Why Buying Online Leads Isn't Sustainable
Over the past five years, some of the fastest growing teams in the country – the team I was formerly with, The Brooks Group, included – have “bought" their way into the real estate sales business with online leads. Most of us bought online leads from aggregators such as Zillow/Trulia and Realtor.com, and then flipped the leads over to our team's real estate agents for a 50/50 split on closed commissions. The Brooks Group spent hundreds of thousands of dollars in figuring out the best method to convert online leads, and which lead sources are valid and consistent. And, in fact, we found that buying solid leads did work very well and allowed us to build a strong database very quickly. However, as the online lead aggregators get smarter, and the landscape gets more competitive, it has become increasingly challenging to be solely reliant upon buying online leads to fuel growth.
However, as the online lead aggregators get smarter, and the landscape gets more competitive, it has become increasingly challenging to be solely reliant upon buying online leads to fuel growth.
Here's why:
Huge Increases in Lead Cost
As a business owner, you want as much control over your budget – and your profits – as possible. So, when buying online leads, you need cost consistency. Unfortunately, we no longer have predictable, consistent online lead costs when buying from large aggregators, because they now mostly use market-based pricing models. The greater the demand for leads by real estate agents, the higher the lead cost they charge you or the less leads you receive. Basically, your lead cost or number of leads received is primarily "floating," so that you have virtually no control over your profit margin when buying online leads from such companies.
Of course, the aggregators are focused on making as much money as possible, at the agent’s expense. They are typically public companies, with a fiduciary responsibility to net their shareholders as much money as possible, so if there's a way to charge agents more, without going so far as to lose any agents as clients, they're doing to do it. To see how far that approach has gone already, take a look at the cost-per-closed-online-lead for The Brooks Group over the last few years:
2016 - $468.25
2017 - $805.61
2018 - $2,251.30 (partially higher due to changing systems)
2019 - $1,523.37
Aggregators like Zillow and Realtor.com have recently adopted a new system for purchasing leads. For example, previously, I was preauthorized to purchase leads from Realtor.com, and those leads would automatically land in my account at a fair price. But things have changed drastically under a new, market-based plan. In one instance, I got a call from a Realtor.com representative offering me leads for a preferred zip code at $11.50 each, and I purchased them. The next week, a different Realtor.com rep called and tried to sell me virtually the same leads for $42.50 each, explaining that demand had increased since I had last purchased one week earlier, and that the system for selling leads had changed. I didn’t buy the leads at that new price, because it simply would not have been profitable. To get new shares from Realtor.com, I was put on a round-robin list where the sales reps randomly call me, from different telephone numbers, to sell me leads at different prices.
Further, Zillow makes adjustments on their market based pricing monthly via an auction to maximize what they charge agents for their leads. In some instances, Zillow even "oversells" specific zip codes, which means they're charging agents even more per lead or the agent received less leads than they originally projected and expected. Overall, the online aggregators are frequently changing the method in which they sell their leads - which causes lead flow issues and financial disruption to all of those agents who buy the leads.
One Way to Reduce Costs Is Through Lender Contributions - And It May Not Be Possible in the Future
How can agents reduce the ever-rising costs of buying online leads? One typical path has been to team-up with a preferred lender who shares the lead costs with the agent, paying up to 50% of the cost in hopes of getting the first opportunity to win that buyer's business. However, that option may not be available in the future since large aggregators such as Realtor.com have stopped taking on new lenders with agents in order to eventually use their own internal lenders.
Zillow is also actively recruiting for Mortgage Loan Officers in some test markets; you can check out their websites to see who they're hiring for. This creates what is likely a temporary conflict of interest, where the aggregator tries to maximize an agent’s spend while simultaneously building a new platform that would charge the agent more and bring in-house the ancillary businesses.
So that Begs the Question - Where is This All Going?
It is highly likely that the lead cost for agents will continue to increase until the lead aggregators flip the switch to evolve into "referral" based companies that also sell ancillary services such as title, mortgage, and insurance, all in one integrated platform. When that happens -- as I anticipate it will (and is already happening in some markets) -- instead of selling the agent an online lead, the aggregator would “refer” it for a 35%+ commission, plus require that the agent use the aggregator's customer service relationship (CRM) platform and give them first opportunity to their ancillary businesses. In many cases, it is more profitable for the aggregators to refer the leads for 35%+ of the total commission and for them to sell ancillary services than it is for them to sell the leads to multiple agents.
The market has been heading this direction for a long time. Having it set up this way, the lead aggregator would profit from every step of the transaction, doing nothing but setting up the platform, while the agent is on the ground doing the leg-work. So, as online lead costs become increasingly higher, and online lead aggregators work toward becoming a one-stop shop, real estate agents must maximize what they currently have, and track their return on investment and their time spent very, very closely.
The reality is, at some point -- probably within the next two years -- leads will primarily become available only by paying a 35%+ commission referral fee to the lead aggregators and/or their subsidiaries. And, when that happens, most agents will stop accepting those leads because that fee structure simply won’t leave enough of the profit pie to go around. Consider that most real estate teams operate at a 50/50 commission split with their agents. Add to that a 35% referral fee to the lead aggregator, plus a 30% split to the big-box real estate brokerage, and that leaves the team member who is actually doing the work on the ground and building the customer base with a take-home commission of only 22.8%. More than 75% of the agent’s hard-earned commission would be paid out to middle men. And, yes, that is crazy.
More than 75% of the agent’s hard-earned commission would be paid out to middle men. And, yes, that is crazy.
That reality is why traditional brokerages just won’t cut it as the market evolves. And it’s why more agent-centric, outside-the-box brokerages like Momentum Realty –where agents immediately 2-4x+ their return on investment while gaining access to the same leads without having to pay a 50/50 team split and/or 30%+ broker fee or other junk fees – will be the path for success in the real estate sales future envisioned by the lead generators. Momentum is committed to carefully analyzing our changing market and constantly adapting to meet those changes. It is structured to help agents maximize profit opportunities in the market as it is now, as well as in the days when the anticipated change in lead generation occurs.
Maximize the present, and prepare for the future – that’s Momentum’s vision. If you're on the fence about making the switch, it’s time to get off. The time to make a move toward building your business and your own family’s wealth is now.
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Opinion written by Jon Brooks, a co-founder of Momentum Realty. Jon recently began working in mortgage financing after four years as an award-winning, top-producing agent, real estate coach, and speaker on real estate best practices and building personal wealth. He continues to write and teach on those topics today.
