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:
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…
And the quality of those agents factors into the algorithm too…
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!
24 thoughts on “Zillow Raises the Bar in Real Estate, Whether You Like it or Not”
Thank you for this post. I made the mistake of watching this today https://thenationalrealestatepost.com/zillow-continues-market-dominance/ and needed some rational thought on the subject.
I can’t stomach those guys. And the comments? From “business owners” that don’t even know the difference between profit and revenue…
Click-bait bullshit designed to generate clicks and ad revenue, and they’re very good at that, alongside their hysteria and fear-mongering.
The only counterpoint to your argument that I would offer is that algorithms are omniscient. This is still very much a “human” business, and unless they do a better job at picking their partners, they may find they have a higher failure rate than their precious computers predicted. Betting the farm on a computer selected partner may not lead to the outcome they hope for, and you predict.
sorry, hit enter too fast. that should have said algorithms are NOT omniscient.
Completely agreed, Phillip. I suspect Zillow will learn a lot about its selection process and the importance of selecting the right partners. Numbers do not ever tell the whole story. This is a huge pivot, and I think they’ll need to adjust their own internal thinking.
Or they’ll fail spectacularly ?
Thinking about Zillow and other like, it seems to me that we have to start looking at companies from a different perspective. Zillow already proved to the world that their Zestimate algorithms, worth 0 !Now they come and scream out loud, our new algorithm will put many real estate agents out of business because it will do miracles to the best agents.Let me make it clear to all those who don`t know how things work in the real world of Zillow and other like.People only look at Revenues, rather than the full financial picture Balance Sheet, Cash Flow, and Income Statement.For Zillow and like other their Stock is
the product.This is where they aim to make money. Premier agent, iBuyer, it is all a cover up. Zillow continues to lose money, lots of money. Many people wonder how Zillow can continue in business as normally if they lose money long term, they can go out of business. Zillow does not care if they lose money because they make far more money off of the stock price increases.The real business for Zillow isn’t real estate, it is making money through their stock price increases.
“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”
STOP PUTTING YOUR LISTINGS ON ZILLOW!
Someone needs a lesson on how the stock market works.
Your explanation is welcome.
696 listings, $215m in volume, $2.16 million in GCI. The same in buy side. In 3 months.
Who’s pulling listings?
“The real business for Zillow isn’t real estate, it is making money through their stock price increases.”
That’s not even close to how the market works. You act as if the stock price goes up, Zillow earns revenue. A company makes nothing if existing shares increase in value.
You sit that and make statements like, “let me make it clear to all those who don’t know how things work in the real world,” then follow that up with, “they make far more money off of the stock price increases.”
And before.you come back with some nonsense about, “that’s not what I meant,” recall you made multiple references to it. That’s exactly what you meant,
Maybe check your arrogance (and ignorance) at the door next time you decide to try to educate the masses.
Look pal, you keep attacking me but you have no explanation how things work. LOL
The world is waiting to read your detailed explanation.
Try educating yourself, pal, instead of being a pompous ass. Here’s a place you can start to learn about your absurd claims that a company makes money when their stock price goes up:
There must be a very good reason why Mr Rich Barton came back to be the CEO instead of Mr Rascoff. Zillow ship is sinking slowly into the deep ocean water.The premier agent program slowing down, there are many other better real estate search portals, and many agents are sick and tired from Zillow. Zillow Raising the bar? they must first save their sinking ship in wall street.
Do the face challenges? Certainly. But are they a sinking ship? No way. As long as they have the consumer (194M of them), they will be able to iterate to profitability. The real risk is if someone else figures out how to win over the consumer in a differentiated way… so far, no one has come close. What are these “better portals” you speak of? Why aren’t consumer using them if they are so much better?
Having thousands of listings on Zillow means nothing. Most listings are not accurate and most are not active anymore.I can say it since I am a real estate investor and I came across of this issue many times before and not to talk on their Zestimate that is a complete circus.
“As long as they have the consumer”
Read what many consumers think of Zillow.
Rob, what do you suggest agents/brokers do with this information for today’s practical purposes? Should excellent agents (good production and Zillow reviews) in decent performing, non-Zillow Flex/Offer markets start pumping thousands upon thousands of dollars into Zillow’s Premiere Agent program in hopes that they get “chosen” someday for the new program? Is this basically a pay-to-play scenario? It sounds like Zillow will choose their high performing Premiere Agents to participate. So, the agent pays for the PA program now upfront and then pays Zillow a referral fee on the back end too? Diabolical
Well, if you look at this unemotionally, here’s what I see:
– Zillow will select agents who have top notch customer satisfaction ratings, and have a large team that can handle online/telephone leads
– Zillow’s actions will make marginal agents even more marginal
If Flex/Offer aren’t in your market, I’d focus on (a) massive customer satisfaction (Zillow Reviews is still a thing, right?) and (b) thinking hard about joining or starting or growing a team.
If PA is available, and CSAT is part of that, then yeah, I would at least think about building a track record of consumer satisfaction for Zillow and for consumers to see. I guess that’s pay to play in the same way that a seller wanting to have you do a CMA or list their home or put it on the MLS would need to pay to play. /shrug
But as I wrote above, there are today and will always be great agents who don’t rely on Zillow or any third party. They don’t really do internet leads because they have a strong sphere, are pillars in their local communities, and have former clients who love them and send them business. I don’t think this affects any of those agents. I’m not sure that anything will affect those agents. If you’re one of these agents, don’t let any of this distract you: just focus on keeping your clients happy, keeping your sphere tight, and keeping your community strong. But let’s be honest, those agents are in the distinct minority of the 1.3 million REALTORS we have running around today.
So I think if I were a marginal agent today, doing a deal every other year or so by happening to fall into one, not that committed to the industry or to the business or to clients, then I’d think about a career switch.
Thanks for your comments
I don’t think most iBuyers are paying agents 1% on the buy side. Why would they?
Not sure how the real estate profession is elevated when the selection of agents is a sample of agents willing to do the job for so much less? Is cheap usually best? Were the foreclosure specialist agents with hundreds of foreclosed sales the best of the best? Not necessarily, some were good; a lot are nowhere to be found now just a few years later. I won’t play the Zillow game for the same reason I didn’t play the foreclosure game; the employer, in this case Zillow, will give you business and expect the large team operation needed to run volume of this type, until they decide to shift and shut off the faucet but you still have this staff to support. Zillow is building their business model of selling these ibuyer acquired properties on the backs of agents hungry enough to discount their commissions hoping that other business will come of that (no guarantee of that, not enough to offset the lost income and added expense and time), if they get many applicants then they will likely discount the fees even more. If it would be more profitable to have this part of the business done in-house, they will. However this is a zero risk game for Zillow in employing ‘good’ brokers at discounted rates who take all of the risk for staffing to fulfill the volume.
For me, action steps:
Disengage from Zillow as much as possible, no need to feed my competition.
Create a home for my reviews in a more neutral space (Google?).
Articulate strong value propositions, when Zillow starts paying agents 1% along with Redfin’s 1% listing fee, the general public will also want to pay that (why not?); what do I do differently then somebody that charges so much less? Do I really bring value to the equation?
Educate the general public as often as possible about how Zillow works, how they don’t make very much money if the consumer just contacts the listing agent; the more people click around their website because they are trying to ask a question or their value it wrong or anything that causes clicks on their site, the more potential for Zillow to make money.
That last point is why I stopped using Zillow for marketing, it is a disingenuous way to attract business from buyers, it is not honest.
All fair points.
I am curious about one thing. When you say, “That last point is why I stopped using Zillow for marketing” because it is a disingenuous way to attract business from buyers, it is not honest… how do you explain that to your sellers? After all, you’re hired to market and sell their homes, right? I’ve always wondered how that conversation goes, so any color you can add would be great.
I found it intimidating at first but when I thought through it there was really nothing there to be scared about.
In our MLS all properties feed to Zillow for now so the sellers property is on Zillow. When I used to pay to be the contact on the listing I would rarely get direct inquiries on my listings, which I found odd as some of these were very active listings. I often would even have clients try and contact me through their Zillow or Trulia listing only to be inundated with calls/texts from ‘the agent’ and they had to explain they were just trying to contact their agent, the listing agent: very confusing for a consumer. Try it yourself on incognito mode, type an address and you will often be blindly given an agent even if you know that the listing belongs to a ‘Premier Agent’. Zillow and Trulia cap the number of listings you can ‘guard’ at 10, there is no explanation for this cap and it is enforced even if somebody is willingly paying trying to do the right thing and respond to their own inquiries on all their listings.
So what I tell sellers is that their listing is on Zillow, as it is also on Redfin and any other 3rd party site that publishes listings; there is no loss for the seller. Even if I agreed to the $4,000 or so yearly minimum fee to ‘guard’ my listings the moment I go over the cap there would be other ‘listing agents’ representing the listing regardless. There is no such protection on Redfin and sellers are perfectly ok with that and Redfin is probably just as popular in my market.
If somebody is surfing on Coldwell Banker’s site or Keller William’s site or REMAX, there is no way for my contact information to appear, so its not like its a foreign concept for sellers that others do advertise and try and promote the listing through the blessing of the MLS, this is probably a good thing. It doesn’t make it necessary for me to try and have a competing broker like Keller Williams or Coldwell Banker or REMAX in this case Zillow or Redfin contact me directly when somebody shows interest. Especially when the protection is sporadic.
If somebody wants to find who the actual listing agent is for a property there is usually a way to do so, in my market consumers can always go to Compass.com where they always show who is actual listing agent is, regardless of company affiliation and for free to that agent. Clients are happy about that and understand that paying for that ‘service’ is no service to them at all.
And this is a perfect example of how Zillow is raising the bar if you like it or not. LOL
Zillow is not raising the bar in real estate. All they do is confusing the consumer and now confusing themselves on their real identity. They have not decided yet who they are.A real estate portal, a real estate investor, a media company, GOD knows. Thank GOD to many bloggers who keeps them alive.
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