U.S. real estate leader Zillow heads into 2020 a vastly different company than it was a year ago. And in view of the company’s plans, the changes have barely begun.
Rather than doubling down on its successful real estate advertising listings, Zillow is pivoting into real estate brokerage, following a growing number of other firms into online home flipping.
It’s shifted Zillow’s focus from the high-margin pursuit of selling information to what has so far been a money-losing business of buying and selling homes.
Zillow launched its IBuying arm, Zillow Offers, in April 2018. Barely a year in, the company’s balance sheet is hardly recognizable. Due mainly to home sales, Zillow’s second-quarter income was nearly double Q2 2018’s, up from $325 million to $600 million.
Home flipping is the biggest of Zillow’s pursuits, but it’s not the only one.
Zillow acquired Mortgage Lenders of America last year and rebranded it in the spring as an in-house service, Zillow Home Loans. That segment accounted for $30 million in revenue during Q2 2019 — a 34% year-on-year increase.
The company is also rolling out Zillow Closing Services, a title and escrow product, in a few select markets where Zillow Offers is available. The service was developed in-house and is so new the company doesn’t have any results to report, according to Zillow marketing manager Lindsey Lombardi.
Zillow plans to add more adjacent services. In an interview in May with Geekwire, Zillow CEO Rich Barton said he wanted to become the “Microsoft Office” of real estate by building a comprehensive suite of services. Next in line could be insurance and moving services.
Zillow is not the only company aiming to be a one-stop home for house shopping. Redfin, for instance, started as a real estate brokerage and has moved into IBuying (Redfin Now), mortgages and most recently digital home sales (Redfin Direct). Opendoor, a pioneer in IBuying, now offers mortgages, title insurance, and an agent partnership program that may be a preliminary step toward building an in-house team.
Stagnation of Premier Agent
Zillow’s pursuit of IBuying is likely driven by the stagnation of its flagship product, Premier Agent. The lead-generating advertising service gives agents prime placement on listings in chosen postal codes. The product is available on both Zillow.com and Trulia.com, the marketplace Zillow Group acquired in 2014.
The subscription service brought in revenue of $323.7 million during Q2 2019, a 6% year- over-year increase. But that rate of growth is down markedly from the boom years. As recently as Q2 of 2016, Premier Agent was growing 32% year-on-year.
Zillow’s resuscitation strategy was unveiled in the spring of 2018, when it replaced the old program with Premier Agent 4. In this iteration, agents no longer received calls from customers directly. Instead, customers were routed through a Zillow call center that supposedly screened them based on their readiness to buy. Zillow said it connected only the best prospects to agents, which ensured more sales and better service for home shoppers. However, many agents were unhappy with the service and cancelled their accounts. Zillow quickly backpedaled and reinstated the monthly subscription model.
Its second attempt at reinvigorating the product has been to shift from a monthly- fee model to one where agents pay a percentage of their commission on successful closings from Zillow leads. That change is a work in progress.
New flexible leads for agents
Zillow has also been quietly running trials of a program called “Flex Pricing.” It began in Florida, and over the summer expanded into four small markets in Colorado and Connecticut. Under Flex, agents have a choice of paying monthly subscriptions for unvetted leads, or getting vetted leads and paying for only those that result in a sale.
According to Lombardi, “agent and customer feedback thus far has been great” and this has spurred more trials, beginning this fall, in two large markets, Phoenix and Atlanta.
The AIM Group contacted several agents in Connecticut and Colorado to gauge agent responses directly. They gave mixed reviews.
A generally favorable response came from Marilee Nickelson of Pueblo, Colo. A veteran agent who had subscribed to Premier Agent for eight to 10 years, Nickelson was paying $3,000 a month to Zillow before enrolling in Flex in June.
She noted a few of the service’s weak points, including the quality of leads that it delivers. “Most local agents agree that we get a lot of leads that are not really ready to buy,” Nickelson said. “Supposedly, Zillow is screening the buyers. My guesstimate would be that more than half of the leads are not really qualified buyers.”
That said, Nickelson counts herself as a satisfied customer. She switched to Flex while dealing with a family crisis that made it impossible to keep up her usual pace in real estate. The zero upfront, pay-per-sale proposition of Flex was a big help.
“Even with working a little bit, those monthly Zillow fees added up quickly,” Nickelsen said. “Now with Flex I only have to pay a referral fee. The cost comes out about the same (percentage-wise), but I don’t have to worry about the monthly payments.”
According to Nickelson, Flex fees vary by sale price. For sales under $150,000, Zillow takes 20% of the agent’s commission. For sales above $150,000, it takes 30%.
“So, on a $135,000 house at 2.8% commission, the full commission is $3,780,” Nickelson said. “And 20% of that is $756.”
Zillow takes a smaller cut from agents with high sales volume, Nickelsen explained. It reduces its commission by half for agents who sell more than a certain number of homes per quarter, and there’s a similar discount for agents who close on more than 12% of Zillow referrals, she said.
But more paperwork and weak leads
Another agent in nearby Fort Collins, Colo., who asked to remain anonymous, was not convinced.
The Fort Collins agent had also been a subscriber to Premier Agent, paying about $4,000 / month for priority placement in specific zip codes.
The agent was frustrated by the lack of control that Flex offered. When customers were put through by Zillow employees to the agent number, some 70% of times it was just a dead line on the phone. Most customers, out of impatience or confusion, dropped the call before the agent could answer.
In other cases, the customer was already working with another agent, and was just seeking information about a listing. “They don’t want to bother their agent with every question, and they think they’re going to speak to someone from Zillow, not an agent,” the Fort Collins agent said. “I think the customers don’t understand what the process is.”
Another complaint was that the Flex program involved more paperwork and hand-holding than the subscription system. In order to track which customer referrals result in home sales, Zillow needs to monitor and document the process from the initial phone call until the customer either buys a home or drops off the radar. In practice, this means the agents have to report on each active prospect once per week.
“Before, there was none of that, you just paid your monthly fee and you got leads and that was the end of it, so it’s more time- consuming,” the Fort Collins agent told the AIM Group.
Nickelson described it as “very cumbersome” but that she found ways to do it faster and said that she can now do all the documentation in “about half an hour per week.”
Under Flex, Zillow wants agents to be available to pick up the calls from its vetting center. In Pueblo, the company initially told agents they needed to pick up a minimum of 85% of their referral calls. That’s a challenge because agents have other work to do: talk to customers, show homes, meet photographers, drive between appointments, etc. Agents chafed under the requirement and in Pueblo Zillow relaxed the requirement.
“They started putting more weight on the number of closings you have had over the years, and whether you are turning their leads into contracts,” Nickelson explained.
One reason Zillow’s pursued the commission-based model so persistently is the theoretical windfall it could provide if Zillow brings its IBuying business to scale.
Early on in Zillow’s IBuying push, it purchased only about 1 out of every 100 homes it made an offer on. However, rejected offers also have value because they bring Zillow into contact with people wanting to sell their homes. Zillow has said that 45% of homeowners who decline Zillow’s IBuy offers go on to list their homes on the open market. This readiness to sell made Zillow’s referrals 10 times as valuable as those offered by Opcity, a similar lead- generating platform connected to Realtor.com, the No. 2 real estate vertical in the U.S. Opcity is owned by Move Inc., which also owns Realtor.com.
At present, the economics on the home- flipping side look dire (See Page 6.) Early results showed that Zillow Offers was earning a gross margin (sale price minus acquisition price) of less than 5% per home. And that was before figuring in costs of buying and selling, refurbishments, holding expenses and agent commissions – costs that Zillow doesn’t report. The bottom line for the homes-buying segment in Q2 2019 was a loss of $71.1 million.
Barton has said Zillow’s new strategy could be “painful from an investor’s perspective.”
The company’s share price fell by more than a third in the months after Q2 2019 results were announced.