How Trulia Soared Through the Housing Crash

1/31/12Follow @wroush

No journalist can resist a good horse race. That’s why most stories about Trulia, the San Francisco-based real estate search company with 17 million users per month, also mention Seattle competitor Zillow (NASDAQ: Z).

After all, both companies were founded in 2005, and both offer fancy map-driven interfaces for canvassing rental listings and houses for sale. Trulia is a bit larger than Zillow (300 employees versus Zillow’s roughly 275). But Zillow beat Trulia to the public markets. It raised $69 million in its IPO last July, while Trulia continues, for the moment, to make do on the $33 million it has raised from venture investors like Accel Partners and Sequoia Capital.

But from my perspective, there isn’t much point in trying to pick a winner in the real-estate search business. The truth is that it’s big enough for both companies. The real prize in this market is an ongoing share of the dollars real estate agents spend on advertising. There are more than a million licensed real estate professionals in the U.S., who earn about $50 billion in commissions annually. Traditionally they’ve plowed about 10 to 20 percent of that income back into marketing and advertising. Do the math, and that’s a $5 to $10 billion industry.

Before companies like Zillow and Trulia came along, the vast majority of this spending went to offline channels: newspapers, classifieds, billboards, direct mail, grocery cart advertising, and the like. But both companies have built thriving businesses selling online ads and related services, with real estate agents now waiting in line to get their glamor shots and phone numbers on the sites’ listing pages.

What really interests me, then, is how quickly the real-estate startups have changed the way people buy homes—and the way agents sell them—even in the midst of the worst downturn in the housing market in generations.

I’ve had a couple of conversations on this theme recently with Pete Flint, Trulia’s co-founder and CEO, and it sounds to me as if both companies are using roughly the same playbook. It involves identifying the most common frustrations plaguing house buyers and real estate agents, and easing the pain by changing the way information gets delivered—whether that’s information about available homes, which was traditionally hard for consumers to find, or qualified leads on home buyers, which is what agents always want more of. “What we are trying to solve for is not only a consumer problem but an industry problem,” says Flint (he’s the one on the left in the photo above). “We not only needed to get smart on consumer needs, but also on how the real estate industry operates-the economics, the personnel, the legal aspects, all of those things.”

British-born Flint got a master’s degree in physics at Oxford and spent five years as a business development executive at UK-based travel site Lastminute.com before arriving at Stanford Business School in 2003. There he met a Finn named Sami Inkinen, who had also studied physics and had done his own spin in the startup and consulting worlds before deciding to pursue an MBA. “We became pretty fast friends,” says Flint. “We had a similar passion for high-tech, and we spent the first year at Stanford bouncing around entrepreneurial ideas.”

As second-year students in 2004-2005, Flint and Inkinen had spend time searching for off-campus housing in Silicon Valley, which is when “the light bulb went on,” Flint says. “At the time there were a handful of regional brokerage sites, but they were not really consumer destinations, and there were some very disappointing national sites, like Craigslist. It hit us that this was a big opportunity that seemed completely obvious, and it was remarkable that no one had done anything that was particularly strong.”

Before they even got their Stanford diplomas, Flint and Inkinen had founded Trulia and built a five-person office in San Mateo, CA. Flint took the CEO role and supervised product development, while Inkinen became president and hit the sales trail, selling realtors on the system. (Six years and about 200 employees later, the company moved to its current quarters in the historic Rialto Building in San Francisco; as one of the only big downtown office buildings that survived the 1906 earthquake and fire, it’s a real estate landmark in its own right.)

Inkinen and Flint figured that if they could bring lots of consumers to their site, they would be able to start siphoning real estate advertising dollars away from newspapers. But it was a chicken-and-egg problem. To attract consumers, Trulia needed actual real estate listings, but the multiple listing service (MLS) systems used by real estate agents to share property information were, for the most part, closed to outsiders.

The solution was to offer free ads. “For the first years of the company, we basically went around to all of the major brokers and franchise holders with a very simple pitch: advertise your listings on Trulia for free,” says Flint. “That helped to grow the consumer audience, and we built the consumer experience on top of that, the data tools and the mapping.”

From the beginning, Trulia’s main appeal to consumers has rested in the mountains of data it provides on homes and neighborhoods. For each home listing, there’s all the information you’d expect about the property itself: price, square footage, lot size, photos, and the like. But in addition, the site will show nearby comparably-sized or comparably-priced properties; sales trends for the neighborhood (such as how much listing prices in the area decline or rise over time); the locations of nearby schools; crime rates; and sales information for recently sold homes. Trulia also features “heat” maps showing which neighborhoods have the highest and lowest average prices, and which neighborhoods are attracting the most searches.

A Trulia map of the Potrero Hill-Dogpatch neighborhood of San Francisco

Bringing in all that data “changed what was a one-dimensional experience, like a Craigslist listing, to a two-dimensional experience,” says Flint. These days, you can also add a third, social dimension: the “Trulia Voices” section of the site, where home buyers can post questions for locals or real estate agents. One user this week, for example, wanted advice on the best low-crime zip codes in San Antonio, TX; another wondered about utility rates in Las Vegas.

Zillow, it must be said, offers many of the same kinds of data, as well as a much-loved feature called the “Zestimate,” an algorithmic estimate of a home’s true value based on Zillow’s accumulated data. But Flint contends that Trulia offers “a more comprehensive view, with unique information [users] can’t find anywhere else,” such as information from Yelp on nearby restaurants and other businesses. He also says Trulia users tend to be more “transaction-ready.” “We build our product for transaction-focused buyers who are actually looking to purchase or rent a property, not the casual user,” he says.

That’s music to the ears of real estate agents, who have three ways to get exposure on Trulia. It’s still free to get a property listed on the site. But to get “featured” positioning, agents need to sign up for a Trulia Pro subscription, with the fee corresponding to the number of promoted listings. Then there’s Trulia Local Ads, which serves agents who “want massive exposure in a micro market,” in Flint’s words. Agents can put display ads on anywhere from 10 percent to 100 percent of the pages Trulia shows for a given zip code. If an agent wants to lock out the competition by buying all of the ads in a given location, all just takes cash. And patience—in many regions there’s a long list of agents waiting for ad inventory to open up, according to Ken Shuman, Trulia’s head of communications.

But realtors aren’t united in their love for the new middlemen. Just this week, San Diego brokerage ARG Abbott Realty Group announced it was barring Trulia, Zillow, and other sites from publishing its listings. ARG president Jim Abbott argues in this YouTube video that firms that let the online services publish their listings are, in effect, giving away business to competitors while enriching Trulia and Zillow. “These sites are nothing more than slick advertising platforms,” Abbott says.

Big Data and Shadow Inventory

Flint and Inkinen definitely picked an interesting time to get into the real estate business. Sales of new homes in the United States hit an all-time high of 1,283,000 in 2005, the year the company was founded, and have been plummeting ever since—the 2011 figure of 302,000 was the lowest in more than half a century. Sales of existing homes have begun to bounce back after the 2007-2009 recession, but only because so many foreclosed and other “distressed” properties are now available at fire-sale prices. So, how has a company that feeds off the real estate industry survived the worst real estate crash since the 1920s?

The main effect of the downturn, from Trulia’s point of view, was that “the big advertisers disappeared,” Flint says. The large national real-estate chains stopped advertising, which meant that individual brokers and franchisees had to take over their own marketing activities. This completely changed how Trulia sold ads, and led to the invention of the Local Ads product, as well as a huge hiring binge. “We essentially turned our sales organization inside out and hired dozens and dozens of inside sales folks,” says Flint. More than a third of Trulia’s employees are ad sales representatives, most of them working from a facility in Denver.

The up side to the tremors in the real estate business, says Flint, is that brokers have had to focus their marketing spending on the channels that bring them the most leads. “It’s forcing people to be more thoughtful about their advertising spend and to take ad dollars from offline to online,” he says. The bottom line is that Trulia’s revenues are doubling year-over-year. (Flint wouldn’t disclose specific financial details.)

To keep up with consumers and the ways they access information, Trulia has developed mobile versions of its service for multiple platforms, including the iPhone, the iPad, Android phones, Android tablets, and Amazon’s Kindle Fire. It also recently released a special iPhone app for real estate agents that includes a Foursquare-like check-in function. “It’s a flag to say, ‘Hey, I have been to that house,’ which gives the consumer much greater confidence,” Flint says.

But the company’s biggest technical push is in the area of big data and analytics. It has built a large-scale computing cluster running the Hadoop distributed computing system, and it has hired a Harvard-trained chief economist, Jed Kolko, to put the system to work. “We have incredible, real-time data about one of the largest parts of the world economy, the U.S. housing market,” Flint says. “We know where consumers are searching. We know what properties are coming onto the market and off. We know rental prices. It’s a staggering amount of data, and we can use insights out of that to improve the experience for consumers and advertisers.”

Improve in what way? Trulia’s Shuman explains it like this: Imagine that you’re trying to buy or sell a home in Fremont, CA. Trulia’s data might show that homes in Fremont are on the market for an average of 73 days before the first price reduction. That reduction, on average, might be 6 percent of the asking price, and the probability of a second reduction might be 27 percent. All of this is information that can help a buyer know when to place a bid, or help agents and their clients decide how aggressively to set prices. And that’s just the beginning.

“There has been a shift in mentality in the real estate industry,” Flint says. “Agents used to fear a well-educated consumer. But I think, now, agents are saying that a well-educated consumer is a better consumer, because they can make smarter decisions and have a pragmatic view of the market. The agent can then spend more time thinking about higher-value stuff. It hasn’t been an overnight change, but many agents are starting to embrace it.”

As is Trulia—but it will likely be years before the startup and its competitors can harvest the full fruits of their data. With unemployment hovering around 9 percent, Americans are still having a hard time paying their mortgages, which means foreclosure rates are still rising—a trend only temporarily slowed by investigations into robot-foreclosure scandals. Foreclosures create what Flint calls “shadow inventory”: distressed properties that bring down home prices for everyone.

“There is just a lot of scar tissue left in the system that will take time to heal,” he says. “We’ve got several years ahead of us before we start to see a healthy market again.” On the bright side, that means real estate agents will stay hungry for leads—and Trulia will be able to make money dishing them up.

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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