Zillow: The Amazon of Real Estate?
How will you stay relevant in the new real estate paradigm?
Zillow recently made two big announcements:
1. It is expanding its “cash offers” programs to four cities
2. The company acquired Mortgage Lenders of America
On the surface, most people shrugged off this news. Why might it be more important? Could this transform the real estate industry as we know it?
INSTANT CASH OFFERS
Zillow’s first major announcement was an expansion of cash offers. They have now expanded to four cities with more in the works. Why is this news so significant? Does Zillow really want to get into the house flipping game?
HOW DO ZILLOW’S CASH OFFERS WORK?
Within two days of receiving a request from a seller, Zillow either will make a no-obligation cash offer or will say pass. The seller then has three days to accept. If an offer is made and accepted, Zillow will buy the home, prepare it for sale and resell the property using a local agent (Zillow).
DOES ZILLOW REALLY WANT TO BUY HOUSES?
What Zillow is doing has been tried hundreds of times by various groups (we buy ugly houses, homevestors and various private investors). Zillow’s objective is not likely to buy houses. Sure, the company will buy a few houses and make money, but this misses the main objective of the program. The leads that instant offers generate are invaluable. The No. 1 factor in any transaction is motivation. In this case you have a very motivated seller if they went through the steps to get an instant offer. This lead is extremely rare and very profitable. A realtor with this lead should be able to quickly sell the house.
THE REAL GOAL OF CASH OFFERS
The true objective of the “cash offer” program is to generate valuable leads. Zillow has stated the company would work with local agents and refer these leads to local agents. In the short term, Zillow could charge a large premium for these leads, generating substantial income; but in the long run this could ultimately change the real estate game.
WHY IS THIS IMPORTANT?
Zillow (also the owner of Trulia) is the largest residential real-estate portal. In the past, information on listings was tightly controlled through local multiple listing services. This has all changed now that Zillow is the holder of information on the vast majority of property listings. This information provides substantial leverage over the traditional brokerage model and the ability to generate leads for purchase and sale transactions that is unmatched by independent brokers.
IS REDFIN THE MODEL?
Zillow’s largest competitor is Redfin. This company has learned to use all the data it generates on its website to promote a “discount brokerage model” that uses its own salary-based agents to facilitate a transaction. This model has cut the average realtor commission from 5 percent or 6 percent to around 3.5 percent, and the savings have been passed on to the seller of the property.
How Redfin makes money with this model is their agents close twice as many transactions as traditional realtors thanks to the lead generation. Its agents are not spending time marketing with their leads flowing in through the company’s online presence.
Along with offering a lower cost option for sellers, Redfin is also integrating vertically with a title company and mortgage product to continue generating revenue from multiple streams off the same transaction. Redfin is positioning itself to control the start-to-finish process from real estate purchase to sale transaction.
DOES ZILLOW SOUND LIKE REDFIN?
Zillow is watching the Redfin model and going to supercharge it. Zillow (and its subsidiary Trulia) are the most heavily visited websites controlling the top two spots (Inman) while Redfin doesn’t even land in the top 10. This allows Zillow to generate exponentially more leads. Furthermore, instant offers allow Zillow to generate higher quality sales leads. This gives Zillow the largest advantage in the marketplace if it takes the full brokerage approach in the future. With so much money at stake, the question is when, not if the company will take this step. Zillow’s purchase of a mortgage lender offers some interesting clues as to the future.
ZILLOW PURCHASES MORTGAGE LENDER
Along with instant cash offers, Zillow is furthering its vertical integration with the acquisition of Mortgage Lenders of America. Zillow released the following press release:
"Now that we are buying and selling homes through Zillow Offers, we believe that having our own mortgage origination service as an option for consumers will allow us to streamline the process for people who buy a Zillow-owned home. (PR Newswire) – Greg Schwartz, president of media and marketplaces at Zillow Group
WHY IS ZILLOW BUYING A LENDER WHEN IT COULD USE ITS “PREMIER PARTNERS?”
“Over time, we expect the work we do in conjunction with this new line of business will help us expand our offerings to our partners – including real estate brokers with existing in-house mortgage operations and third-party lenders who co-market with Premier Agents." (PR Newswire)
This press release makes no sense!
The company claims to be purchasing a lender to compete with their existing lender partners, but somehow this is going to help “expand our offerings to our partners – including real estate brokers with existing in-house mortgage operations”.
How is this possible?
It is obvious the company is buying a lender to expand its revenue streams and eliminate other lenders/brokers. Zillow owns the data, so this is a logical step.
Why would Zillow merely pass along leads as opposed to funding it themselves?
ZILLOW’S LENDER STRATEGY FORESHADOWS BIGGER CHANGES
By buying a lender to compete with their existing lenders, Zillow is revealing the future.
The roadmap is further vertical integration to best use the data the team already has. This strategy will lead Zillow to a brokerage model in the future. This is exactly the strategy Amazon took when first starting. Amazon allowed others to sell products and ultimately determined which products were the most profitable and started selling themselves. I recently bought a monitor off Amazon – a far cry from books of the platform’s beginnings. Zillow will do the same to the real estate industry and agents and lenders will be profoundly affected by this seismic shift.
Is your business ready to compete with Zillow? How will you stay relevant in the new real estate paradigm?