Let’s talk about Zillow.
There’s this great article that Fortune magazine just released. And there’s just a lot of great information about Zillow, what they’ve been up to, their failures, and some of their successes. I just want to share it with you because it was so much fun to read.
The title of the article is “Zillow’s $6 billion home flipping business was a disaster. Now, a cooling housing market could foil its comeback plan.”
For those of you who don’t know, Zillow is one of the biggest names in real estate, and the Insider says, “Zillow is now averaging more than 200 million users a month, roughly double the number of people checking the latest scores on ESPN.com.”
They have different services catered to home buyers and real estate agents.
One of Zillow’s services includes lead generation and selling those leads to agents.
Leslie Turner is a Zillow Premier Agent, which means she pays the company for the contact information that buyers provide on the website. In 2018, one of those Zillow leads connected her with a couple looking for a second home in Charleston, S.C., where Turner is a broker at Maison Real Estate. With her help, the buyers landed a $335,000 cottage that ticked all their boxes. Two years later they reach out to Turner to help sell the cottage ($373,000), buy an investment property nearby ($450,000), and splurge on a permanent residence in the heart of downtown ($845,000). That’s four major sales—all from that one little lead. (Source: Insider)
“Zillow leads aren’t a perfect solution for agents like Turner,” says Insider. “She says she pays Zillow about $250,000 per year for the information and credits it for just 12% of her sales.”
The last time I went online, I Googled “What’s the most visited website in the world?” and Zillow wasn’t in the top 20. The number one was Google.
When I typed in homes for sale in any area, I saw that Zillow was paying Google to show up in the ad section. So were Redfin and Realtor.com.
So, I did the math.
Turner credits 12% of her business, and she’s paying $250,000 a year. If I were Turner, I thought—what if I started using the same strategy that Zillow does? They have Google PPC (pay-per-click). What if I ran Google PPC and spent $250,000 a year?
I use Google PPC now, and my average is $16 per lead—that’s 15,000 leads in a year (if I spent the same $250,000 that Turner did)!
And if I’m good at talking to people, let’s say I can convert 1% of those leads to sales. That’s around 150 closings annually. And if the home price averages about $450,000, that is $1.7 million a year in commissions, if I use the same strategy the big companies like Zillow, Redfin, and Realtor.com have been using for years.
What I’m trying to say is that there is a better solution for real estate agents, and that is Google PPC.
According to Insider, “This aspect of Zillow has never been the sexiest part of what it does. After all, lead generation has been around for decades, going back to telemarketers and even door-to-door salesmen. But its financials might get you going: In 2021, the division that includes lead gen was the company’s second-largest—and the only profitable portion of its balance sheet.”
Another business Zillow does is home-flipping, and it has become a hot issue recently. Especially when their Zestimate kept getting home price estimates wrong.
“The path to Zillow’s home-flipping debacle began innocently enough, with small-scale pilot programs in Phoenix and Las Vegas in 2018. The company, which got started in 2006 when it launched its home price estimator tool, Zestimate, thought its algorithm could suss out a home’s current worth and predict how it would change in the future. The plan was to identify properties that are quickly appreciating and have motivated sellers willing to pay Zillow’s 5% to 9% service fee; buy the homes; and flip them at profit,” says Insider.
So, they were competing not only against agents, but now they’re competing now against the actual consumer.
Insider continues, “Not a bad theory…” They wanted to do the fix and flip, or buy and then maybe sell it for a little bit more. It is not bad, in theory.
“…But doomed by a pair of issues—one beyond Zillow’s control, and the other explicitly of its own making. First came the pandemic, which led many, including Zillow, to assume the worst,” says Insider.
But if you’ve been following along with us, we called it the first month and said the housing market is going to do a sharp rebound contrary to what everyone is saying, and it’s going to be an amazing year for real estate.
So first, they screwed that up, when the pandemic started Zillow stopped buying, and “…the company halved what it charged agents for leads as it hunkered down for a stagnant market. But the slowdown never came,” according to Insider.
Insider showed this graph of the change in Zillow stock price. It dipped in 2020, and all of a sudden it shot back up in 2021, and the Zillow stock was amazing, they were buying and buying and then they started dropping because it didn’t work out as they thought and the Zestimate isn’t working out.
Insider also shows Zillow’s quarterly revenues, and in Q1 of 2022, they had $4.26 billion in total revenues, with the majority coming from home sales, but it doesn’t mean home sales are profitable.
“By spring of 2021, the market had overheated to a point where Zillow’s much-lauded algorithm, the backbone of its home-flipping strategy, was struggling to make accurate pricing predictions. Believing its own inflated numbers, say analysts, the company began overpaying for homes all across the country,” according to Insider.
And that’s the Zestimate that a lot of people use, and unfortunately, it’s not working.
Zillow executives are blasé about the failures of its algorithm, the loss of millions of dollars, and the implosion of Zillow Offers. “It’s a part of business. You’re going to take some big swings. Some work out, some don’t,” says Zillow President, Susan Daimler. (Source: Insider)
Insider says, “Of the 6 million or so people who bought a home in the U.S. last year, about 4 million visited Zillow.com at some point in the process, according to the company. Roughly 1.5 million of them asked Zillow to put them in touch with a real estate agent. Yet only 3% of all U.S. home transactions in 2021 involved a buyer who was connected to an agent through Zillow. The company thinks it can double that share by 2025, taking it above $5billion in annual revenue.”
And if you keep on reading the article, you’ll see Zillow plans on expanding by owning the whole process, starting from when the lead comes through and asks to be connected to an agent, to the title, and even the mortgage. They give agents a commission for sales, but they will take the rest.
“Things are looking pretty maxed out: An analysis conducted this spring by Moody’s Analytics found that 96% of U.S. housing markets are ‘overvalued.’ A housing correction would be a tough break for Zillow. Fewer buyers and sellers mean less demand for their services. Critically, that also means fewer good leads to sell to agents, and because realtors often drop out of the industry during down markets, fewer agents buy them,” says Insider.
Zillow mostly targets big teams, big brokers, and people that produce, so they’re still going to be around purchasing these.
Lastly, Insider says, “The company’s home-flipping experiment was a step away from that mission.” The mission is to sell leads to agents. “Perhaps its new direction will bring it back to its roots: empowering homebuyers—not competing against them.”
Hopefully, at the end of the day, they’re not competing against the agent either.
I hope that helps you understand Zillow's approach to everything real estate. The bottom line is that they just want to make more money. It doesn’t matter if they compete against the actual people that are trying to buy homes or the agents. Right now, they need to make their bottom line work.