Zillow Raises the Bar in Real Estate, Whether You Like it or Not

Happy Friday everybody. I realize most of you won’t get to this until tomorrow or perhaps Monday, but since I’ve been working on the Zillow Q2 earnings analysis (likely publishing on Monday), I wanted to end the week on a… well… interesting note.

Most of you have seen the headlines on Inman about Zillow’s massive losses in Q2, its massive gains in the Zillow Offers iBuyer business, and so on. Maybe you read Brad Inman’s op/ed that Zillow Is the Real Estate Industry — Period. But I’m pretty sure few of you actually listened in on the earnings call, pored over the numbers, and tried to make sense of what was going on.

This is in the upcoming analysis post, but I thought it was of general interest to the industry as a whole, so I wanted to put this post up for your weekend reading pleasures.

Bottomline: Zillow will do more to raise the bar in real estate than anyone else in the past 20 years, and it will do so whether you like it or not.

Let’s get into it.

From the Q2 Earnings Call

First, let us stop in the prepared remarks where Rich “Aragorn” Barton says:

We’re using data and customer feedback to select our broker partners in Zillow Offers markets, and our machine learning algorithms are already helping to identify the Flex agents most likely to close deals with the highest satisfaction level. The future of these partnerships is key to our seamless real estate transaction experience vision. [Emphasis added]

Later on, he talks about something called PPA, or Performance Pacing Algorithm. Here’s the exchange with an analyst:

Rich Barton

We’ve just launched what we are calling the performance pacing algorithm, the PPA. And what that is, is using an autonomous model to make optimal matches between buyers and real estate agents that are able at that moment and familiar with that particular type of home in that particular area. And we expect to see pretty significant conversion gains from that as we…

Mike Chen

And the quality of those agents factors into the algorithm too…

Rich Barton

Yes, you bet. So the algorithm is driven by expertise in the market, past transaction history and then customer experience score, CSAT score. And then if you’re engaged at that moment and accessible to us. So we’re going to see some pretty awesome wins in customer experience, which we believe will flow through to gain some transaction volume and conversion rates. [Emphasis added]

This is important because… consider who is doing the selecting. In the old Zillow, the agent was the customer and Zillow was trying to sell you advertising and leads. In the new Zillow, the agent is a vendor, and Zillow picks which vendor it wants the lead to go to based on factors including “quality of the agent.”

This is a big change, and one I’ve talked about for a while now. It is just made plain to see.

Also in the Q&A , there was a fascinating exchange. A Wall Street analyst asked, in relation to Zillow Flex:

And then you talked about the idea that you’ll be able to send more leads and more home sales to higher quality agents. If Flex is successful over time, then do you see a world where you have more leads and more transactions going through higher quality agents, so the agent count could fall further over time?

Rich Barton answered him:

And then the question on agent account. We intend to have a selection of the most productive agents in the business. Connections allow them to pick up the phone and have a live customer who’s been vetted, who wants to talk to them and to get appointment, go out and see a house, get connected to them. This is a really important efficiency driver for them. So we expect that the best get bigger. You asked if that’s the question. We certainly expect that to occur.

And the team model is very well suited to this, which we’ve invested in now for many, many years. A lot of wonderful individual practitioners have now become businesses, hiring buyers’ agents, hiring showing agents, hiring listing agents, hiring transaction coordinators on top of our platform. We expect that to accelerate. And so the total customer count may decline early but the number of agents working the volume that we send downstream will probably grow, and each of them will get more of their business from us, but it’s early… [Emphasis added]

In case you’re having trouble understanding exactly what is being said here, let me spell it out for you.

Analyst: So if you’re going to send more leads to better agents, and Flex is successful, won’t there be fewer agents?

Barton: Yes, there will be fewer agents, but those fewer agents will do a lot more business, and lots of that business will come from us.

The Prophecy of Robstradamus, Fulfilled

This should be incredibly obvious to Notorious ROB readers since that was pretty much what I saw in 2015, and then again in late 2018.

In 2015, I wrote a post titled, “The Future of Real Estate, According to Zillow” right after Zillow’s Q2/2015 earnings call. Spencer Rascoff, then CEO, said a lot of really interesting things. Then I wrote:

Unless something changes dramatically, this is the inevitable end of increased technology and the Internet. I’ve been talking about this ever since I started this blog. (A quick search finds this post from 2011 where I mention “he that hath, gets.”)

Zillow has read the tea leaves and has decided to bet the farm on the top 5-10-15% of the producing agents, who have no trouble spending $5,000 per month on Zillow because they have the systems, staff, technology, and the expertise to turn that $5,000 investment into $50,000 in income. The rest of the industry — franchises, brokerages, Associations, MLSs — continue to try and preserve headcount-based business models.

When the entire economic model of real estate is a zero-sum game, where the number of homes sold and the prices of those homes have nothing to do with the industry and everything to do with macroeconomic factors that no one (besides maybe the Federal Reserve) controls… productivity gains for the Best of the Best have to come from somewhere.

For all the Raise the Bar hoopla of the real estate industry over the past decade or so, maybe it’ll ultimately be Zillow that does it for us, over our objections, over much weeping and gnashing of teeth, as the bottom 60-70% of the agent population find themselves completely locked out of the Top Producing Agents Club because they can’t afford the investment it will take to compete with the big boys and big girls.

But that is the future of the industry that Zillow has foreseen, and is now committed to bringing about. And Zillow has put its money where its mouth is. It has actually change the product lines at Trulia to rid itself of the low-performing, low-producing agents.

In late 2018, after the bombshell announcement from Greg Schwartz that if you suck at customer satisfaction, Zillow doesn’t want your money, which came right around the time that NAR released its Commitment to Excellence program, I wrote this post where I said that things were getting clearer and that we were witnessing an involuntary transfer of power from NAR to Zillow.

I wrote back then:

But more importantly, the C2EX vs Best of Zillow really highlights just how little power NAR has and just how much power Zillow has over brokers and agents.

C2EX is a voluntary self-improvement program with no teeth whatsoever. Best of Zillow requires a 90+ rating on Consumer Experience Report to qualify. Fall below 72 on the Consumer Experience Report, and you’re booted out of Premier Agent: no leads for you. We don’t want your money. Amazing.

Just… step back and imagine NAR doing something similar. “Measure up to this customer service rating, or your REALTOR status will be revoked!” Can you do it? Because I can’t.

Well, here we are in the summer of 2019 and the new Zillow under Barton has made it perfectly clear that they not only don’t want the crappy agent’s money, they fully plan on putting them out of business.

They will do so by sending as much business as possible to the great agents, who have the highest customer satisfaction ratings, have the infrastructure and the team in place to be responsive, and to convert leads into transactions.

Zillow Offers Phoenix, As a Glimpse of the Future

Let me provide you one example of this bar-raised future, from Phoenix, using only Zillow’s iBuyer activities, as I think it’s illustrative of the mechanics of how this is going to work.

Zillow uses one team, the George Laughton Team, at My Home Group for all of its Phoenix iBuyer activities. This chart is just the listing side for the past 12 months, from Q3 of 2018 to Q2 of 2019.

That’s a total of 696 listing transactions for $215 million in Sales Volume, for a total of $2.16 million in GCI assuming an institutional rate of 1% for the listing fee.

Now, Zillow had to buy every single one of those 696 homes. Guess who they use to buy those homes. Let’s say they pay an institutional fee of 1% for those transactions, since Zillow charges a seller fee and then pays people out of that, instead of double-charging the home seller. That’s still an additional 696 buy-side transactions for $215 million in Volume, and another $2.16 million in GCI.

On its website, the Laughton Team boasts that it averaged over 200 homes sold per year for the last 6 years. Obviously, the copy is outdated, because I’m showing 696 homes sold for one client in the past 12 months. And with the growth rate of Zillow Offers, I would not be shocked if the Laughton Team ends 2019 with 1,500 to 2,000 homes sold in 2019. For one single client.

Think that might put them into the Top Producer ranks?

As I said above, real estate is a zero-sum game, where every listing taken by one agent means a listing taken away from another. If the Laughton Team is doing 2,000 listings in 2019, that means some mix of agents out there in Phoenix are not doing 2,000 listings in 2019. At some point, some of those people are going to decide it just isn’t worth paying the licensing fees, Association dues, MLS fees, brokerage fees, desk fees, and a wide variety of tech vendor monthly subscriptions to do no business. Some of those agents are going to decide that driving for Uber is a higher return on their time and investment.

Is this not a perfect encapsulation of what Rich Barton laid out? The few agents that Zillow will bless will get more leads, do more deals, capture more market share, and more and more of their business will come from Zillow. Look above: the Laughton Team might be looking at $4.25 million in GCI from Zillow Offers alone. What percentage of their business is this one all-important client?

Now add Zillow Flex to the mix.

I have to add that there will still be great agents who are not part of any Zillow program, whether Premier Agent, or Flex, or Zillow Offers. I assume many of them will get phone calls from Zillow asking them to consider joining, now that the new regime is all about the best agents providing the best consumer experience. But not everyone is going to do that; they have enough business with their sphere and community presence and marketing.

Some are going to be superb individual agents who don’t want to run a team, and they’ll have a nice business with their client network, referrals, and so on. It isn’t as if those agents are going anywhere whatever Zillow does.

But the agents that have Zillow’s blessing will see growth and numbers and production that is hard to imagine, never mind turn down. They will take enough business away from the crappy and marginal agents to raise the bar naturally.

This is What You Wanted… Right?

For as long as I have been in the residential real estate industry, there has been enormous energy spent on “raising the bar”. The image atop this post is from a Facebook Group devoted to the topic of raising the bar in real estate. It has 22,313 members as of this writing, making it one of the largest social network gatherings of real estate brokers and agents anywhere. It’s stated goal is “to stimulate conversation and raise awareness about issues that affect the level of professionalism in real estate.”

Many of its members despise Zillow with the hatred of a thousand burning suns. It isn’t really clear why, but they do.

How about now? Zillow has taken concrete steps to raise the bar in the industry, reduce the number of part-timers, of incompetent agents, of unethical agents, and all of the things that the people of Raise the Bar have been complaining about for years. Those crap agents will no longer be getting Zillow leads, period, and the productive ones with the highest customer satisfaction scores will be getting them instead.

I assume that #RTB will be filled with hosannas and paeans of admiration for Zillow for its firm commitment to professionalism and client satisfaction.

Since lack of professionalism was the #1 issue on NAR’s DANGER Report, I assume that Rich Barton will be accepting some kind of an award at the NAR Annual Convention for Zillow’s actions in promoting professionalism and client satisfaction. Right?

I mean, is this not what you wanted? Is this not what everybody in the entire industry said they wanted?

Of course, I know that none of that will happen. But as of today, it doesn’t matter whether the rest of the industry approves or not. Because Zillow is going forward with its programs, with its transformation into a transactions company.

In the meantime, let me make a bold prediction. Given the direction of Zillow Flex, and the confidence of Barton and team, I think we will see a minimum of a 30% decline in the number of REALTORS in the next 3-5 years. We will also see some agents, especially those with large, well-run teams, post record-breaking numbers like we have never seen before. Five years from now, when RealTrends does its The Thousand report ranking the top 1,000 real estate agents and teams, I’ll predict that 60% of them will be Zillow Premier Agents.

Have a great weekend, everybody!

-rsh