Zillow: Making Realtors Obsolete
Zillow is using big data to create a transparent marketplace. Will it be enough to break the realtor monopoly?
Believe or not, the United States unquestioningly supports an archaic, opaque marketplace where information asymmetry misallocates billions of dollars every year.[i] At the heart of this marketplace is a professional service industry with drastically different financial incentives than the buyers and sellers they represent. Realtors are puppet-masters, controlling the largest transactions most Americans will ever participate in. But hope is on the way; Zillow is using technology to marginalize the power of the listing real estate agent, in the process generating billions in savings for the American people.
The incentives in a home sale transaction are thoroughly misaligned, particularly for the seller. A seller, looking to maximize the value generated from the sale of their home, keeps (on average) 94% of the sale’s value with the realtor companies – buying and selling – split 6%. Of each firm’s 3% share, 1.5% goes the firm while 1.5% goes the individual realtor.[ii] For a fully paid-for, $100,000 house, this amounts to $94,000 in the pocket of the seller while the selling realtor pockets only $1500. If the seller was willing to sell for $90,000, the seller would get $84,600 while the realtor would get $1350. A $10,000 price reduction only impacts the seller by $9,400 while only reducing the listing agent’s bottom line $150.
What this means is that the seller’s realtor secures the majority of their value upon executing a binding listing agreement. By contractually limiting a seller’s influence on the process, a realtor can use their leverage in the process to pressure and mislead their sellers to execute a suboptimal contract with a buyer. Further, if there are issues with the execution of the transaction, most standard real estate contracts absolve the realtor for any liability. Listing agents are paid to essentially draw up standard contracts.
But hope is on the way. Digital real estate platforms, most notably Zillow, are loosening listing agents’ iron grip on the system. Zillow is bringing transparency to both the market and the process, normalizing the information asymmetry and bringing power to the people.
First, Zillow is building a comprehensive database of home values to help sellers better understand the nuances of their local market. These “Zestimates” are generated through a combination of publicly available information and user-submitted data about special features, location, and market conditions and help serve as a proxy for possible listing prices.[iii] As machine learning is further incorporated into Zillow’s functionality, the accuracy of the residential transaction market will improve. With a more transparent marketplace, the need for real estate agents to participate in the negotiation process will decline, fundamentally changing one of the primary roles of agents in today’s market.
Second, Zillow provides information about the transaction process that can be helpful to sellers as they embark into negotiations not only with potential buyers but also their listing agents. This information includes strategies for pricing and negotiation techniques, as well as access to a forum that connects and enables discussion between like-situated people.[iv]
In their coming updates, Zillow is positioned to help usher in an era of user-empowered, a la carte real estate services that meet the needs of users while reducing the transaction cost associated with selling a home. Below are a few simple steps Zillow can prioritize to help them lead an epic disruption of the real estate industry.
- Ensure Zestimate market information is as accurate as possible
- Empower users with an interface for updating property details
- Provide database of standard real estate agreements with explanations
- Offer high-quality, remote real estate expert, photographer, and legal services
With these services geared specifically to selling a home, the home-owner is empowered to optimize the sale of their own home. Zillow could charge for these services and owners would be willing to pay – it would be far less of an expense that the current marketplace. If, for some reason, a home-owner wishes to use the conventional process (i.e. an agency) to sell their home, Zillow could also employ agents to conduct this normal business at a fraction of the cost, leveraging their scale to drive traditional marketplace costs down.
Home owners, the investors, are losing billions of dollars each year to real estate professionals. By harnessing and personalizing technology, we can empower the home-owners to realize the full value of their investments.
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[i] National Association of Realtors. 2016. Existing Home Sales. [ONLINE] Available at: http://www.realtor.org/topics/existing-home-sales. [Accessed 18 November 2016].
[ii] Investopedia. 2011. Understanding Real Estate Commissions: Who Pays. [ONLINE] Available at: http://www.investopedia.com/financial-edge/0611/understanding-real-estate-commissions-who-pays.aspx. [Accessed 18 November 2016].
[iii] Zillow. 2016. Zestimate. [ONLINE] Available at: http://www.zillow.com/zestimate/. [Accessed 18 November 2016].
[iv] Zillow. 2016. Real Estate Advice: Home Selling. [ONLINE] Available at: http://www.zillow.com/advice/US/home-selling/question-discussion-guide/. [Accessed 18 November 2016].
My gut tells me that there will still be a spot for real estate agents in the future. Even if the numbers do not support using a realtor, humans don’t always act rationally. When it comes to a family’s home, which is often their largest asset, they are likely more risk averse than they would be in a lower stakes situation. There is a lot of comfort to be garnered through partnering with an “expert” who you can talk to face to face. Also, to take a less cynical view, real estate agents might add more value than your post lets on. After selling hundreds of houses, they develop a sense for what features buyer are looking for — if they recommend that a client stages their house with beautiful furniture for $15k and that decision gets the seller an additional $100k on the sales price, then the realtor likely paid for his or her commission.
I think there will still be a market for traditional realtors. Some people are just too busy to actively market and sell their own homes. For example, it will be very difficult for say a traveling consultant, to sell his or her home. If you are on the road all the time or have late hours in the office it would be impossible to show a prospective buyer to your home. Also, I like the idea of a rational agent brokering a deal. If you own the home you might have some sentimental attachment to it and could lead to you acting irrational in negotiations over price.
Zillow is bringing a ton of value to the market through centralizing home values and building products around residential real estate transactions. I’ve heard Zillow’s CMO speak and one of the many problems the company faces is that the typical home owner is only in the market to purchase a home once every ~10 years. Zillow must find a way to capture value from their customers more than simply on the home purchase/sale. The challenge they face will be to innovate new products on their various databases and tools to extract more value from their consumers. Perhaps Zillow can recommend home improvement projects that will add incremental value to homes in a given market, and partner with companies like Angie’s List to recommend contractors.
Great post! Your idea on the next-era Zestimate, one that is extremely accurate and basically governs the price discovery process of all properties, made me think about Kelly Blue Book. By looking up Kelly Blue Book, car buyers and seller essentially know what the fair price is, and thus there remains very little room for negotiation. KBB practically makes second car market more or less arbitrage-free. I agree with you that, when Zestimate successfully creates a completely transparent property market, consumers will benefit hugely from lower cost of transaction to seller/buyer as a result of information asymmetry.
Great post! Given that few consumers are extremely adept in the real estate market, I think they may be finding benefit in some degree of hand-holding that agents currently provide, such as explaining the rationale behind valuations or forward-looking projections. The problem is the incentive system and inefficiency in the current model, which firms like Zillow really have the potential to disrupt. I like your idea of Zenefits potentially having agents that leverage their data to do the work at a lower cost than a traditional option, giving users the best of both. Really interested to see how this plays out – if they are able to truly establish trust in their appraisals and help users comfortably transition into this new model while limiting the burden of effort on these users, we could see big changes in the way these transactions work.
Thank you for the interesting post. As we try to understand whether Zillow will break the realtor monopoly, there are a two significant variables that we should elaborate on:
1. Competition: Zillow’s business model is dependent on scale. If another competitor can establish and develop the same scale, Zillow’s existence may or may not be called into question. In addition, as has happened in the UK, realtors may group together to establish a competing site, thereby perpetuating their role in the monopoly, digital or not.
2. Willingness of users to buy and sell homes through Zillow: Buying a home is a very personal, and high risk transaction. Individuals are not experts and yet Zillow will create incentives for individuals to conduct the transactions themselves. Zillow should work at all levels to reduce the ‘risk’ of the transaction for individuals. This could include software that supports pricing estimates which can be modified based on select variables (e.g. house age, furnishing, leasehold or freehold). Additionally Zillow must offer a service where a Zillow estate agent will visit a users house, to recommend a price, but where the fee is far lower.
By being cognisant of these factors, Zillow will greatly support their chances of breaking the realtor monopoly.