So who’s making money?

Traction proves a product-market fit, but at the end of the day the business must make money
and turn a profit to thrive. Call me an old-fashioned M&A guy, but I like my businesses to make
money.

Let’s take a look at three examples as we explore the money-making potential and viability of
these new business models: ComFree, Purplebricks and Opendoor.

ComFree reported approximately $40 million in revenues in 2014, making it the largest company
by revenue in my market scan. It has roughly 40,000 listings and a staff of 400.

Its prices are significantly discounted in new markets it enters in Canada. Even so, the average
revenue per customer suggests it is able to successfully upsell premium services (for instance, it
offers expert negotiators for an additional fee).

Earlier this year, Purplebricks reported full-year revenues of £46.7 million and pre-tax losses of
£6 million. At the time, it had 450 local property expert contractors, and its numbers suggest it
listed around 41,000 properties in its 2016 fiscal year.

Opendoor has claimed it has bought over 4,000 houses and averages a 9 percent commission fee
(yes, you read that right: this disruptive player is charging higher fees than agents). That’s a huge
potential revenue pool! On the above numbers, that’s over $75 million in potential revenues (but
on very slim margins), but revenues and profitability are highly variable on eventual selling
prices, costs to prepare houses for sale, debt servicing costs and the market risk associated with
holding inventory (Check out my detailed analysis of Opendoor's business model, Inside
Opendoor: what two years of transactions say about their prospects).

So that means the revenue potential is definitely there for Opendoor, but because of its business
model design, a few more years must pass before it earns the “money-maker” designation. But it
shows promise.
 A note about Purplebricks

While its price point is higher than ComFree ($1,093 vs $643 in US Dollars), Purplebricks’
volumes are lower and the cost of customer acquisition is much, much higher (leading to big
losses as it builds audience).

Why are customer acquisition costs so much higher for Purplebricks? Because it is relatively
new in the market. ComFree has been operating for nearly 20 years in Canada, Purplebricks just
two years in the U.K. One would expect (and shareholders would hope) that those costs will
significantly drop over time, which is necessary for the company to reach profitability.

The most important difference between the U.K. and U.S. markets for these new models is what
sellers pay for agent representation (1.4 percent in the U.K. vs. 5.5 percent in the U.S.). That
difference means that operators in the U.S. are able to charge higher prices while still saving
their customers money, which will make a big difference in revenue-generating potential and
eventual profitability.

What we can learn

There is clearly innovation occurring in the real estate space. I’m interested in the models that
are getting the most traction in the market and are making a real impact at changing how people
buy and sell houses. From the scan above, some clear learnings emerge:

 The models getting the most traction are those that smartly combine technology, human
support and a killer consumer proposition. ComFree and Purplebricks have hundreds of staff to
support their customers, supported by technology, and offer a compelling proposition of better
service with lower cost.
 There’s no one, winning model. All share common ingredients, but a number of different
ways exist to achieve success.
 For sale by owner propositions suffer when they focus too much on technology. The
market isn’t ready for an app to sell your house.
 There’s exciting innovation occurring with the disruptive players, but it’s too early to say
if they’ll be disruptive and valuable. But watch this space.

These models aren’t going to change the industry overnight, but they do represent the best of the
new models gaining traction. The future of real estate is coming -- and it will look a lot like these
businesses.