Andy Florance: "CoStar is not going to change its business model to get a portion of the commission"

CoStar CEO Andy Florance says that his company will not change its business model to go after agent commissions once it is established as a residential real estate portal player in the United States.

In an onstage interview with U.S. agent publication RisMedia [subscription required], the outspoken founder and CEO of the PropTech giant said that CoStar would not be changing the way it goes about its business and that the company's residential portal Homes.com would stick to the 'your listing, your lead' principle.

"CoStar is not going to change its business model to get a portion of the commission. And in fact, when we bought Homes.com, they had $40-50 million in revenue from referral fees and we terminated that the first month we owned the company; we walked away."

Florance also put paid to the idea that CoStar would follow many other big U.S. real estate players and look to get into some adjacent revenue streams that agents in the market have typically seen as their own domain.

"I’ve had plenty of time to take a commission; I’ve had plenty of time to do iBuying; I’ve had plenty of time to do a referral fee; I’ve had all kinds of time to do those things that people don’t like and we’ve chosen to never, ever do them."

CoStar is already the leading player in commercial real estate via the LoopNet portal and in apartment rentals via Apartments.com. Since its $250m acquisition of agent platform Homesnap and the minor portal player Homes.com for $156m, CoStar has made no secret of its intention to shake up the residential portal sector and take a big slice of the market away from the likes of Zillow, Redfin and Realtor.com.

With nearly $5 billion cash in reserve and a history of success in other niches, Homes.com is expected to provide a stiff challenge for the incumbents. The task at hand for Florance and CoStar has been to convince agents of a model that charges listings agents to promote their content (rather than charging a success fee) and doesn't allow rivals to advertise on an agent's listing (as Zillow does).

Florance told delegates at the RISMedia’s 26th Annual Power Broker Reception & Dinner that the way Homes.com will do business will not suit every agent.

"I’ll be frank with you—what our business model does is ‘success begets success’. If you’re a successful agent, you’re going to get more business off of our business model. If you’re just starting out, you’re not going to be able to buy your way into prominence on our site.

Five billion dollars is being paid out to Zillow and Redfin right now, and at some level, that’s coming out of broker/owners’ pockets. I think we can not only reduce that exposure dramatically; I think we can accelerate their businesses by improving the way they work with their clients and be able to meet their clients where they are."

For now, CoStar's residential segment remains relatively small (3.6% of total revenue in Q3 2022) despite Homes.com having tripled traffic in the last 18 months.

Homes.com and CoStar's tilt at the title is expected to begin in earnest with a massive marketing campaign in the new year. The company is well aware that for its ambitious plans to work it will need to prove its value by attracting home-hunter interest. Florance alluded to his residential division's work to enrich the data available to Homes.com users and drive traffic.

"We have to have traffic for us to be relevant to brokerages, so how are we going to get the traffic? We’re doing some crazy projects - we’re hiring a thousand folks to go out and we’re visiting every park, neighborhood, condo, school in the country. We’re collecting all sorts of information"

CoStar nailing it before scaling it with acquisitions in residential

CoStar is known for going after big acquisitions to grow in new segments. Asked about possible acquisitions that the realtor community might want to know about, Florance said that despite having a lot of capital to deploy, CoStar would be concentrating on its core competencies in residential for the foreseeable.

"Well, we are always doing something every two to three years, but I have to say, residential real estate in the United States is pretty good! Give me a year or two!

I look at certain players in the industry who go out there and try to monetize some model whether it be referral or discount brokerage, and pretty quickly that one thing they’re doing is not enough—all of a sudden they’re doing mortgages iBuying. You’ll notice that some of the other players are losing money with everything they do. We want to basically do this, do this right, get to a place where it’s profitable, and then we’ll take on the next thing."

The CEO, who has become well known for controversy during his 36 years in the job, ended with a comment that many real estate portal bosses would like to express in one way or another to their customers.

"I do hope you guys will give me a break and by the time I’ve been doing this for 50 or 60 years, you will stop asking me if we’re going to compete with the Realtors."