- Finance remains a slowly emerging trend
- Generating revenue from it is a key challenge
- Successful marketplaces use real estate agents to influence financing
In real estate classifieds, finance is becoming an essential component of revenue growth. It’s the most logical part of the transaction to extract revenue from, but it’s also the most difficult. The mortgage market is crowded and, in developed countries, mature. Compounding that, the path to choosing a mortgage is not linear and often begins somewhere in the middle of the consumer’s journey to buying a home.
In order to generate meaningful revenue from mortgages and other property finance, it’s critical that marketplaces develop strategies that enable them to influence finance transactions.
In mature markets, that will prove especially difficult. Finance is highly regulated, with clear and entrenched leaders controlling the market. So far, few marketplaces have found a truly successful strategy that brings finance and their core businesses together. In the U.K., Zoopla’s success selling finance leads led many other marketplaces to follow suit. But selling leads is a high-volume, low-margin business that’s incredibly challenging.
Many marketplaces are realizing that if they are going to expend resources building and generating awareness of a business that effectively passes the revenue to a third party, they ought to try to get a bigger share of the financial spoils themselves. As a result, a number of leading verticals around the world have set out to build their own finance businesses.
Slow and steady in Oz
Australia-based REA Group is one example. It operates the market-leading vertical RealEstate.com.au and has two mortgage offerings that it said help capture a greater share of the A$400 billion ($296 billion U.S.) annual home loans market.
The first offering is straightforward: In 2017, it acquired a traditional, bricks-and-mortar mortgage brokerage, SmartLine, which has a network of 300 brokers and a A$25 billion loan book.
In Australia, around 53% of home loans are written by mortgage brokers, which generate about A$2.2 billion annually in broker fees. SmartLine enabled REA Group to generate immediate revenue from the broker market — SmartLine writes around A$4.5 billion in loans each year.
So far, REA has been content to let SmartLine operate as a standalone business — there’s almost no integration with RealEstate.com.au, besides an online form for buyers to book an appointment with a SmartLine broker.
The company’s other home loans product, RealEstate.com.au Home Loans — developed together with the National Australia Bank (NAB) — goes further by integrating quite deeply with the NAB banking system. The offering has a tool on RealEstate.com.au that lets buyers apply for a conditional pre-approved loan, based on NAB’s standard variable principal and interest loan rate.
A conditional pre-approval helps potential buyers understand their buying power and enables them to make an offer on a property or bid at auction. Later, the preferences around interest rates and principal and interest repayments can be changed when the finance is finalized. Even though a conditional pre-approval isn’t a firm loan, it’s a common gateway to one. From each loan finalized, REA receives between 0.5% to 0.55% of the loan value.
REA doesn’t disclose what volume of conditional pre-approvals it receives or how many are converted into loans. In FY2020, the company’s entire financial services division, including SmartLine, generated A$25.7 million in revenue, a decline of 5% year-over-year due largely to the bushfire crisis in Australia and Covid-19.
Still, for a company that booked A$750 million in revenue in Australia, largely from its core residential listing business, the financial services segment represents just 3.4% of the company’s Australian revenue.
Additionally, it’s unclear how REA plans to grow SmartLine’s revenue. Currently, revenue in the financial services segment has been largely flat. When the segment was created, REA guidance put FY2018 revenue in the range of A$26 million to A$30 million. As a predominantly old-world, offline business, there is scope to digitize its processes, which may bring greater efficiencies. But to grow revenue materially, REA needs to find a way to drive more of its audience to SmartLine to take up loans.
It’s an area rival property vertical Domain is also trying to figure out. It developed its own home-loan comparison site called Domain Loan Finder, a joint venture with online mortgage broker Lendi. Domain Loan Finder takes buyers through the application process online. It’s finalized when a Lendi mortgage advisor contacts the buyer to complete the process. Because the process is more involved, buyers are given an unconditional pre-approval for a loan, with interest rates and repayment preferences already determined.
Since launching in 2018, the business has recorded strong growth, albeit off a much smaller base. In FY20, Domain’s consumer solutions segment — which comprises Domain Loan Finder and insurance product Domain Insure — grew revenue 83% to A$5.6 million, of which loan commissions amounted to A$5.1 million, according to Lendi’s financial documents, or 1.9% of total revenue. Unconditional approvals and settlements at Domain Loan Finder were up 64% and 74%, respectively, year-over-year.
The result isn’t bad. But Lendi, which itself launched in 2015, earned A$36.3 million in commissions in FY20 excluding Domain Loan Finder revenue. Although Domain Loan Finder’s growth rates are roughly similar to what Lendi’s were at the same stage of the business, it shows how hard it is for property verticals to influence the process when, despite playing a key role in the
discovery of property, they don’t control any parts of the transaction.
Attaching mortgages to IBuying
Ygal Arounian, an analyst at Los Angeles- based Wedbush Securities, said U.S. companies, particularly IBuyers, face a similar challenge, because consumers have plenty of opportunities to organize finance before they come to buy a home. “Typically, homebuyers have come with pre-approvals, or having already done the groundwork for a mortgage,” he said.
“This represents a fundamental challenge with the mortgage attach rate to IBuyers, as it’s difficult to sell through a mortgage when representing the sell-side of the transaction.”
At Zillow, much of its $54 million U.S. in home-loan revenue is derived from refinancing — in the third quarter of FY20, refinancing loans increased 300% year- over-year, Zillow told shareholders. Attaching new loans to Zillow Offers homes has proven much harder, though it remains crucial to improving its unit economics. Total mortgage revenue from Zillow Home Loans is 8.2% of Zillow’s total revenue.
Recently, Zillow brought real estate agents in-house to represent it on IBuying transactions. Bringing agents in-house not only eliminates the cost of agent commissions, but it also provides a greater consumer experience and efficiencies. In particular, Mike DelPrete, the real estate tech strategist, said “full-time, salaried agents lead to higher attach rates for services like mortgage and title.”
Like Zillow, attaching mortgages to IBuyer transactions is crucial to long-term profitability of OpenDoor, another U.S. IBuyer. The company, which has plans to go public, expects each mortgage it attaches to contribute an additional $5,000 U.S. in revenue per home, significantly helping to increase its total contribution margin from 1.9% currently to about 6% to 8%, or an average of $17,500 U.S. per home, by 2023.
Already the company has had success attaching title services to homes it sells — the attach rate hovers around 83% nationally, according to DelPrete — and OpenDoor expects that the mortgages attach rate will reach parity.
Title insurance, which indemnifies a new owner from financial loss should they discover title issues, such as land encroachments, illegal buildings, outstanding liens or the like, is a reasonably low-value service. OpenDoor puts title revenue at around $1,750 U.S. per home. It’s especially easy to attach to a sale when the company controls the sales process.
In the mortgage market, however, consumers are harder to pin down. They’ll shop around, compare rates, and ultimately do a lot more due diligence. OpenDoor’s attach rate for mortgages is currently around 2% and Zillow’s is similarly low. Traditional real estate brokerages do better — the attach rate at Berkshire Hathaway HomeServices, for example, is around 20%. Similarly, Redfin, the U.S.-based tech- enabled brokerage, has an attach rate in the mid-teens.
“Just because OpenDoor is seeing early success with title insurance, the easiest adjacent service to attach, doesn’t mean it will find similar success with more difficult services, such as mortgage,” DelPrete wrote in a research note. “The evidence suggests a long, difficult, and uncertain road ahead — in a hotly contested and crowded field of incumbents and disruptors.”
Companies that offer trade-in services or help consumers buy their next home are having more success attaching mortgages. Companies such as Homeward and Orchard, for example, buy the consumer’s next home and also sell their existing one. Through this business model, they’re able to bundle finance into the service offering, which DelPrete said results in a 60% to 80% attach rate.
Ultimately, Arounian said, the key to driving mortgage attach rates and other ancillary revenues is having control over the entire property transaction. “The companies that are doing the best job with attach rates on mortgages have employee models where they can drive their employees to leverage the ancillary products,” he said.
This is already playing out in emerging markets, like Asia, where mortgages are just starting to develop, giving property verticals the opportunity to influence the loan process.
Finance in emerging markets
In Myanmar, ShweProperty, a hybrid brokerage and portal, developed a mortgage platform that integrates tightly with a number of Myanmar’s banks, enabling the company to operate as the primary conduit for loans on properties it’s selling. For each loan, ShweProperty gets a commission of around 1.5% of the loan value.
Influencing mortgage decisions in Myanmar is far easier because the market is neither competitive nor especially regulated. Myanmar’s mortgage market didn’t exist until two years ago when banks first started lending to consumers. The country had just emerged from 60 years of military rule and the real estate market had recently exploded, driving up the demand for finance.
“The banks became very aggressive,” Justin Sway, the CEO and co-founder of ShweProperty, told the AIM Group. “If you’re a married couple, you only need a 5% deposit on a $30,000 (U.S.) home and the bank will lend you the rest. All you have to do is pay back $500 U.S. a month, so it becomes very affordable. That was very successful.”
Crucially, ShweProperty uses its in-house real estate agents as a key distribution channel for its mortgage products. The company employs its own agents as part of its real estate brokerage business and, in addition to managing the sale of the property, ShweProperty agents also take the buyers through the loan application process. “The transactions team close the paperwork, they do the sale and purchase agreement, the home loan agreement, cash collection. … It’s a whole ecosystem from the front end to the banking dashboards,” Sway said.
In nearby Singapore, leading real estate vertical PropertyGuru is using third-party real estate agents and its own employees as financial advisors to offer mortgage products. In March, the company launched PropertyGuru Finance, a finance marketplace. The product provides consumers with a range of finance products from all of Singapore’s banks. It’s embedded in property listings, offers instant approvals and online applications. For each loan, PropertyGuru is paid a commission by the bank.
Crucially, PropertyGuru has also opened the finance marketplace up to real estate agents, who act as “independent advisors” to buyers. Through this relationship, PropertyGuru is able to “extend its partnership with clients,” Paul Wee, the company’s MD of fintech, told us. But it also gives PropertyGuru greater control over the finance transaction in the city-state’s crowded mortgage market. “In Singapore, people have decent access to finance,” he added, “but the user experience of securing a mortgage is poor.”
Through technology and deep integration with the banks – it expects that finance will comprise more than 10% of its overall revenue in the next three to five years. The company is aiming to enable an entirely digital mortgage by 2022 and fully digital property transactions by 2025.
Overall, the mortgage market in Southeast Asia is worth more than SG$300 million ($224 million U.S.) and the company said each country has its challenges to overcome. In Malaysia, the loan rejection rate sits at around 60% because buyers don’t properly understand their borrowing power. PropertyGuru plans to bring its finance product to Malaysia next, with agents as distributors again, and to Vietnam, where mortgages are still in their nascent stages. (In the past, in Vietnam, people have financed property through loans from friends and family.)
“We believe if we do a good job at solving consumer pains, we should be capturing a good proportion of the [mortgage] market,” Wee told the AIM Group.
DomClick drives finance in Russia
The other way for marketplaces to control finance transactions that’s proving enormously successful is if the bank or lender owns the marketplace. That’s been the case in automotive (see: Santander’s push into automotive marketplaces), and the largest bank in Russia, SberBank, proves the model works in real estate, too.
State-owned SberBank operates DomClick.ru, which it launched in 2017 as a way to drive consumers to its mortgage and other property finance products. The bank is already the leader in the Russian mortgage market, with a roughly 40% market share. By launching DomClick with that imperative, it’s rapidly leapfrogged over its property vertical rivals to the No. 2 position in Russia. That’s largely been driven by its tightly integrated finance offering. Buyers can apply for a SberBank mortgage pre- approval entirely through DomClick, find a suitable property, and then finalize their mortgage application without ever leaving the DomClick site (if they’re an existing client and have their SberBank online login details).
SberBank sweetens the deal by offering consumers a 0.3% discount off their mortgage rate if they find a property and a home loan on DomClick — the biggest driver of the marketplace’s explosive growth.
To create trust among consumers and drive mortgage applications, DomClick mostly limits listings to licensed real estate agents. Private sellers can list, too, but they’re only allowed one listing at a time. It also verifies that listings are accurate by checking the property address against the Russian federal real estate database, and amends property listings to match official documentation where necessary.
DomClick’s success in the Russian market shows that tying mortgages to the property discovery process without agents as the intermediary, in a fashion similar to automotive marketplaces, can be successful, albeit when the primary goal is to sell finance and not property listings. The site’s listings services are free for agents, but they don’t receive any share of mortgage commissions. (Read more about DomClick on page 44.)
Property verticals and marketplaces are undoubtedly good places to generate awareness of mortgage products, but without a clearly defined strategy for controlling the finance transaction, they will struggle to convert their large audiences into customers for loan products.
Realistically, marketplaces would need to become major brokers or mortgage lenders to generate large revenue streams from finance. Consequently, there will almost certainly be a greater coming together of banks, brokers and marketplaces in the future, both on a cooperative level and through m-and-a.