Extreme Makeover at HouseValues

Maybe SOLD is the perfect ticker symbol for HouseValues (Nasdaq: SOLD). The online provider of Realtor marketing opportunities struggled in its latest quarter, posting a loss of $0.05 a share on a 23% slide in March quarter revenue.

The red ink was no surprise. Analysts don't expect the company to turn a profit until next year at the earliest. They actually figured that the company would lose $0.07 a share, but shrewd cost-cutting kept the blood spilled to a minimum. (At least HouseValues, like a depressed home seller, knows when to knock down its asking price and start pinching pennies.)

But those same Wall Street pros also figured that the company would generate $19.5 million in revenue, a far cry from the $17.8 million top-line showing that HouseValues ultimately generated.

Gutting the building
HouseValues is tackling the tough reinvention process. Ever since less invasive sites like Zillow and HomeGain began spitting back rough home values, the company's flagship model has been challenged. HouseValues.com counts on visitors to answer about two dozen questions, which are then forwarded to a local Realtor who pays for the lead.

I never liked the model. I kicked the tires and it kicked me right back. Cybersurfers are smart fish. They can only get hooked by a thinly-veiled lead-generating site once.

Naturally, you won't hear HouseValues tell you that its model is flawed. The company points to the bursting of the housing bubble as the cause of its predicament. Yes, it's partly true. A weaker residential housing market has hurt. The end of the speculative boom is making homeowners, resale renovators, and condo-flippers less interested in knowing what their homes are worth. Cash-strapped Realtors are backing out of the program, if not out of the industry entirely.

This is a tough climate to work in, but the HouseValues model was going to be tested anyway. Other online real estate plays like Move (Nasdaq: MOVE), RealEstate.com parent IAC (Nasdaq: IACI), and even Web-savvy real estate broker ZipRealty (Nasdaq: ZIPR) seem to be holding up better. In that sense, it's refreshing to see HouseValues begin to wean itself off the mother's milk of lead generation.

There's no place like HomePages, Toto
The company's HomePages.com was relaunched yesterday, incorporating its aerial maps with deeper editorial content and broader breadth of national listings. It's as good a reason as any to get excited about the company's future. The original version looked sharp but lacked listings. It's a lot more useful now. I was able to navigate through the free site without hitting any registration roadblocks. Real estate agents can pay to feature homes on the site, and the online advertising model is more in tune with what its peers are doing.

Meanwhile, the company's flagship HouseValues.com site will keep plugging away. Even though its Realtor customers are down to 15,500, the company isn't about to gut the site and turn it into a clone of its less-prying competitors. Hey, it might come to that eventually, but the company claims that there is customer loyalty among its oldest participating real estate professionals.

We'll see. The wick is getting shorter on the company's cash candle. Whereas the company pulled in about $4 million in operating cash flow the first quarter last year, it dropped to a loss of $2 million in this latest quarter. If it does decide to take HouseValues in a more traffic-friendly direction, let's hope it begins that makeover before the greenbacks run out.

It can do so, though it may want to see what HomePages is capable of before committing deeper into an online advertising model. I can respect that, especially since the lead-generating model itself isn't dead. Bankrate (Nasdaq: RATE) has thrived by sending leads to financial services providers, and now even a hopeless laggard like InsWeb (Nasdaq: INSW) has shocked the world by turning a profit this past quarter.

However, I think it's inevitable that the company will have to radically transform its namesake site. The site has burned too many visitors and paying Realtors to grow again, even if real estate prices start going through the roof.

At that point, I'm guessing, HouseValues would move over to the Big Board and begins trading under the ticker symbol BUY.

Yes, it's available.

HouseValues is a Hidden Gems newsletter service recommendation. It's an open house at the moment, offering up free 30-day trial subscriptions. Bankrate is a Rule Breakers stock pick.

Longtime Fool contributor Rick Munarriz isn't interested in selling his home, even if he recognizes that the once-red-hot South Florida market is cooling off quickly. He does not own shares in any of the stocks mentioned in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.