New Home Insights Podcast Episode 58 Transcript | John Burns Real Estate Consulting

Episode 58: How iBrokers Will Change How We Buy Homes

 

Transcript

Dean Wehrli:

Hi, this is Dean. Just a quick note, we conducted this episode with Court Cunningham of Orchard a little before Zillow made the announcement that it would be leaving the iBuyer space. So just wanted you to keep that in mind, as you listen, because we don’t talk about that. Enjoy.

Dean Wehrli:

Welcome to the New Home Insights podcast by John Burns Real Estate Consulting. I’m your host, Dean Wehrli. Today we have the founder and the CEO of Orchard, Court Cunningham. Orchard is a company that is not an iBuyer. I’ve been assured of that. We’ll talk about that in a little bit. But it’s also not a traditional broker. It’s really a company that’s using technology to shake up both the buying and selling of homes in a growing part of the country.

Dean Wehrli:

Court, why don’t you start off? First of all, say hi to the folks and then tell us a little bit about your background.

Court Cunningham:

Sure. Thanks for having me today Dean. I am an unlikely participant in transforming real estate. I grew up in Michigan and have been mostly doing B2B software related things for my career. I worked at Double Click, which is one of the big ad platforms that got bought by Google. I was a little social networking company called Community Connect and then helped found a company called Yodel, which was Double Click for the small guy, helping small businesses advertise online. I am new to real estate, but was super intrigued by the challenges in the real estate industry, which is what drew me to it.

Court Cunningham:

I’m a 20 year veteran software person, trying to figure out real estate.

Dean Wehrli:

That’s interesting because you do come upon the real estate sector from a real technological background, don’t you?

Court Cunningham:

Yes.

Dean Wehrli:

Let’s talk about that. Tell us, first maybe, what was the spark that led you to founding Orchard? Then, tell us a little bit about Orchard in terms of the win and the how many and then where you’re at.

Court Cunningham:

Yeah. Having built up a couple of software companies that had good exits, I wanted to do something big. I wouldn’t call myself old but I’m certainly not early in my career, and wanted to have a big impact. I started looking at industries that were structurally not in a good place and not delivering consumer value. Real estate rose to the top of the pack. It is just an incredible industry, where through a combination of state level regulation, federal regulation, industry structure, many of these businesses are franchised, no one is set up to deliver a delightful consumer experience. You look at how book buying and e-commerce and insurance and all these other categories have been modernized, taxis, car buying with Carvana. Real estate was unchanged. It’s a very hard problem to solve which made me think twice before I jumped into the deep end of the pool. But the opportunity is so big and the consumer impact is so big I felt I had no choice.

Dean Wehrli:

I noticed you not using the word disrupt. Is that intentional? Because effectively you are, in a sense, disrupting the real estate world.

Court Cunningham:

I would say I’m an understated guy from Michigan. I don’t like to wave my hands, but we’re transformative. We are a realtor. We’re a licensed realtor and we’re trying to modernize it. I do think that the Carvana analogy is an interesting one. Carvana’s background, they were a traditional car dealer, used car dealer, who decided to try to modernize buying and selling used cars. While I don’t have that industry background, I do view myself as a member and participant in the industry, trying to help propel it into the future.

Dean Wehrli:

Plus the word disrupt literally became a cliché the first time it was used. It’s hard to fathom, but I swear, that’s what it felt like. What’s the nuts and bolts? When did you actually found and get Orchard off the ground?

Court Cunningham:

Yep, we were incorporated in the fall of 2017. Our first dollar of revenue was in February of 2018. We’re a little less than a four year old company at this point. We started in Texas, in San Antonio, which we picked because it’s average town USA, average income, average home price, average everything, looks like America generally. Texas was a good market for a bunch of reasons. So yeah, started in Texas four years ago and we’re now in nine markets.

Dean Wehrli:

Was one of those reasons the relatively more compliant regulatory environment there?

Court Cunningham:

A little, we just viewed it as lower risk. We do take a little bit of real estate risk in our business, which we can get into. Texas is the lowest volatility real estate market in the country, from our perspective. For a bunch of reasons, there are some structural reasons like you can’t take out a home equity loan unless you have 20% equity in your house, so you don’t have a lot of over-levered home owners. But also macro reasons like people are moving there from all over the country because of low cost of living and quality of life. All of those things provide stability to real estate prices.

Dean Wehrli:

Right. So now, let’s get into the meat of what you do. Let’s get into your services. Let’s first talk about, I think your flagship service, which is the Move First world.

Court Cunningham:

Yeah.

Dean Wehrli:

Get us started on what that means, what that key program is for you guys.

Court Cunningham:

Yeah, let me take. I’ll start one level higher and then I’ll get to Move First. At the highest level, we do two things very differently for our customer. One is we’ve put all of the pieces of the transaction onto a single digital platform. Online research of a home, coordinating home showings, getting your mortgage applied for and documents uploaded, submitting offers on new homes, listing your old home, receiving offers on your old home, closing on both homes, all happens on one digital platform. That’s important because there are just too many people touching the transaction in real estate. That complexity drives friction and consumer dissatisfaction. It also drives cost. We are simplifying the transaction for the consumer and taking cost out of the transaction. That doesn’t get focused on as much but it is key to what we’re doing and we think is going to give us the ability to do pretty magical things for the consumer over time.

Court Cunningham:

The second thing we do is we turn our customers into cash buyers, which allows them to buy their new home before they sell their old home, which is what people want to do. That product is called Move First. You can move first into your new home before you sell your old home and do so as a cash buyer into the new home.

Dean Wehrli:

Part of that is, what are the nuts and bolts of that? The math of that in terms of the brokerage fees and things like that and how they relate to more traditional brokerages?

Court Cunningham:

We’re charging standard fees everywhere and in some places slightly below market. One interesting thing that we’ve found is that consumers do not respond well to discounted fees in real estate. The proof point there is if price was the most important thing, Redfin would have more than one percent market share 18 years after its founding. This is the most important transaction of people’s lives. It’s the house where they’re going to raise their family, build memories, accomplish and fulfill their dreams. They want to make sure they’re getting the best execution and the best value.

Court Cunningham:

Our approach has been, okay let’s leave pricing roughly where it is. On mortgage, we charge a little less. Title we can’t really charge differently for state regulation reasons. How do we add value to the transaction? Rather than pay a six percent listing fee to a Keller Williams agent for example, you pay us that six percent listing fee, but we will buy your new home for you with our cash, which usually gets you a one to two percent discount. It also means that you’re much more likely to win that offer than the other guy. We will move you into your new home. If your old home needs work, we’ll do it at no margin. We’ll put our capital to work to replace paint and carpet and clean up your old home and get it ready for sale. We’ll guarantee the sale of your old home. We charge nothing for any of that. That’s a big difference when you look at other people in the space, they’re adding cost to the equation. Hey, we’ll do all that, but for a fee. We charge nothing for those extra services.

Court Cunningham:

So leaving the fee the same, but adding value to the transaction.

Dean Wehrli:

That’s interesting. Free actually almost impacts the psychology of the homeowner. The homeowner is thinking, okay I want to get what I pay for. I don’t care about Redfin and those low cost guys. But free services, does that get them over the hump I guess?

Court Cunningham:

Yeah. We position it as value added services. We’re giving you our cash to turn you into a cash buyer. We’re guaranteeing the sale of your old home. We’re fixing up your old home at cost. That resonates pretty strongly with people.

Court Cunningham:

It’s almost a suite of services. If you think about it, it’s like Amazon. I keep coming back to Amazon and Carvana, but why do you go to Amazon? It’s easy. It’s generally lower cost. If I’m a Prime member, I get next day delivery. I get access to movies on Amazon Video. It’s a bundle of value that makes me want to go back to Amazon again and again. Our approach is the same except the purchase cycle here is every 10 or 15 years, not 10 to 15 days.

Dean Wehrli:

Yeah. You do have some criteria for what homeowners actually qualify. I noticed that. Speak to that really quick first. I have a question about that.

Court Cunningham:

There are two elements. For the new home, you have to obviously qualify for a mortgage. People can do that through our integrated mortgage brokerage. Generally, if you qualify for a conforming or government mortgage, you’ll qualify for our program. Our underwriting criteria are generally aligned with Fannie and Freddie and the government loan providers. So that’s on the consumer credit side.

Court Cunningham:

On the home value side, we’ve got a pretty wide buy box. It varies by region. At the low end, we’ll go down to a $150,000 home. At the high end, in some markets, we’ll go up to $2 million. It kind of ranges from a million to two million depending on the market.

Dean Wehrli:

I did notice though, if I read it right, that you only do single family homes, so you won’t do attached homes. Is that right?

Court Cunningham:

Today, yes. There are five million single family home transactions in the average year. This year we’ll do a few thousand. We don’t need to add more complexity and inventory types. Over time, my guess is over the next couple years, we’ll start to do condos and co-ops and duplexes and other types of housing inventory.

Dean Wehrli:

There’s no criteria with respect to length of tenure ship or something like that? I guess to have enough equity-

Court Cunningham:

It’s on our website. We won’t do… Two acres is the biggest property size. We’ll back stop right now. Homes older than, I think we go back to 1930 or 40 or something. There are some other parameters. 75% of housing stock in America can work with our program. I call us Honda for Housing. We’re not doing the high end, the big ranch or the $5 million dollar home. We’re not doing the low end, the $100,000 trailer home. It’s the broad middle, where middle America lives and our customers are teachers and fire fighters and HR professionals and sales people. They’re normal everyday Americans.

Dean Wehrli:

Yeah. I think instant equity is another one of your sort of programs. That’s part of the Move First program and that’s correct?

Court Cunningham:

Yes, Move First is this ability to move into the new home as a cash buyer, and we guarantee the sale of the old home. We call that Instant Equity. That price that we guarantee your old home for is called the Instant Equity price. The reason we call it that is that it unlocks the home equity. If you’ve got a $400,000 home that you’re living in and a $300,000 mortgage, you’ve got a $100,000 of home equity trapped in that old home. That’s the problem today, is to access that equity, I need to sell my home, put my stuff in storage, live in a hotel, and that’s a huge pain for people. By giving them this contract to buy their old home, we unlock that equity. It’s instant equity, is what that piece of the offering does, which by the way, is very different from an iBuyer who also unlocks equity, but they do it by buying that home at a discount to intrinsic value, which we think is not a good deal for the consumer.

Dean Wehrli:

So you’re biggest differentiator with the iBuyer model then, besides the fact which we’ll get into in a second, besides the fact that you don’t, in most cases, you don’t really own the home, is that do you think you’re giving a little more fairer price to your clients?

Court Cunningham:

Yes. I would differentiate from the iBuyer in a few ways. One is we help you buy your new home as a cash buyer. The iBuyers don’t do that. Two is, we give you a back stock price, that’s instant equity price, for the old home. We don’t say, we have to buy your old home. That’s great because 95% of the time, your old home is going to sell on market. You’re going to get a full market price, not a discounted iBuyer price. That is important, because we’re on the same side as the consumer. For an iBuyer to make more money, they need to bid down on that home. They’re on the opposite side of the table for the consumer. We’re on the same side, trying to get the highest price for their old home to sell on market. So we feel it’s good to be aligned with our customers.

Court Cunningham:

The last thing, which is a result of that, is more of a business model thing. So that’s from the consumer experience. But from a business model, we don’t make any money on the underlying real estate because we’re almost always just transacting and earning the brokerage fee and the title fee and the mortgage fee. That means we’re aligned with our customer and it also means we’re a much less risky business model. If you look at Zillow and Open Door and their public earnings announcements, their profit per customer has more than doubled in the last year as real estate markets have become tight. That’s great except for when the market slows down, what happens? It goes the other direction. Our profit per customer went up by like three percent. We’re just earning our fees, whether the house turns slow or fast, it doesn’t make a difference, because we’re not making money on your underlying house.

Dean Wehrli:

So you’re more transactional as opposed to fluctuating with the market?

Court Cunningham:

Yeah, this is a business me thing, but I view iBuyers as market makers and we are basically an intermediary, taking a fee for facilitating the service.

Dean Wehrli:

Okay, okay. I think it’s a 120 days listing is the normal listing length?

Court Cunningham:

You get up to 120 days for your house to sell before we will buy it from you. As I said, 95% of the time, that house sells on market in that window.

Dean Wehrli:

God, these days, that days on market column is, you almost never see 120 anymore. But yeah, you’re right.

Court Cunningham:

In the last year, by the way, in the last year, we haven’t bought a single old home.

Dean Wehrli:

Oh really. There you go. I can speak to what you mentioned earlier, that trapped equity for contingent buyers is that you mentioned living in a hotel. We do a lot of apartment studies and we do some build for rent studies. It’s become more and more a major part of the renter profile, are those folks waiting for their home, their new home to free up or for their home to close.

Court Cunningham:

By the way, those are the lucky ones who can afford to get a short term rental. We’ve had customers, who this is their second time doing this, who lived in a tent in a KOA campground for two months in Texas, because they couldn’t afford interim housing. They wanted to save money for their down payment. It’s a big problem.

Dean Wehrli:

Until they adopt the lifestyle and they decide to become hippies and they pocket mulch. We like tents. We actually grew to love it. You never know.

Dean Wehrli:

You have another thing called Offer Boost?

Court Cunningham:

Yeah, Offer Boost is another feature. Move First is the product. Offer Boost is the, we turn you into a cash buyer on the new home and the instant equity price is the guaranteed sale price on the old home. Those are just features of the Move First product. we’ve really trademarked names of our website I guess.

Dean Wehrli:

Is Offer Boost a trademarked name?

Court Cunningham:

I think so yeah.

Dean Wehrli:

You do have agents though right? You have normal real estate agents in your markets?

Court Cunningham:

Depends on how you define normal. We have licensed realtors, except they are employees. We pay them a base salary. We pay them a commission based on volume. We also pay them a commission based on customer satisfaction. That’s very different from a traditional brokerage, where that agent is an independent contractor, basically operating on a 100% commission, no base salary. We think the base salary approach is important for a couple of reasons. One, the agent can pay their rent without having to jam some transaction through. So they’re going to be much more focused on customer satisfaction than a traditional agent. Two, as employees, we can train them. They have to show up to weekly trainings and have to use the tooling that we built. That drives a better experience. As an independent contractor, you’re not allowed to force those people to show up to trainings, and many of them don’t. To be frank, it’s a challenge in hiring. We’ve hired half our people from outside the industry and teach them real estate and half from inside the industry and teach them the new way to home, which is what we do.

Court Cunningham:

Funny story that gives you a little bit of a flavor of where the industry is, there was a new hire in Charlotte, which is in one of our cities. He was not showing up. We do team meetings on Mondays and Wednesdays. He was consistently missing team meetings. His manager calls him and he doesn’t call him back. In a normal company, you would never do this as an employee. But he’s an independent realtor. Finally the guy calls him and he hears a siren in the background. He’s like, “What is going on?” He’s like, “I’m on the truck.” He’s like, “What do you mean?” He’s like, “I’m a volunteer fireman. I do real estate on the side to help pay the bills. My passion is saving people’s lives and that’s why I haven’t been showing up to your meetings. Real estate is my part time gig.” It doesn’t work that way. We’re paying you a salary. If you want to be a volunteer fireman, that needs to be on the side.

Court Cunningham:

The point is, this is how the industry operates, is I’m a stay at home mom who does this on the side, or I’m a fire fighter who does this on the side. That is by definition, not a professionalized experience.

Dean Wehrli:

Also maybe firefighting should not be a side hustle? Just a thought.

Court Cunningham:

Yeah.

Dean Wehrli:

I want them to be focused. By the way, don’t think I didn’t notice that you just used home as a verb I believe. A new way to home?

Court Cunningham:

Yeah.

Dean Wehrli:

All respect.

Court Cunningham:

That’s part of our tagline. It’s interesting. We talk about, internally, this concept that buying is romance and selling is finance. The iBuyers, it’s all about the price. Give me the best price and that’s all I care about. Us, we’re focused on helping people buy their new home. That is romance, as I said. It’s where I’m going to raise my family and my hopes and aspirations. The process, so many people in the industry are focused on the process and the mechanics. The consumer doesn’t care about that. All they care about is, help get me to home. So that’s how we talk about our services, we’re the new way to home.

Dean Wehrli:

I like it. I like it. I just had not heard it used that way.

Dean Wehrli:

You also have a title company I think, that’s increasingly key to you folks?

Court Cunningham:

We do. I view title as the shopping cart of real estate. You think about any e-commerce site that you’ve been to, what’s the last site that you went to where you pick all the things you want to purchase and then you have to go to another site to buy? It doesn’t exist. Why? Because the purchase, the selection process, and the checkout process belong on a single platform. So that’s what we’re doing with real estate. Yes, we have a title company, which has to be separate for regulatory reasons, but from a consumer experience, it’s tightly integrated and it’s just like, with a bit more complication but just like the checkout cart on Amazon.

Dean Wehrli:

Yeah, it’s another thing you check, again, on the same platform and the same experience.

Court Cunningham:

Yeah.

Dean Wehrli:

And you have a concierge experience too, which is traditionally, tell me if I’m wrong, traditional broker that tends to be associated with the higher end niche. Again, you’re in an even entry level niche. How does that work?

Court Cunningham:

The concierge service today, and we think this will evolve over time, but we started with a simple consumer value proposition, which is, if your house is rough for any reason. The carpet is torn up. Scuffed walls or damaged walls, bad countertop in the kitchen, obvious detractors? Your house is going to sell for a lower price and it’s going to take longer to sell. What we do there is we fix those detractors. We’ll come in on our dime, take our money and repaint, recarpet, clean up the kitchen a bit, and that has a benefit to you in terms of helping you sell your house faster, and also getting a higher price. There’s actually a return on that. We do that, as I said, at no cost for you. You’ve got to pay us back for the labor and the materials when you sell, but we earn no margin on that. It’s just a value add service to the consumer.

Court Cunningham:

The question is, would we want to do that in new homes? That’s a debate that we’re having. For now, it’s really about helping get the best price and best execution on the old home by putting some capital to work.

Dean Wehrli:

Honestly, it does make sense for that to not be free. That could be a pretty big difference maker.

Court Cunningham:

Yeah, but again, our view is, it’s a new service. Your Keller Williams agent isn’t going to come over and paint and carpet your house. We want to keep it simple. The only place we make money is the real estate brokerage fee, the title fee, the mortgage fee. That’s it. We feel that aligns us with our customers.

Dean Wehrli:

Okay. I can’t believe you just said that by the way. I’m usually very much on the side of the consumer, but I look at that and I think, I would expect to pay for that.

Court Cunningham:

Maybe down the road, I don’t know. So far, not yet.

Dean Wehrli:

Is there any part of the buying or selling process that you would not touch? That you don’t touch and shy away from?

Court Cunningham:

The one that we legally can’t is appraisals. We do inspect homes on behalf of our customers, at their old home and if they want, the new home. We do home insurance which we haven’t talked about. It’s a small part of what we do. No, other than appraisal, which there are regulatory reasons why that has to be done by an independent appraiser, we have pretty much vertically integrated the entire transaction onto our platform.

Dean Wehrli:

Yeah, that’s what I thought.

Dean Wehrli:

Let’s switch a little bit to markets. You need to focus on the market. What’s happening, market dynamics? Essentially you’re kind of making bets on how the market is going to happen, at least in near term future, with a guaranteed price right? You want to make that as tight as possible. How do you assess the market? What are your key indicators that you’re looking at?

Court Cunningham:

I’ll make a shameless plug for John Burns research. We are a customer of the John Burns research team. We obviously look at data from the MLS. You guys do fantastic research, which we consume every month. We’re looking at obvious things, probably the most important are the number of new listings. How much new supply from old homes is coming on market? We look at new builds. How much new home supply is coming on market? We look at home price appreciation, both historical which we can measure, and forecast which we look at five or six different forecasts, including John Burns. We look at days on market. We look at buyer health, so interest rates and general financial health of the consumer.

Court Cunningham:

It is, while we don’t own that real estate, we are basically giving you a back stop price so we could own it. We don’t want to overprice it because we don’t want to own the real estate. We do want to be a backstop. On the flip side, we don’t want to underprice it, because if it’s too low then we’re not freeing up enough of your trapped home equity. Balancing that is hard.

Court Cunningham:

One thing I will say, and it’s one of the reasons we love you guys as a firm, is you have all the data, but you also talk to a lot of people. You will write up your sentiment on industry trends. I, quite frankly, think that’s as valuable as the data, when your team has talked to all the top ten builders and understands zoning regulations and other things that are more qualitative, that also is helpful to understanding market dynamics.

Dean Wehrli:

Don’t you think though, we should do that more on TikTok and maybe be dancing while we talk about it? Just a thought. I’ve been bugging John about that.

Court Cunningham:

With some peppy music in the background.

Dean Wehrli:

Yes. Thank you, thank you. I’ll tell John you said so.

Dean Wehrli:

I agree with all those indicators, by the way. Another one that I like to look at is the difference between the bid and the ask, because for a long time now, the asking price has been well below the sales price. That percentage difference has been heightened. I’m starting to notice in a lot of markets that I work in that you’re starting to see that bid, ask difference a little bit squeezed. It’s still positive, but it’s a little bit squeezed. Go ahead.

Court Cunningham:

For sure. We’ve got a dashboard that we look at that probably has 50 metrics. I covered the big ones. That one, percentage of listings selling above initial list price is one of the metrics we look at. I don’t have it in front of me right now but the last year has been something crazy, like 60% selling above initial list price in our markets. We’re in slightly hotter than average markets. You’re right, that’s coming down. It’s still high by historical standards, but it’s come down by 10 or 15 points. In a normal market, that’s 10 or 20% of the time where you’re selling over list price.

Dean Wehrli:

I was going to use that as a segue to real quick, get a sense of your crystal ball. Do you feel the market normalizing? Do you see things as calming down, at least in near term?

Court Cunningham:

One high level point, the great thing about our business, because we’re not tied to the underlying real estate, the market goes up, down or sideways, we do well, which we like. Our view is that, when people talk about, the market is softening. Year over year, all these metrics are down. They’re down from a hundred year high.

Dean Wehrli:

Yeah, yeah.

Court Cunningham:

We’re nowhere near quote, unquote, normal. My view is, we will slowly, over the next year, return to a more normal balanced market and the risk is, unlike previous real estate crises, we have a real supply problem. There are five million fewer homes that have been built over the last cycle then should have been built. All the millennials who deferred nesting are now nesting. You’ve got increased demand, reduced supply, which is why housing prices are doing crazy things. The thing that will take the edge off of that is interest rates when they start over the next year. I think the Fed is going to manage that in a very gradual way, which will hopefully bring the market back in balance.

Dean Wehrli:

Yeah, and we project that as well for that exact same reason, modestly increasing mortgage rates. But still, we forget, three and a half or even four percent will still be historically crazy low.

Court Cunningham:

Yeah. I’ve read some articles, some breathless article in some magazine over the last week that mortgage rates are up 15 bases points in the last 30 days. You look at the one year chart, they’re still the lowest they’ve been all year. You look at the five year chart, and we’re at historic lows.

Dean Wehrli:

That’s what I mean. Just make that thing go to the left a little longer Brad, and then you’ll see, you shouldn’t be quite as worried as you are, Kevin. I just gave him two names.

Dean Wehrli:

What’s your biggest competition? Is it traditional brokerages? Or is it like a FlyHomes or something like that, that’s doing something similar to what you’re doing?

Court Cunningham:

It depends how you think about it. From a number of transactions, 90% of it… One fun stat, when we get in front of a customer in their home, we will win that business 55% of the time, over half the time. That’s a very high win rate and it’s because we believe we’ve got the best offering for home owners. Of the people that we lose, either because we went to their house and they decided they didn’t like us, or we didn’t get into their house, 95% of the time, they’re going to a traditional brokerage. It’s a friend, a relative, someone they know from school or church or whatever it may be. That is the competition just based on where our non-buyers are going.

Court Cunningham:

But obviously we don’t really worry about the traditional guys as a competitive set because they’re not innovating. The innovators are people like FlyHomes who has a similar offering to us and people like Homeward and Knock and Ribbon who are trying to enable the traditional realtor to compete with us. They’re the ones… and Open Door will start to innovate more and Zillow is doing some innovation. Those are the folks pushing the frontier with us.

Court Cunningham:

In general, we don’t spend a lot of time focused on the competition. We are maniacally focused on creating a magical consumer experience and taking cost out of the equation. If we’ve got the best experience and the lowest cost, we will win over time, which is what we plan to do.

Dean Wehrli:

Do you see any of the traditional brokerages, because they have a major market presence and some of them are really, really big outfits. Do you see them attempting to innovate and pivot towards closer to what you do?

Court Cunningham:

They’re going to try. The question is, will they succeed? Most of what you’ve seen happen has been partnering. The problem is, you’re taking a transaction where too many people are touching the transaction today and you’re adding more people to the transaction. You’re adding a Home Order or a Knock or a Ribbon, so that’s another person, another process, another fee. I think that’s going in the opposite direction. I think you have to vertically integrate this to simplify it for the consumer and to reduce cost. Realogy and Keller Williams are the two that have the best chance of doing it. Keller Williams has an army of developers down in Austin, south of the river. I haven’t seen any consumer facing that’s game changing yet. Only the paranoid survive. Maybe they will surprise us one of these days.

Dean Wehrli:

That’s a nice pearl. It’s a very good words of wisdom. Only the paranoid survive.

Court Cunningham:

That was actually Andy Grobe, the founder of Intel.

Dean Wehrli:

Was it?

Court Cunningham:

They were known for their rapid development cycles. Why are you so maniacal about developing a new chip every nine months. He’s like, “Because I don’t know what the competition is doing. Only the paranoid survive.”

Dean Wehrli:

For traditional brokers to do that though it would have to be such a sea change. It reminds me a little bit of Kodak, where they made so much money on film development and film, and they had this really good digital camera division, but they buried it because they couldn’t just go whole hog into this new technology that turned out to be the winner.

Court Cunningham:

That’s right. There’s business books written on this. One of the more famous one is by Clay Christensen, The Innovator’s Dilemma. It’s about exactly this, where your profit pool today is driven by mode of distribution, which is not going to be the long term mode of distribution. Our agents make more money than the average real estate agent out there. They do five to six times the number of transactions per year of the average agent. They’re way more productive because of the training and the technology and the system we’ve built. Rather than us capture that profit, we’re using that to give back to the consumer, right?

Court Cunningham:

In a world where you look at Compass, who’s publicly traded. Keller Williams isn’t. Their margin, after agent compensation, is 18%. Four years ago, it used to be 22%. What does that tell you? It tells you the agents have the power. They’re saying, “Pay me more or I’m going back to Keller Williams or Realogy or wherever.” That’s not a very big profit pool to innovate on things. They have the added problem of, if I’m an agent, then what does a brokerage do for me? They basically give me a license which I can rent from multiple places. They give me leads which I can buy from Zillow. They give me a technology system to manage my business, which now I can rent from places like Side, or I can go to one of these, what are called no fee brokerages like eXp or Fathom, where they take $500 a transaction. The power is on the agent’s side. What’s ironic is, as they capture more and more of the profit pool, the traditional guys will, I think, be under real pressure and that is going to enable us to accelerate faster because that independent agent team in Dallas with ten people cannot do what we’re doing.

Dean Wehrli:

Yeah. Also remember, your agents also don’t have to fight fires on the side, so that’s helpful.

Court Cunningham:

Yes, exactly.

Dean Wehrli:

It frees up their time. What’s the most dangerous part of the process for you? Is it rapid market changes? Or is there no real major danger point?

Court Cunningham:

Yeah, I would say, the risk to the business are, we do need capital. We’re buying those new homes with cash. There’s a capital market’s risk. We need access to capital. We manage that by having multiple lending partners with staggered maturities and making sure we always have sufficient liquidity to run the business. Second is human talent. We actually, in a couple of markets, had to turn people away in September and we’re still doing it in two markets. We’re going to turn everything back on. Because we just didn’t have enough people to execute the business. We’re growing three X year over year and we couldn’t hire and train people fast enough, so that is something that we’re investing more there. Then from a balance sheet risk perspective, I think if prices change really rapidly, there is risk to the business, but what’s nice about it is because we are capturing margin from real estate and title and mortgage, we can withstand a pretty severe downturn. If 2008 happened today, and you ran those scenarios in terms of price declines through our business model, we would still be profitable. We’d be obviously less profitable, but we’d still be profitable.

Dean Wehrli:

That’s nice to know. You’re going to hate this question, but what is the biggest downside risk to your clients?

Court Cunningham:

You’re going to hate my answer, which is, I really don’t see one. I can work with… Let’s just go through the categories, a traditional agent. I always go to Keller Williams because I think they’re the biggest, where I don’t get a cash offer. I don’t get a backstop price. I don’t get concierge. I don’t have a single platform with a single point of contact, but I pay the same fee. Why would I do that?

Court Cunningham:

I could go work with Zillow or Open Door, where they’re not going to help me on the new home. They’re not going to have a seamless transaction management platform. They’re going to force me to sell my old home at a five percent discount to intrinsic value. If I’ve got, in that example I gave, $100,000 of home equity, but five percent of the home is $15,000. That’s $15,000 of my $100,000 in home equity is going to Zillow and Open Door. That’s not fair. So why would I do that?

Court Cunningham:

It’s not really clear if there’s a better alternative out there. The one, if you’re going to point fingers, there is one small added cost to our offering, which is we do charge rent on the new home while you’re there, for your 60 to 90 days. It’s not a ton of money. It’s maybe a few thousand dollars of cost. That is the one added cost to the equation.

Dean Wehrli:

Would a traditional brokerage, and I’m not saying they’re right or wrong, say that you don’t have the local nuance that they do?

Court Cunningham:

That is exactly what they say. I know Stone Oaks in San Antonio, or I know Denton in Dallas, or whatever the sub-market is. I do more transactions. Today, they’re right. Those power brokers in those sub-markets do more than we do over time. We are going to be able to say we’re every bit as local as you are but today, we can still say, “Look, that’s right, but we are the most accurate at pricing old homes. We’ve got the data to prove it.” Our homes sell faster and at less discount from list price than others on the market, which means we’re getting the price right. Yeah, we may not have done 100 transactions in Denton, Texas, but we’re really good at pricing homes which is a really important part of the real estate transaction.

Dean Wehrli:

You have, at least to me anyway, a surprisingly big part of your business is in the new home sector right?

Court Cunningham:

It is. Part of that is by design. We have some channel programs with new home builders to try to make it easy for them to work with us. Part of that is the price point that we operate in where there’s not enough existing home inventory and people are going to new homes. It’s roughly 25, 30% of our business is people buying new homes.

Dean Wehrli:

Geographically, remind us, you’re in Texas. You’re in eight or 10 markets?

Court Cunningham:

Yeah, four cities in Texas, all the big cities in Texas, Denver, Colorado, Atlanta, Georgia, Charlotte, Raleigh and metro D.C. We’ll be launching in Washington state and Portland, Oregon and entering iBuyer central, going to Phoenix, Arizona where every iBuyer is. It’s where Open Door started.

Dean Wehrli:

IBuyer and build-for-rent central too.

Court Cunningham:

Yes.

Dean Wehrli:

A couple of things going on there. How do you decide where to go into a market next?

Court Cunningham:

We do try to pick lower volatility markets that have all the dynamics we talked about in Texas, in terms of macroeconomic growth and net in-migration. Bigger is better obviously, more transactions, more opportunity. Newer housing stock is important. It’s easier to value and less deferred maintenance and therefore less risk. That said, our ambition is to be a national platform. So, in the next couple years, we’ll be in suburban LA, suburban New York. We’re not going to do anything urban, at least in the next few years. Our plan is to be a national platform.

Dean Wehrli:

Okay, okay. Interesting, I heard LA, because I was going to ask you, next question, ever coming to California? Suburban LA, be careful of the Antelope Valley. I’m just saying. Roll your windows up. I’m just kidding. Sorry, Antelope Valley. I’m joking.

Dean Wehrli:

What might be next for you is you might get into the world of being a direct lender? Do I have that right?

Court Cunningham:

That is something that we are planning on doing at some point over the next 12 months. The reason for that is it comes back to the reason we make every decision, which is, how can we drive a better customer experience. We look at when people say, I’m not happy with Orchard today, it is around the lending experience and we work with some great lending partners and we will continue to, especially for government loans and jumbo loans. 70% of our book of business is conforming, Fannie, Freddie, loans, and we think that we can automate that and drive a much better experience, where you don’t have to call your loan officer to get a pre-approval letter. You can print it out at any time. Where we can do appraisals faster. Where we can have you fully underwritten and documented from a loan perspective in a matter of days, not weeks. That’s harder to do in the jumbo space and the government, VA, FHA space, but in the conforming space, we believe it can be done.

Court Cunningham:

Again, coming back to Amazon, everything they’ve done is, how do I drive more value for the consumer? It’s a big thing to do and it’s going to take a couple years to get right, but we’ve decided to make that the next frontier that we go after.

Dean Wehrli:

Yeah, that will be a big step. I love that you call yourself, you said it earlier, the Honda for housing. You’re not just for rich folks. That’s a great title. Someone, hopefully you’ll know the name, but it was a University of Colorado professor, researcher in the real estate world, who called you Power Buyers. Do I have that right?

Court Cunningham:

Yeah, his name is Mike DelPrete. He’s a very smart guy and I highly recommend his research. He covers the real estate industry broadly, from a business model perspective. He did that. I think it’s an okay name, it’s a category name, for two reasons. One, to differentiate from iBuyers, which we’re not. Two, to make the point that we are predominantly focused on helping the consumer buy the new home, whereas the iBuyer is predominantly focused, or exclusively focused on selling the old home to the iBuyer. I think it’s an okay name and he’s got other direct to consumer companies like Fly Homes and then he has the middle man, Knock and Ribbon and Homeward, who are trying to help agents offer something similar to their customers.

Dean Wehrli:

We want to get you a new category name. Option A was Power Broker. If you like that, I thought of it. If you don’t like it, John Burns, my boss, thought of it. What do you think of that one?

Court Cunningham:

I think it’s good. I think it’s good. I don’t know. We’ve spent four years trying to figure out, what is a good category name. The problem is, I come back to, we’re the Amazon for real estate, or we’re the Carvana for real estate. That is mostly true, but not quite accurate, because the human element. That relationship with what we call the home advisor or the licensed realtor, is really, really important. People want a knowledgeable person who can advise them. It’s Amazon with a human person advising you along the way. Every analogy we try to come up with doesn’t work. If you like Power Broker, I like Power Broker.

Dean Wehrli:

I have an option B that I like better. Weirdly, John and I actually thought of this independently and each emailed each other about this. What do you think of iBroker? Is it too restrictive? It’s catchier I think.

Court Cunningham:

Yeah, and iBroker gets into the whole digital platform. Yeah. You’re a broker for the most part. You’re not taking balance sheet risks. Yeah, that’s actually not bad. I think that’s actually better than Power Buyer potentially.

Dean Wehrli:

We thought so too. If you like it, go for it.

Court Cunningham:

Okay. I’ll start pushing it and see what sticks.

Dean Wehrli:

See what happens. Court, I really appreciate you coming on. This has been fantastic and really eye opening, because again, you’re doing something that seems on its face, traditional, but when you dig a little deeper it clearly is not.

Court Cunningham:

That’s right. If you think, oh this is just like traditional, listen to some of our customer testimonials on our website or any of the review sites. You can see it and feel it and hear it in their voice. This is really magical for people and it’s what gets me out of bed every morning.

Dean Wehrli:

Awesome. Awesome. Thanks for coming on, so much.

Court Cunningham:

Thank you.

Dean Wehrli:

It’s been a pleasure.

Court Cunningham:

Really appreciate it.

Dean Wehrli:

That was Court Cunningham from Orchard and that’s it for this week. This is Dean Wehrli for the New Home Insights podcast. We’ll see you in a couple of weeks. Bye.


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