Zillow is the elephant in the room, and Mynor Herrera doesn’t know whether to feed it, ignore it, or find a mouse.
Herrera at first felt he needed to work with Zillow, and he sent a check to the company each month in exchange for leads. But the head of Mynor & Associates, a Keller Williams affiliate in Bethesda, Maryland, grew frustrated.
“We used to attribute 25% of our business to Zillow,” Herrera said. “But they were constantly changing their fee structure, so we couldn’t count on it. Also, we figured they would wake up one day, and say, ‘Hey, we’re a brokerage.’”
Zillow, for years, made money selling leads to real estate agents, a practice that agents like Herrera already felt ambivalent toward.
But Zillow has changed.
In 2020, the three-year-old Zillow Offers program, where Zillow itself buys a home and then resells it, made up the majority of both company revenue and expenses. That’s despite the company pausing the iBuying program for four months amid the pandemic.
In January, Zillow opened brokerages in Atlanta, Phoenix, and Tucson, which focus on finding new buyers for Zillow Offers-purchased homes.
Rich Barton, company CEO since 2019, declared during a February earnings call that Zillow is pivoting from a media business to a transactional one. Barton spoke of a “one-click nirvana,” where real estate transactions can be exhaustively completed through the Zillow website or app.
The company, again, ratcheted up its ambitions this month, announcing a plan to hire 2,000 employees by the end of 2021, a massive increase to Zillow’s end of 2020 workforce of 5,504 full-time employees.
Wall Street is buying what Barton is selling. Zillow’s market cap has increased at an almost preposterous rate, with the company valued at $38.5 billion on March 10, four times its valuation a year ago.
Agents, however, aren’t sure where they fit into Zillow’s transformation.
Some see Zillow Offers and entry into brokerage as another attack.
“I hate Zillow,” said Frederick Warburg Peters, of Warburg Realty in New York City. “They are coming to eat our lunch if we let them.”
But others say they can keep pragmatically benefiting from a new-look Zillow.
“The only thing guaranteed in this business is change,” said Tony Rench, of Rench Real Estate in Denver. “It’s best to embrace Zillow rather than to complain.”
Ambivalence at first sight
Even before iBuying and one-click eternal salvation, there existed “a love-hate relationship between many agents and brokerages with Zillow,” said Ygal Arounian, an equity analyst at Wedbush Securities.
That ambivalence lies in the company’s DNA.
Launched in 2006 by Barton, ex-CEO Spencer Rascoff, and Lloyd Frink, Seattle-based Zillow has consistently kept its focus on the home buyer. The company’s annual report perennially warns investors, “Our dedication to making decisions based primarily on the interests of the customers may cause us to forgo short-term gains,” and “Our customer focus may also negatively impact our relationships with real estate brokerages.”
But Zillow’s growth was bankrolled not by customers but rather brokerages and agents. Agents such as Rench use Premier Agent, where they sign contracts to buy leads.
The more Rench pays Zillow, the more contacts he gets from customers interested in homes. Rench paid $24,000 over the past three months, he said, in order for Zillow to call him a “Premier Agent” that gets leads. The agent claims he netted $77,000 in commission income from those leads.
For years, Premier Agent was Zillow’s bread-and-butter. It operated at a profit in 2020, generating $1 billion, a 35 % leap from 2019.
“Not enough agents admit they pay Zillow for leads,” Rench said.
Others, though, have long felt exploited by Premier Agent.
It is the agent, these critics note, who enters information and pictures of a home into a National Association of Realtors-run Multiple Listings Service.
Zillow, in turn, plucks the data from the regional MLS, places it on Zillow’s website, and then sells the leads to Premier Agents.
“I have never bought space on Premier Agent,” said Michael Nourmand, a broker at Beverly Hills’ Nourmand & Associates. “I am not interested in them repackaging their data and selling it to me.”
But in parts of the country like Bowling Green, Kentucky, “The big boys are the premier agents,” said Garry Gevorgiyan, an agent at Coldwell Banker.
From 2018 to 2020, Gevorgiyan said he paid $2,000 a month for leads and snared a positive return on his investment. But Gevorgiyan stopped using Premier Agent this year, he said, as Zillow upped its fees.
Gevorgiyan returned to informal networking for leads, plus signed up for a different online lead generator, Agent Assistant.
“An experienced agent doesn’t need Zillow to be successful,” Gevorgiyan said.
But in the next breath, Gevorgiyan acknowledged, “Most people, that’s all they know is Zillow. Who knows? Down the road, they could take over.”
Zillow’s Instant solution
Nine-point-six billion. That number hits as hard as a Joel Embiid elbow.
Zillow had 9.6 billion visits to its website in 2020, by far the most of any real estate company. They had 236 million unique monthly visits, compared to Redfin’s 49 million. According to a Google Trends report, more people in 2020 searched “Zillow” than “real estate.”
“Zillow has this monstrous brand awareness and people thunder to their website,” said Steve Murray, co-founder and senior adviser at RealTrends.
But Zillow’s monstrous traffic figures haven’t necessarily translated into huge revenues.
For example, save for Premier Agent, the company collects little from ad revenue – the banner and pop-up ads for sunglasses and mattresses that permeate media websites.
Zillow said it doesn’t do general ads because it would dampen the customer’s experience. “We are really committed to making real estate and shopping easier,” said a company spokesperson.
Instead of more ads, Barton envisions Zillow as a party to more home sales. After all, Zillow’s own economists peg the total value of all U.S. homes at $36.2 trillion dollars.
“If Zillow can use their capital and name recognition to get just 4 to 6 % of market share, boom, they could stay a profitable company,” Murray said.
Under Barton, Zillow has ramped up a few transaction services including loan originations, and the company has said some planned new hires will enter its mortgage arm. Also, in February, Zillow acquired ShowingTime for $500 million, a portal that agents use to schedule home showings — and an accumulator of data related to those showings.
IBuying, though, is where Zillow has really put its money.
Zillow made over $1.7 billion in revenue from the sale of 5,337 homes in 2020, with an average sale of $320,500. The company’s total 2020 revenue was $3.3 billion.
But between the purchase of 4,162 homes, plus repair of current Zillow-owned home inventory, Zillow spent $2 billion on the iBuying program, resulting in a $241 million loss.
The company’s overall 2020 net loss was $162 million. In other words, Zillow would have been slightly profitable were it not for its iBuying mega-ramp-up.
IBuying is enjoying a moment in the sun. Opendoor shares trade on the New York Stock Exchange, newer companies like Knock are knocking on the space, and Redfin upped its own iBuying.
Some of these companies vow to upend the traditional agent model. Opendoor CEO Eric Wu once said in an interview, “It’s good to be hated by some agents.”
Zillow, on the other hand, is “careful to walk a fine line,” said Arounian of Wedbush, between growing transactions and “their Premier Agent business.”
Where the agent fits
“Premier Agents are responsible for our biggest business today,” declared a Zillow spokesperson.
While, yes, Zillow Offers is bad news for a sales agent, the company deems it a rising transaction-tide that will even lift agents’ boats.
“There is potential for meaningfully more growth” in Premier Agent, the spokesperson said, as Zillow “makes more connections between our high-intent customers and our best-in-class, high-performing agents.”
Plus, Zillow has no immediate plans to recruit a stable of in-house agents, perhaps another hopeful sign for Premier Agents.
Agents interviewed aren’t sure how threatened to feel by Zillow Offers. But the emerging consensus is that even if they have a role in iBuying, it’s at odds with what makes being an agent lucrative – and fun.
Adam Dow, broker at Dow Realty Group in Wolfeboro, New Hampshire, bowed out of Premier Agent last year, lamenting that its fees and structure (for example, a Zillow customer rep started talking to leads, instead of routing the lead directly to him) kept changing.
But Dow also cut ties because of the company’s move to transactions, and he knows New England rivals who have done the same.
“I think Zillow is now a competitor of mine,” Dow said, adding, “There’s a conflict of customers” as, by directly buying homes, Zillow undermines listing agents.
Also, finding a buyer for homes on Zillow Offers, is, frankly, unappetizing – from Zillow potentially not getting right a home’s value, to the upkeep of an empty abode, to working on a home that Zillow accurately valued only because of its reliable blahness.
“You could see the iBuyer program working in a place where all the homes are the same, and can be easily valued, but it’s tough,” Dow said.
Stephen Shapiro, co-founder and chairman of Westside Estate Agency in Los Angeles, was more pointed.
“They seem to be buying low-end shit,” Shapiro said. “They are looking for desperate people, and will then rent it, carpet and paint it, turn around, and flip it.”
The growing Zillow elephant
The way Yousuf Hafuda sees it, iBuying “couldn’t be further apart” from Premier Agent, and Zillow’s primary function as a listing website.
“One is asset-heavy and dependent on arbitrage,” the Morningstar equity research analyst said. “The other is asset light and depends on a tech solution.”
Zillow could turn a profit, Hafuda said, if they focused on Premier Agent and related media businesses.
But Zillow seems seduced, Hafuda added, drawn in to the tantalizing trillion-dollar figure that is the U.S. real estate market, and businesses like Amazon that became profitable by doing it all.
Murray of RealTrends concurred.
“They don’t pay the earnings game,” he said. “They play the ‘some day we will be the Google of the world’ game.”
Beyond grow, grow, grow and one-click nirvana – “We imagine a future where the real estate transaction is as easy and transparent as a pizza tracker on your phone,” a spokesperson said – Barton hasn’t articulated an end game for the company’s own liberation from annual losses.
Pressed on how iBuying could become profitable, Zillow referred to a shareholder note from last November: “Most sellers are also buyers, so as more people consider selling to us, we are able to create a flywheel effect when they go to buy their next home.”
The letter went on, “We are building adjacent services in both mortgages and title and escrow,” and plan to, “spread our low customer acquisition cost across all these services.”
So, Zillow wants to do it all in real estate. And the role of agents in this isn’t nothing. But agents’ role seems more like one worker on an assembly line, instead of a hand-holder amid the dynamic, stressful and inefficient process that is the home sale.
“At the end of the day, I still believe it comes down to relationships,” said Herrera of Mynor & Associates. “This is hundreds-of-thousands or millions of dollars you’re investing.”
“I mean, you go on Web MD right now, and figure out how to remove your kidney stones. That doesn’t mean it’s advisable.”