Zillow: A Worthy Opponent to Real Estate Agents?

Zillow is a real estate marketplace that allows transactions to occur at a much lower cost compared to finding traditional real estate agents. With a strong presence in North America, Zillow has the potential to be (and in some ways, already is) a gamechanger in the real estate industry. What is Zillow’s future, and is it a worthy opponent to traditional real estate brokerages? Here are my thoughts.

THE FUTURE IS BRIGHT:

Solving Information Asymmetry

Information asymmetry occurs when one party in a transaction possesses more information than the other party, resulting in an unfair advantage that benefits the party in question. In the real estate industry, information asymmetry presents itself in many forms. The most significant one is that real estate professionals have more information on the industry (market trends, new listings, prices, etc.) than their clients. Additionally, sellers have more information on the property than buyers. For one, Zillow definitely solves information asymmetry between agents and clients in the market. Traditional real estate agents have access to many sites that help them navigate the business. Clients either do not have access or do not have the time to seek out this information. As clients, real estate agents owe them fiduciary duty (to do what is best in their interest). However, Zillow still provides an easy platform that enables many clients to keep an eye out on the pricing and availability of what they are looking for. As a result, a huge pain point in the real estate industry — the high cost in transactions — is resolved. Many sellers and buyers feel that although great amounts of work are put into finding the right property and closing a transaction, the pay of 1.5–2.5% of house price commission to agents does not equate to the effort required. Zillow understands this need in the market and provides a solution. Agents were able to charge that amount not only because of their expertise, but also their access to more information than their clients. With Zillow, end consumers can access this information and reduce information asymmetry.

Zillow provides Zestimates, an estimation for an appropriate listing price based on a property’s neighbourhood (based on their huge database of information on property prices in the area). This evens the playing field for sellers — not only can they see what is in their area (which they can do on other listing sites as well), they can get a fast estimate from a trusted source. By doing so, Zillow helps solve another uncertainty of seller clients when transacting, which is how much to price their property. Additionally, if a client is unsure about Zestimates, an option to work with real estate professionals is also provided by Zillow, which is discussed in the next section.

Diversified Revenue Streams

Zillow has quite a diversified revenue stream to stabilize itself in four ways:

1. Zillow Offers (revenue from buyers and sellers): Zillow Offers purchases properties from sellers in the hopes of future buyers purchasing within 90 days after relisting. Zillow may fix up the property through renovation to increase its value as well. This provides sellers the instant gratification of selling their property, and convenience for buyers of potentially faster move-ins. Zillow earns from flipping properties and earning the difference.
2. Listing Fee (revenue from sellers and real estate brokerages): The same idea as advertisements on any website, for sellers or real estate brokerages to post a listing of their property for sale, Zillow charges a listing fee. Sellers and brokerages are drawn to this due to the popularity of Zillow and the high number of potential buyers that can see their property.
3. Agent Finder & Premier Agent (revenue from industry professionals): Similar to posting advertisements about one’s expertise anywhere — inspectors, agents, brokers, insurers, interior designers, lawyers, etc. can put their names out there on Zillow’s site. Zillow’s Premier Agent is a CRM (customer relationship management) tool for real estate agents that integrates MLS (multiple listing service) to track and serve users that showed interest in working with each agent. Professionals are also drawn to this due to Zillow’s size, and perhaps fear that it will be a dominant player in the industry in the near future. Premier Agent definitely provides the convenience factor as well.
4. Mortgages (buyers, loan providers): Zillow partners with loan providers to offer mortgages to buyers purchasing from their site. Loan providers know it is a huge opportunity for advertisement — one that simplifies the process for buyers, and buyers do not have to go through another complicated path to find loans.

OBSTACLES TO ‘REPLACING’ REAL ESTATE AGENTS:

Regulations & Real Estate Councils

A common theme in innovation in traditional industries such as real estate is the slow catch-up of regulations to new innovations. For example, Zillow operates as neither the client nor the agent, but a platform for transactions to occur. It is not purely an advertising or listing platform either, as it provides price estimates for sellers (which is the work of an agent/appraiser) and engages in buying & selling of properties (which is the role of both a buyer and a seller). It is difficult to categorize Zillow in the way the existing industry operates, thus hard for lawmakers to decide how to review regulations to incorporate new players like Zillow. Should any disputes occur, it can be hard to assign responsibility. This is a difficulty that Zillow must face and conquer.

Additionally, each province has its own Real Estate Council to enforce regulations on salespeople's conduct and to protect consumers in the marketplace. The council’s governance team (Board of Directors and Committee Members), no matter the province, is usually made up of a number of professionals currently working in the industry as brokers or brokers of record. When they discuss how to protect consumers in the marketplace, the interests of their own career and their fellow agents currently practicing will definitely be protected as well. Zillow, as a new entrant to an established, traditional industry, is liked by customers but definitely entices mixed feelings from Real Estate Councils. Firstly, to protect consumers, sites like Zillow can be quite confusing to regulate and assigned responsibility during disputes. Secondly, although Zillow is an amazing platform for agents in terms of providing advertisement and CRM tools, it does threaten the existing positions of agents in the market.

Industry’s Dependency on Agents is Still Heavy (Even Zillow!)

To many consumers who are unfamiliar with the real estate transaction process, buying, selling, and renting a property can seem quite daunting. Especially in purchases and selling of properties, no one wants to miss anything important. The advice of one-on-one, customized advice from a trained professional can provide great reassurance — more reassurance than general advice provided by a website. Agents are still needed.

More importantly, three of Zillow’s revenue streams discussed previously — Agent Finder, Premier Agent, and Listing* are heavily dependent on real estate professionals of today. Clearly, Zillow understands the importance of expertise in a real estate property transaction. Although the website can do a lot of an agent’s work, there is an irreplaceable aspect of an agent’s help because of a transaction’s complexity and the heavy in-person aspects of purchasing a property. As three of Zillow’s main revenue streams are dependent on current real estate professionals, attempting to replace them completely is unwise. However, Zillow is moving fast in their Zillow Offers revenue stream and is projected to add $20 billion USD to their business annually over the next 3–5 years[1]. This could be their attempt to slowly transform and lower the dependency on existing industry professionals.

*: Only partially dependent, as sellers can list their place on Zillow as FSBO (for sale by owner). Nonetheless, sellers can already do this today outside of Zillow.

In sum, Zillow provides amazing benefits to all participants in the real estate industry. However, the current setup of the industry is heavily dependent on the input of traditional marketplace participants such as real estate brokers and agents. Like any industry with strong, dominant players, they are likely to act in their best interest against new market entrants. Slow regulatory changes also hinder Zillow in obtaining a more dominant position.

However, Zillow has a strong potential to change the industry forever. Zillow Offers is a huge house-flipping program that speeds up the transaction process and brings in revenue for Zillow. The key here is, traditional marketplace participants such as agents are not needed. Perhaps, in a few years, Zillow will transition out of its revenue dependency on agents and focus on this as their main business model.

I believe Zillow will change the market in a way cashiers are partially replaced by self-checkouts: there are fewer opportunities as cashiers, and the opportunities present themselves in a different way — cashiers manage multiple self-checkout counters at one time rather than working at one. More traditional customers may still prefer cashiers. Agents may be assisting at a smaller capacity to provide advice and connections, while clients put in the effort to search for places. More traditional real estate clients or more complicated transactions may still require the extensive help of agents. Now is a great time for real estate professionals to reflect on their value-add to clients to increase their own competitiveness and what they can bring to the table. This can greatly increase market efficiency, which overall, is a great thing and better use of everyone's time. Thanks, Zillow!

[1]: Why Zillow is Free and How It Makes Money, Investopedia: https://www.investopedia.com/articles/personal-finance/110615/why-zillow-free-and-how-it-makes-money.asp

[2]: Real Estate Council of Ontario: https://www.reco.on.ca/about/governance/board-directors/