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Zillow could be crushed. Here's how.  XML
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Nathan
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Joined: 06/17/2014 09:32 PM EDT
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Location: Carmel, IN
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Zillow did $846 Million in Revenue in 2016.

Let's put that in perspective: There were 5.45 Million existing homes sold in the same year. That's $115.22 per home, a number which has steadily increased, but let's use that number as a baseline. Now let's take an average home sale of $230,000 for the year and an average commission for both sides (agent commissions) of around 5%. (Yes, I get that many homes are listed at 7%, but this is corrected for higher end homes that often go for much less, BLB's, and of course the FSBO's with no commissions).

Total Commissions: $62 Billion. (Estimated, industry wide)

Zillow's share of the total Gross Commissions ends up being around 1.5% of the total that all agents and brokers in the U.S. make. This is disgustingly substantial, especially when you consider a few of the following factors:

1. The fees disproportionately affect the buying side of the transaction. It's probably more like 2.7% on the buyers and .3% on the listing side.
2. This is on Gross. If we assume a 20% profit margin in the real estate business, this 1.5% equates to 7.5% of the "profit" (yes, this is a hard number to justify in a global sense, but it's not like agents don't work for it or have desk fees, insurance costs, marketing expenses, etc. It's possible that some see less than 5% of their take home pay go to Zillow while others pay in the double digits)
3. The revenue driver here is the information on listings, which comes from the agents.
4. Zillow hasn't improved the industry in any real way. The same number of homes would sell with or without Zillow and presumably for the same amount.

In other words, 1.5%-7.5% simply came off the top of what agents/brokers make because of Zillow's existence. There were no additional sales, there were no increases in value to the market, and even if you can justify that some amount of that revenue came from ads other than agents buying their own clients in the form of leads (that most often don't result in a closing), it was still revenue sucked from broker's pockets from their vendor programs and affiliated entities like mortgage companies. In fact, when you add it all up and add in all of the additional advertising spent by agents, brokers, and franchises combined it is likely that more than the $846 Million left the real estate economy for the enrichment of one single dot com. Add in a few million for all of the coaches and consultants and systems agents are investing in to try to capture and turn these leads into clients. I hesitate to say a number that may be taken as fact but in my opinion the damage to the real estate industry from Zillow is in the $2 billion range. Unless you're on the winning end of the equation.

On the other side of the coin (that winning end of the equation), the positive Zillow has delivered to the market is one of the easiest apps to find homes. Realtor.com had to play catch up. Agents were also given an outlet to connect with new buyers for said fee and it stands to reason that more business has come from outside of the "sphere" since Zillow came into being than the years prior. So those are good things...at least until Zillow bites that hand that feeds. Here's one of many stories about that:

https://www.investopedia.com/news/zillow-buy-and-sell-homes-2-markets/

That's right, Zillow is putting themselves in the position of buying and selling homes and expanding those ventures rapidly. For now they're picking favorites when it comes to the brokers they work with but eventually why would they pay commissions at all?


It's not like anything above is something you haven't heard before. Some see Zillow as a positive, others not so much, I personally have no problem with them or their executive team and innovation always comes with pain and promise. The fact that Realtor.com has been pushed to provide similar services and keep the agent front and center is a testament to this process we call capitalism...which brings me to the way that Zillow could be crushed, and it already happened once. Right here in Indianapolis. I had a front row seat.

I would give you exact dates but the internet has been virtually wiped clean of the events that transpired.

In the early to mid 2000's, a company started up in Indianapolis called "HomeYeah.com". (Feel free to try to go there...website is down) They had a business model much in line with other discount brokers with a huge exception: It was all online. When it first started rolling out, the general feeling in the local real estate community was that it was a joke. Sellers would pay next to nothing to sell their home, I think it was in the $900 range if they wanted to be in the MLS and a little less to just handle the paperwork off the MLS, but it caught on. It caught on so much that Lisa Dean, the broker of record for HomeYeah.com, was the #1 listing agent in the local MLS for some period of time. I knew Lisa, Jeff, and Cy - who were basically the team running it. All good people, but with the exception of Jeff no real estate background to speak of. They didn't need it in their minds.

There was a healthy competition for 2-3 years. I remember at one of our local offices called Century 21 Scheetz there was a closet known as the Homeyeah.com sign graveyard. Every time they could get one pulled out of a front yard and replaced with their own, it was a success much celebrated. I'm sure other offices felt the same way.

Were clients well served by HomeYeah.com? Well, no, but they weren't supposed to be. They paid for no full service real estate, they received no full service real estate. Buyer's agents came to expect that if they sold a listing from HomeYeah, they were basically going to have to run both sides of the deal for the same money. By the way- sellers were basically setting their own prices as well, so expectations were not well set when these homes hit the market. This of course led to a lot of expired HomeYeah listings and more of those signs in the closet graveyards as mentioned above.

Still HomeYeah.com was successful. Buyers were seeing their colorful, simple signs. They had ads all over town. People were going to their website which was at the time probably the most advanced here locally and they were searching for homes on that site. The future was bright, except for the one thing that could crush them: Required Level of Service.

At some point around 2006 or so, the MLS here changed its rules and mandated that the agent attend all closings. There were a few other aspects to it, but basically the idea of an online "do it yourself" portal to access the MLS was a no-no and the leadership at HomeYeah.com realized they had made a grave error: They were successful in a market where the competition was in charge of the rule book. Their business model changed a couple times and ultimately went by the wayside as the MLS and local competitors figured out any way possible to legislate them out of business.

It is my position that Zillow is in an even more precarious position when it comes to their business model. Sure, they have a few hundred million dollars more than HomeYeah did to go to battle with, but their business is 100% reliant upon one single thing: Data Flow.

Data from listings goes all over the place now. Realtor.com, Trulia, Zillow, even the API's into individual agent and brokerage sites. Heck, I pull listing data regularly. The REALTOR boards and MLS systems have lost the battle of owning the data and they should have never fought for it in the first place, but they haven't lost the ability to legislate for its use and restrictions on said use. Let me give you one example of how Zillow could be crushed in a market -- let's say the various REALTOR Boards, the State level Board, and the licensing authority (or any one of the three) in a given location were to establish a rule for the use of listing data that specified, "Any and all listings must clearly show the name of the brokerage and the full contact details of the agent of record and shall not promote any other agent in a manner that might deceive the public into thinking another agent has specific knowledge or access to said property. This shall include pictures, links, or contact forms steering prospective buyers away from the agent of record."

It's a rough draft, but think about that for a moment. If this passed at one single MLS, that Board would send a letter to Zillow that effectively kills any possibility of creating leads off of those listings. If they want to use the data for easy access for buyers to find properties, great, but they could no longer really profit off such other than generic "find me an agent" lead generation and perhaps some of the vendors that might want to advertise on these pages.

Would such a thing happen? Should such a thing happen?

I think it probably will happen somewhere. A relatively small online brokerage that sold a few thousand homes over their entire lifespan became the source of ire for one of the largest REALTOR boards in the country. Someone, somewhere, with a very cooperative board all on the same page is going to figure out that even though they are forced to share the data at this point that they're not forced to share it with no strings attached -- and if they're smart about it those strings could eliminate Zillow as a lead source locally. Should they do it? I'm torn on that. On one hand, Zillow basically makes the average agent who doesn't make a whole lot of money make even less. On the other hand, we're seeing innovation like we haven't seen for a while and if that continues and the market gets competitive over exuding protectionism, Zillow and the likes may actually end of being the best thing that ever happened to real estate.

Only time will tell.
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RobertAllen
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Great info!
Preston
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Joined: 06/19/2014 05:20 PM EDT
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Sorry to use the same reply. But this was from your other article on this year.

The homes segment is not yet profitable, reporting a loss before income tax of $27.2 million on $41.3 million in revenue. Barton said profitability will come as Zillow Offers and the Homes segment scale up, but he didn’t give specific timing.

“It’s definitely going be awhile, and it could happen in the three-to-five-year time frame, but honestly we just don’t know,” Barton said of profitability in the Homes segment. “A lot of it will depend on how rapidly it grows for how long, and how big ultimately this way of buying and selling homes can get.”

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scottlseaton
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This is a subject of great interest to any realtor. It amazes me that Zillow was scoffed at so much in the beginning and now is literally taking money out of the realtor's pockets and it's willingly happening.

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Endggame
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The Real Estate industry has remained relatively unchanged for a long time. Now the changes are comimg fast.

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maxiaoyun
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good
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good
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