re probably looking to hire a CFO to take some of the load off of this fellow)
A VP and General Counsel
A VP and CIO
That’s a lot of management for an-1,800 agent company. To my knowledge, there is only one person with a VP or higher title who has ever sold a home. My question is – why is it necessary to have all of these managers? Since their agents are selling 7 homes per year (.6 per month) they either have the wrong agents, the wrong management, or both.
2. Get rid of the rebate. The rebate is unnecessary. Zip rebates about 20% of their gross commission to their home buyer customers. They provide a similar discount to home sellers. In my experience, the discount/rebate attracts buyers and sellers at the low end of the market. I sold houses for zip and gave the required rebates. I also sold homes for traditional firms and never gave a rebate. Guess what happened when I stopped giving a rebate. My average home sales price went way up and so did my average revenue per transaction. Most of my leads were sourced online just like zip’s so, this is a relevant comparison.
3. Invest your shareholder’s money. Zip is currently sitting on over $88 million in cash and short term investments. Most of that money was raised at their initial public offering back in November 2004. I was pleased to hear that they plan to increase their expansion by adding 8 – 12 new markets this year. At an average investment of $500,000 per new market, that’s a $6 million investment. Good start, now what are they going to do with the other $82 million their shareholders trusted them to invest (besides hiring a trainer)?
I do believe that zipRealty can be a much bigger player in the real estate industry. They are the best in the industry at generating leads for their agents. They also have fantastic technology to help their agents convert those leads. Now is the time to make significant changes that will drive the financial results their investors and employees expected. Unfortunately, based on their latest conference call, it doesn’t look like they intend to do so.706 comments