Minneapolis-based discount real estate brokerage Webdigs Inc. has acquired "substantially all the assets" of Iggys House and BuySide Realty, but has warned investors that it must raise additional capital to fund operations beyond October.
In a regulatory filing, Webdigs management said the company acquired the rights to Iggys House and BuySide Realty’s Web sites, software, and network of customers and real estate professionals for $150,000 in cash and 7.12 million shares of Webdigs common stock.
The technology acquired from Iggys House could help Webdigs expand into additional markets, the company said.
"With Webdigs, we developed a very sexy search capability with mapping — we feel it’s one of the best out there," Webdigs Chief Executive Officer Robert Buntz told Inman News. "We always intended to build out the back-end — client management and those kinds of things — but hadn’t gotten around to it. Then the Iggys opportunity came up, and virtually everything we wanted Iggys and BuySide had."
Joshua Katz, formerly head of brokerage for Iggys House and BuySide Realty, has joined Webdigs and is heading up real estate brokerage operations. Because Katz is licensed in Florida, South Carolina, Virginia, Maryland and Texas, Webdigs will gain access to those markets as well as its existing base of Minnesota, Wisconsin and Colorado, the company said in a press release.
Buntz said Webdigs is "scratching its way" into those states, and will also be partnering with real estate brokerages that want to operate under its umbrella through an affiliate program.
Iggys House co-founder Joseph Fox has joined the Webdigs board of directors, and Buntz said he believes Fox will be "a very active board member" and "great advocate and proponent" of the company.
"We are looking for him to be out there, one of our front men, in talking up interest in what were doing," Buntz said. Fox did not respond to a request for comment.
Iggys a ‘non-operating entity’
Webdigs and Iggys House share a common history as money-losing startups. Webdigs is a publicly traded company that issues regular warnings to investors in its regulatory filings that it must raise additional capital in order to stay in business.
Chicago-based Iggys House, which offered discount real estate services and also has mortgage operations, was "a non-operating entity" at the time of the June 12 deal, Webdigs said in reporting terms of the acquisition. Iggys House had developed a Web-assisted real estate brokerage that operated in 38 states in 2007 and 2008, Webdigs said.
In financial filings related to a plan to take the company public, Iggys House reported net losses of $9.45 million through June 30, 2007, and said the company sought to raise $14.2 million through an initial public offering. Iggys House withdrew its request for an IPO in January 2008 (see story).
Last summer, the Iggys House Web site went dark during parts of June and July. Fox said at the time that the company was undergoing a "restructuring" that included the departure of some brokers (see story).
Fox — who with his brother Avi in April 2006 founded BuySide Realty, a buyer-focused discount company that was the predecessor to Iggys House — last year told Inman News that a downsized Iggys House was offering free MLS listing services in 10 states and buyer rebates in California and Florida (see story).
Webdigs has had losses of its own, and recently agreed to "unwind" its October 2007 acquisition of mortgage broker Marquest Financial Inc. …CONTINUED
According to Webdigs’ most recent quarterly report to investors, Marquest Financial Inc.’s previous owner, Edward Graca, agreed in May to return the 1.3 million shares of the Webdigs Inc. common stock he received in the sale of his company (there were 31.1 million outstanding shares of Webdigs as of June 15). Webdigs said it returned all outstanding shares of Marquest Financial to Graca.
Webdigs had previously reported consolidating its mortgage brokerages Marquest Financial Inc. and Home Equity Advisors LLC into a joint venture, Marketplace Home Mortgage-Webdigs LLC, which Webdigs owns a 49 percent stake in.
"Unexpected resignations of key personnel" at the joint venture kept it from turning a profit for the three months ending April 30, Webdigs said in its last quarterly report. Marketplace Home Mortgage recorded "essentially break-even results" — a net loss of $1,689 — Webdigs said.
Buntz said Marquest wrote only conventional loans, and that when demand for loans backed by the Federal Housing Administration (FHA) picked up, "we had to change very quickly" to form a joint venture with Marketplace Home Mortgage. He estimated that 90 percent of the loans originated by Marketplace Home Mortgage are FHA-backed.
In time, Buntz said, the joint mortgage venture is expected to generate half of Webdigs’ revenue.
Marketplace Home Mortgage was founded by some "very young, aggressive, technically savvy guys who will be doing some great things for us with their technology," Buntz said, including making the mortgage application and approval process available online.
Graca, who is now a loan officer at another division of Marketplace Home Mortgage, said he had no qualms about giving up his shares in Webdigs. The rising number of transactions that involve short sales and distressed properties require more time and expertise from agents, he said — a trend that doesn’t bode well for discount brokerages.
"I don’t think the (discount) model works because the real estate transaction is more complex than it was," Graca said. "The type who goes to these sites, to say they are value-conscious is an understatement. They want everything for nothing."
Webdigs’ losses
Webdigs offers commission rebates of up to 50 percent to buyers, and will list homes in a multiple listing service for 3.9 percent of a home’s sale price at closing (1.2 percent of the sales price is paid to Webdigs and 2.7 percent to the broker representing the buyer).
The company’s Web site allows clients to schedule home visits as well as make offers and monitor the offer and counteroffer process. Buntz said Webdigs also plans to offer a basic listing service starting at $299 that will be offered along with a la carte services.
Since its May 2007 launch, Webdigs had racked up $3.4 million in cumulative losses through the end of April, according to the company’s most recent quarterly report.
Webdigs was able to trim its operating loss for the quarter by 53 percent from a year ago, to $295,000. But it did so largely by making drastic cuts in Web site development spending and all but eliminating its advertising and marketing expenses.
Spending on Web site development and upkeep for the three months ending April 30 was down 71 percent from a year ago, to $32,541, while marketing expenses were slashed by 92 percent, to $22,448.
Webdigs represented 11 buyers in closed transactions during the quarter, averaging $3,613 in commissions on each deal after paying out rebates. The company also represented four sellers, for a total of 15 transaction sides during the quarter. Net sales revenue for the quarter was up 28 percent from a year ago, to $59,241. …CONTINUED
By comparison, in its annual report to investors, Webdigs said it represented 79 buyers and 20 sellers during the year ending Oct. 31, or an average of 25 transaction sides per quarter. Net commission revenue totaled $310,000 for the year, or $77,500 per quarter.
In its last annual report, Webdigs said it took a shortcut to becoming a publicly traded company — through a merger with defunct Select Video Inc. — in order to raise capital quickly to fund a rapid expansion. Webdigs was looking to raise $5 million to $6 million to fund an expansion and provide sufficient capital to fund operations through the end of October 2011, its management said in February (see story).
Webdigs has not yet been able to attract such an investment. Although the company obtained a $250,000 loan from existing shareholders in December, it had just $6,553 in cash and cash equivalents on hand at the end of April, and liabilities of $1.5 million. In its latest quarterly report, Webdigs said it owed its advertising agency and Web site developer — a minority shareholder in the company — $631,885.
Those numbers, along with a stockholder’s deficit of $1.1 million, "raise substantial doubts about the company’s ability to continue as a going concern without additional debt or equity financing," Webdigs management warned investors.
If Webdigs can’t raise additional capital soon, it plans to make further reductions in advertising and identify other areas to reduce costs, concentrating on the Minneapolis-St. Paul market and the Wisconsin market, and closing down operations in Florida if necessary.
"We believe that our projected revenue growth during the third and fourth quarters will not fund us beyond the end of the current fiscal year ending October 31," the company said in its latest report to investors.
Buntz said such warnings are not unusual for startup companies — and that such disclosures are required of public companies.
"Ever quarter we’ve ever reported we’ve basically had the same statement in there — that we are not going to make it past the next quarter — and we’re still here," Buntz said.
Much of the losses the company has amassed reflect the investments the company has made in infrastructure like its Website, Buntz said. Fox has pegged the investment Iggys House made in the proprietary technology that’s been acquired by Webdigs at $3 million.
Buntz said May was the the company’s best month ever, and June the second best. The company made a $100,000 prepayment in May on the $250,000 loan it took out in December, he said, and has "substantially" reduced payables.
"Things will look a lot different when we report next quarter," Buntz said. "What this economy has done for us is forced us to think through how we could expand with very little money, and I think we’ve got that formula now."
Webdigs shares were trading for 10 cents Thursday and Friday, down from a 52-week high of 75 cents on June 18.
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