The Ebay of Real Estate.
Updated: Sep 14, 2019
Zillow has made two big announcements recently:
1) Zillow is expanding its “cash offers” programs to 4 cities
2) Zillow acquired mortgage lenders of America. On the surface, most people shrugged off the announcements as neither appear monumental. Why are these two announcements more important than they initially appear? How will this transform the real estate industry including lending? Why should you be worried? How will you prepare for the changes?
Instant Cash offers:
Zillows 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 does Zillow “Cash Offers” work?
Within two days of receiving a request from a seller, Zillow either will make a no-obligation cash offer or they 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 then 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). Why is what Zillow doing now different than what has been tried in the past? The objective of Zillow offers likely isn’t to buy houses. Sure, they will buy a few houses and likely make money, but this misses the main objective of the program. The leads that instant offers generate are invaluable. The number one 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 with the sellers known motivation.
The real objective of cash offers
The real objective of the “cash offer” program is to generate valuable leads. Currently, Zillow has stated they 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 they 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 gives it 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. Redfin has learned to use all the data/information it generates on its website to promote a “discount brokerage model” that utilizes its own agents that are salary based to facilitate a transaction. This model has cut the average realtor commission from 5-6% to around 3.5%. These savings have been passed on to the seller of the property.
How Redfin makes money at this model is their agents close twice as many transactions as traditional realtors due to the lead generation. Its agents are not spending time marketing as the leads are flowing in through it 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 to generate revenue from multiple streams off the same transaction. Redfin is positioning itself to control start to finish the real estate purchase and 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 ten. This allows Zillow to generate exponentially more leads. Furthermore, instant offers allow Zillow the ability 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 in my mind is when not if they 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 their vertical integration with the acquisition of Mortgage Lenders of America. Zillow released the following press release:
Greg Schwartz, president of media and marketplaces at Zillow Group. “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)
Why is Zillow buying a lender when they could use their “premier partners” that have existing operations? From the Zillow press release:
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)
The press release makes no sense; they are 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 quite obvious they are buying a lender to further their 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 showing the future. The roadmap is further vertical integration to best use the data that they already have. This strategy will lead Zillow to a brokerage model in the future. This is exactly the strategy Amazon took when first starting. They 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, this is a far cry from books! 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?