Amazon Is About to Disrupt the Real Estate Industry

Whenever Inc. (NASDAQ: AMZN) moves into an industry, the existing companies there shudder. And for good reason. Amazon is huge, and it's willing to take a loss early on in order to grab market share.

One thing is for sure: Consumers are the winners in these battles. And so are shareholders.

You might think that with interest rates at generational lows, real estate would sell itself. But Amazon sees more. Much more.

In fact, last month, it teamed up with Realogy Holdings Corp. (NYSE: RLGY) to refer potential buyers to Realogy agents via its joint TurnKey program.

Amazon is not selling real estate, but it will, thanks to its enormous reach, funnel potential buyers into Realogy.

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Realogy is a real estate company that owns brand names like Coldwell Banker, Sotheby's, Century 21, and Better Homes and Gardens Real Estate. These are big firms, and they cover the real estate market from the entry-level homes to the most exclusive estates. All together, they employ 190,000 real estate agents in the United States and another 98,200 around the world.

Any potential buyer answers a few questions on the TurnKey platform and will get a call from a Realogy agent in the appropriate brand. But Amazon's magic does not end there.

The Real End Game for Amazon

While there is money to be made in selling homes, think about what Amazon is really doing. It is getting this new customer in the habit of turning to Amazon first when they need to buy something online.

To reward homebuyers who close on a home through TurnKey and Realogy, they will get up to $5,000 in Amazon credits.

Not only will buyers love the extra $5,000 to put toward furnishing their new home, but Amazon will likely hook them into their ecosystem. Not only does Amazon sell smart home devices such as Alexa or Ring doorbells, but its Amazon home services will even install them or assemble new furniture.

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That's creating customers for life, especially as Amazon makes more and more products available, not the least of which is Whole Foods and a host of other acquisitions, including Audible (books on audio), Zappos (shoes), and Double Helix Games (video game developers). And we haven't even mentioned streaming movies, music, and cloud services.

You see, Amazon wants to sell you anything and everything, and its technology makes it very easy for the customer to buy.

Imagine what can happen if this arrangement takes off. Amazon's muscle and the promise of incentives for successful closings, coupled with the one-stop shopping possibility certainly can disrupt the stodgy old real estate broker business.

The houses and properties may have changed, but the system hasn't. That makes it ripe for disruption.

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Realogy Is a Buy Right Now

It's been a rough road for Realogy stock until the Amazon deal was announced. Realogy stock peaked in mid-2017 at $35.18 but fell all the way down to $4.52 on Aug. 5. It closed at $6.32 Wednesday.

But don't let that fool you. This company's portfolio and innovative plan make it a "Buy."

Lower industry-wide real estate commissions played a big role, but real damage was done in November 2017 after proposed tax changes were introduced that would limit the mortgage interest deduction. The stock suffered more sharp selling in February and May of this year on earnings misses.

But things seem to be changing, and that's before the Amazon deal. For starters, in June, company CEO Ryan Schneider bought $1 million worth of Realogy stock. That's a big vote of confidence from somebody who is intimately knowledgeable about the company's business prospects.

And with interest rates on mortgages reaching new lows, volumes could be on their way back in the real estate market. More volume means more commission revenue for Realogy.

This was reflected in the Aug. 8 earnings release, which showed the company beating analyst estimates on both the top and bottom lines.

Plus, the company is simply too good to ignore. Despite having a down year, it made $137 million in profits last year while paying shareholders a 5.7% dividend yield. The company is trading at a 300% discount to its average price-to-book value, too.

But the Amazon deal is the icing on the cake.

Partnering with the titan of disruption means Realogy is well positioned to reinvent the real estate industry, while laggards like Re/Max Holdings Inc. (NYSE: RMAX) are left operating on the old model.

Plus, it puts a dent in newcomer's ambitions. Zillow Group Inc. (NASDAQ: ZG) and Redfin Corp. (NASDAQ: RDFN) haven't been able to translate their startup approach to real estate to a profitable business. Amazon's disruptive power combined with Realogy's market know-how will be another hurdle for this firm to climb.

It's no wonder MorningStar says Realogy is trading at a nearly 50% discount to its fair price. But the upside could be even higher now that it's partnered with Amazon to disrupt the real estate sector.

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