{"id":14943,"date":"2016-11-16T15:26:25","date_gmt":"2016-11-16T20:26:25","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/zillow-has-not-yet-broken-the-broker-model\/"},"modified":"2016-11-16T15:26:25","modified_gmt":"2016-11-16T20:26:25","slug":"zillow-has-not-yet-broken-the-broker-model","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/zillow-has-not-yet-broken-the-broker-model\/","title":{"rendered":"Zillow: Has not yet broken the broker model"},"content":{"rendered":"

Introduction to homebuying<\/strong><\/p>\n

How did you start the homebuying process 10 years ago? You scheduled an appointment with a real estate agent who was licensed by the state and had access to property listings in the region through the multiple listing service (MLS) systems, and the agent gave you a handful of listings that fit your criteria.[1]<\/a><\/p>\n

How do you start the homebuying process today? 90% of people[2]<\/a> hop online to sites like Zillow or Trulia to see listings, aggregated from MLS and posted by buyers themselves.<\/p>\n

Zillow has taken the first step toward changing real estate, by democratizing real estate information, but has not disrupted the industry.<\/p>\n

The complex real estate process<\/strong><\/p>\n

The homebuying process remains complex for both the seller and the buyer, leaving room for agents as middlemen.<\/p>\n

\"buying\"<\/a>\"selling\"<\/a><\/p>\n

The Need for Agents<\/em><\/p>\n

While agents are no longer needed to curate listings, they are needed to schedule showings, facilitate negotiations and financing, and assist with closing.[3]<\/a> Customers are not yet comfortable with buying and selling real estate directly to each other; in 2012, only 9% of homes were sold by the owner directly.[4]<\/a><\/p>\n

The Cost of Agents<\/em><\/p>\n

The seller pays 6% of the home\u2019s sale price (3% to the buyer\u2019s agent and 3% to the seller\u2019s agent), the buyer pays the closing costs, and the agent pays the selling costs (advertising, open houses, etc.). Due to this structure, the agent may not have the customer\u2019s best interests in mind (the principal-agent problem). Rather, agents are incentivized to sell quickly and accept suboptimal offers, resulting in selling prices that are 5.9-7.7% lower than they should be.[5]<\/a><\/p>\n

Zillow\u2019s business and operating model<\/strong><\/p>\n

Zillow was started by Spencer Rascoff in 2005[6]<\/a>, before going public for $80M in July 2011 and getting a secondary offering of $147M in the fall of 2012.[7]<\/a> Zillow then acquired Trulia for $2.5B in February 2015, and both companies now sit under the Zillow Group.[8]<\/a><\/p>\n

Customer Value: Public Property Listings<\/em><\/p>\n

Data Availability<\/em><\/p>\n

Capitalizing on internet and mobile channels, Zillow helps 124M consumers early in the homebuying cycle who want to explore their options and do online research before making complex buying decisions. Previously, agents were the gatekeepers of this information, but Zillow first gained permission from MLS to republish their listings and second negotiated data sharing\/syndication agreements with data aggregators (who have entered data sharing agreements with national real estate companies). Zillow controls more than 70% of real estate searches, with 2\/3 of visits (186 visits per second) coming from mobile.[9]<\/a> [10]<\/a><\/p>\n

Pricing Accuracy<\/em><\/p>\n

Zillow creates value, beyond just a search engine, with its automated valuation model (AVM) called Zestimates. Zillow has published Zestimates on more than 100M homes across the country based on zillions of data points (yes, that\u2019s why it\u2019s called Zillow) pulled from public records and submitted by users. AVMs cannot factor in renovation premiums, the positioning and size of certain rooms, and architectural styles, but visual recognition may be able to detect these smaller details in the future.[11]<\/a> Zillow has published an update to the algorithm and claims that this should reduce the median error rate from 8% to 6%.[12]<\/a><\/p>\n

Agent Value: Advertising and Customer Relationships<\/em><\/p>\n

Zillow provides agents, property management companies, mortgage lenders, and other businesses advertising space to reach customers in certain zip codes, charging them per impression. 92.3K agents have paid to join the Premier Agent Program (subscription and cost per click model) that gives them increased exposure in search results and allows them to manage customer relationships, generating $338\/month per enrolled agent for Zillow.[13]<\/a><\/p>\n

Company Profitability<\/em><\/p>\n

In 2015, Zillow reported $615.2M in revenue, with 78% from services sold to real estate agents and property managers, 13% from display advertising, and 7% from mortgages.[14]<\/a> Despite the $6B annual advertising spend by agents, Zillow reported a net loss of $91.1M and hasn\u2019t been profitable since 2012, reflecting its approach to grow at all costs.[15]<\/a> What\u2019s concerning is that the company has reached scale\u2014acquiring competitors and expanding market share\u2014but has become less profitable each year.[16]<\/a><\/p>\n

A comprehensive platform in the future<\/strong><\/p>\n

The logical next step for Zillow, which has high brand recognition and adoption, is to expand from a front-end platform to an all-in-one service that encourages buyers and sellers to transact directly. Zillow should develop back-end capabilities to schedule visits and coordinate inspections, and help buyers sign documents and finish closing. The business model should pivot to a subscription model, where buyers and sellers pay to use the platform and its services, perhaps with a small commission to Zillow for successful transactions.[17]<\/a> Although it will be challenging, Zillow is uniquely positioned to disrupt real estate by providing digital avenues for what was traditionally done in person.<\/p>\n

(799 words)<\/p>\n

[1]<\/a> http:\/\/www.inman.com\/2015\/08\/17\/disruption-could-come-from-the-direction-you-least-expect\/<\/p>\n

[2]<\/a> http:\/\/www.bloomberg.com\/news\/articles\/2013-03-07\/why-redfin-zillow-and-trulia-havent-killed-off-real-estate-brokers<\/p>\n

[3]<\/a> http:\/\/www.inman.com\/2015\/08\/17\/disruption-could-come-from-the-direction-you-least-expect\/<\/p>\n

[4]<\/a> http:\/\/www.bloomberg.com\/news\/articles\/2013-03-07\/why-redfin-zillow-and-trulia-havent-killed-off-real-estate-brokers<\/p>\n

[5]<\/a> http:\/\/www.bloomberg.com\/news\/articles\/2013-03-07\/why-redfin-zillow-and-trulia-havent-killed-off-real-estate-brokers<\/p>\n

[6]<\/a> http:\/\/www.businessinsider.com\/zillow-chief-heres-why-we-can-be-a-billion-dollar-company-2012-4<\/p>\n

[7]<\/a> http:\/\/www.geekwire.com\/2013\/years-ipo-zillow-flying-high\/<\/p>\n

[8]<\/a> http:\/\/www.wsj.com\/articles\/zillow-to-buy-real-estate-rival-trulia-1406551333<\/p>\n

[9]<\/a> https:\/\/medium.com\/yalantis-mobile\/what-technology-stack-do-zillow-redfin-and-realtor-com-use-for-property-listings-b6b1ba695618#.7bfs1ka60<\/p>\n

[10]<\/a> http:\/\/expandedramblings.com\/index.php\/zillow-statistics\/<\/p>\n

[11]<\/a> http:\/\/blogs.wsj.com\/cio\/2016\/11\/11\/zillow-develops-neural-network-to-see-like-a-home-buyer\/<\/p>\n

[12]<\/a> http:\/\/www.housingwire.com\/articles\/33105-have-a-problem-with-a-zestimate-you-can-now-immediately-change-it; https:\/\/www.nerdwallet.com\/blog\/mortgages\/putting-zillow-zestimates-accuracy-test\/<\/p>\n

[13]<\/a> http:\/\/expandedramblings.com\/index.php\/zillow-statistics\/<\/p>\n

[14]<\/a> http:\/\/investors.zillowgroup.com\/releasedetail.cfm?releaseid=954622<\/p>\n

[15]<\/a> http:\/\/www.businessinsider.com\/zillow-chief-heres-why-we-can-be-a-billion-dollar-company-2012-4<\/p>\n

[16]<\/a> http:\/\/seekingalpha.com\/article\/3959914-sales-growth-masks-problems-zillow-group<\/p>\n

[17]<\/a> http:\/\/www.inman.com\/2015\/08\/17\/disruption-could-come-from-the-direction-you-least-expect\/; http:\/\/www.seattlepi.com\/business\/article\/New-real-estate-site-aims-to-outdo-Zillow-like-10609313.php<\/p>\n

“16 Amazing Zillow Statistics.”\u00a0DMR<\/em>. N.p., 14 July 2016. Web. 16 Nov. 2016.<\/p>\n

Abrosimova, Kate. “What Technology Stack Do Zillow, Redfin and Realtor.com Use for Property Listings?”\u00a0Medium<\/em>. N.p., 04 Aug. 2015. Web. 16 Nov. 2016.<\/p>\n

Bundrick, Hal M. “Putting Zillow Zestimates’ Accuracy to the Test – NerdWallet.”\u00a0NerdWallet<\/em>. Medium, 14 July 2016. Web. 16 Nov. 2016.<\/p>\n

Castellanos, Sara. “Zillow Develops Neural Network to See Like a House Hunter.”\u00a0WSJ<\/em>. Wsj.com, 11 Nov. 2016. Web. 16 Nov. 2016.<\/p>\n

Cook, John. “Zillow Is Flying High Two Years after IPO: Can This Stock Go Much Higher?”\u00a0GeekWire<\/em>. N.p., 19 July 2013. Web. 16 Nov. 2016.<\/p>\n

Demay, Daniel. “New Real Estate Site Aims to Outdo Zillow, Redfin.”\u00a0Seattlepi.com<\/em>. Seattle Pi, 11 Nov. 2016. Web. 16 Nov. 2016.<\/p>\n

Inman, Brad. “Who Faces Disruption in the Real Estate Industry?”\u00a0Inman<\/em>. Inman, 17 Aug. 2016. Web. 16 Nov. 2016.<\/p>\n

Lane, Ben. “Problem with Your Zestimate? You Can Now Immediately Change It.”\u00a0HousingWire RSS<\/em>. N.p., 15 Feb. 2015. Web. 16 Nov. 2016.<\/p>\n

Light, Joe. “In Zillow-Trulia Deal, Making Room for Brokers.”\u00a0WSJ<\/em>. Wsj.com, 28 July 2014. Web. 16 Nov. 2016.<\/p>\n

Rosoff, Matt. “Zillow Chief: Here’s Why We Can Be A Billion-Dollar Company.”\u00a0Business Insider<\/em>. Business Insider, Inc, 26 Apr. 2012. Web. 16 Nov. 2016.<\/p>\n

Stone, Brad. “Why Redfin, Zillow, and Trulia Haven’t Killed Off Real Estate Brokers.”\u00a0Bloomberg.com<\/em>. Bloomberg, 7 Mar. 2013. Web. 16 Nov. 2016.<\/p>\n

Trainer, David. “Sales Growth Masks Problems At Zillow Group.”\u00a0Seeking Alpha<\/em>. N.p., 21 Mar. 2016. Web. 16 Nov. 2016.<\/p>\n

Zillow Group. “Zillow Group Reports Fourth Quarter and Full Year 2015 Results.”\u00a0Zillow Group Reports Fourth Quarter and Full Year 2015 Results (NASDAQ:ZG)<\/em>. Zillow Group, 11 Feb. 2016. Web. 16 Nov. 2016.<\/p>\n","protected":false},"excerpt":{"rendered":"

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