The Good, the Bad, and the Worse of Using Online Leads

What are the pros and cons?

Ever wonder why so many agents rely on large online lead aggregators?

A major reason is that they fail to maintain a long-term relationship with their customers after they sell them a house. Or, if they do have a customer touch program, they don’t maintain and consistently use it.

Either way, with no reliable platform to generate repeat, referral, and review customers, these agents become reliant on marketing and buying online leads to stay afloat.

Enter the large aggregators like Zillow or Realtor.com to fill the void. The aggregators created platforms to collect buyer and seller data via Multiple Service Integrations and then sell that customer contact information – the lead –  back to the real estate agents. For a very pretty sum.

It is to note that many agents still, today, are able to make a healthy profit within these online lead purchase models. We believe the agent should use the model that works for them until it stops working; while still being fully aware of the long-term viability of the lead source. We are aware that 90%+ of buyers find their home online, thus, it is incredibly important to be marketing to where the buyers are looking.

Of course, real estate agents – myself included – can’t really complain. We’ve played into the online lead game for a long time because online leads are the Easy Button. Pull out your credit card, wait for your phone to ring, and pray you make a return on your investment, all while building your database. That sure is a lot quicker and easier than spending the time and effort to build actual relationships with customers and colleagues.

Or is it?

Let’s explore why — aside from warp-speeding the growth of your database - buying online leads from the largest lead aggregators are often not the best solution to growing your business long-term:

#1. Online Lead Prices are Constantly Changing.

Many of these online lead aggregators are public companies with a fiduciary responsibility to their stockholders to maximize their profit. To that end, some of them have adopted market- based pricing for their lead cost, meaning that a lead could cost $125 one day and $130 the next, depending on agent demand. I personally have spent hundreds of thousands of dollars with this system over the past few years, and seen the cost of leads increase by at least 4.7X in three years.

These ever-increasing lead costs affect the finite commission pie, of course. With a limited and continued compressed commission for real estate agents (commission dropping from 3% to 2.5% per side), when lead costs go up, team or brokerage splits must come down.

And, most of the time, those commission cuts come out of the pockets of the agents on teams who answer the phones and do the ground work. This is how some agents are now being paid or earning similarly to Uber/Lyft drivers. Of course, there is only so long that talent will put up with earning only 20-30% of transaction just for being given the lead and some systems. Eventually, after gaining experience, many of these agents end up leaving those brokerages or teams out of pursuit of profit and lifestyle.

#2. Online Leads Create an Unsustainable Lifestyle.

If you're a solo agent buying online leads, you may be stuck in the rat race of answering your phone non-stop. That’s because you must immediately call the online leads whenever they come in, regardless of time of day, and whether you're with family, on a date, or serving another customer.

In fact, according to Opcity (Realtor.com's referral platform), if an agent doesn’t call an online lead within 2 minutes – yes, 2 – their chances of closing that customer drops by 400%! Speed to lead, indeed! Agents on most teams dial within 3-5 seconds.

That slave-to-the-lead approach means you’re rarely fully present with your friends and family, always staring at your phone, worried that if you miss a call it could cost you thousands in lost business. To make matters worse, a substantial chunk of those leads you buy are worthless to begin with. Our data shows that 25% of the leads being sold are actually real estate agents calling in themselves, and another 10% are "bad numbers." Money down the drain. It’s just part of the process and the numbers game.

Further, many agents on a team work with a shift system or have required office hours to call leads. They are more like an employee in a call-center than an entrepreneur, and their income reflects that. Yet, most agents don't get into real estate to live the employee lifestyle; they are usually looking for something bigger and better.

In fact, it’s because the sky is the limit that real estate is such an incredible business.

To work online leads within a financial structure that doesn't offer opportunity for long-term financial success fails to take advantage of the vast opportunity that real estate offers.

For example, you could sell four homes via online leads or one lead that’s generated organically, and net nearly the same amount of profit in most models after considering costs and splits. Which do you prefer? There’s no wrong answer. You must choose for yourself. Just be aware of the lifestyle and profit that comes with both options!

#3. Online Leads Create Unhealthy Reliance / Switch Costs.

Many agents get used to the fact that, when they buy online leads, all they have to do is pay the cost and wait for their phone to ring. They are in their comfort zone, often afraid to quit the online lead game because they lack the skills or knowhow to generate their own business and get their life back. Or, sometimes, they just don’t know there is a better path.

These agents are being held captive by their online lead generators, caught in what we call the “survival trap,” where they must generate quick revenue somehow because they face a business loss each month.

This never-ending survival mode lifestyle creates an unhealthy reliance on the fast leads offered by online lead aggregators. It also creates a huge and unnecessary level of stress, including the “switch cost” of having to drop everything they’re doing in order to answer their phone during all times of the day and night.

Agents wanting to get out of the online lead rat race have options at Momentum. Our leadership has had a lot of experience with this game, and we know how to help you break free over time. We’ve done it ourselves by getting our database to a size and by implementing a touch program where it snowballs and grows itself.

#4. The Current System for Buying Online Leads May Soon Change.

The simple system now used – pay a flat fee and get some leads – may not be around for long. Online lead aggregators are starting to create referral platforms, such as Realtor.com's ReadyConnect Program and Zillow's Flex Program, that forgo selling leads, and instead hand-select several invitation-only teams or brokerages to accept their leads in return for a 35-38% referral fee to the aggregator.

That means the teams and/or brokerages with the highest customer service rankings, according to their systems, will be rewarded with more leads, on a performance basis by these large lead aggregators. That might sound pretty good if you're one of the few that the aggregators choose, but not so good if you’re not. And, even if you are chosen, Wall-Street is always looking for ways to make even more money and could increase the splits even further in the future, making the business model even closer to break-even.

More importantly, there is a long-term, existential threat from getting into bed with these Wall Street aggregators: once they have worked with you and learned everything you know, they can replace you with technology.

We’ve certainly seen that happen with other industries (Carvana or Amazon, anyone?) and the financial incentive is there.

Why would they want a team to be part of the transaction and siphon off a big chunk of the profit when they could just do it all themselves via a virtual and automated platform?

In fact, they are already heading in that direction. These big companies are building platforms that include title, mortgage, and insurance, and many of the large aggregators are already a nationwide brokerage. That means, despite their protestations that it isn’t so, they are a direct competitor not only on transactions, but also on ancillary businesses.

So, a broker/owner that might want to create an ancillary business while working with these Wall Street referrals, would be in direct conflict with the lead aggregators’ business model.

Is it hard to imagine that, in time, the contracts with these aggregators could prevent broker/owners from building competing ancillary businesses to service their customers?

These changes won’t happen overnight, of course. The big aggregators will have different phases for rolling out new products and working their way down from the top of funnel (searching for leads) to the bottom (hiring real estate agents, such as Redfin does). They will then integrate ancillary businesses into every activity via a rewards program for customers and agents.

Momentum leadership foresees that this is bound to happen over time. And we are preparing for that day, in the not-so-distant future, when this full integration by big aggregators will occur. We have a plan to compete that is and already has been underway.

We know that 87% of agents fail in their first five years, and we help our agents to avoid being among them. We are preparing our brokerage and our agents for long-term success even in that brave new world of real estate.

This is a personal opinion post by Jon Brooks (jon@jonkbrooks.com). Jon notes that many teams and brokerages are and have been very profitable using an online lead approach to warp-speed their databases. Jon believes agents should continue using lead aggregators until it stops making financial sense to do so, while warp-speeding their databases in the meantime.

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