UPDATE – 02/08/06: Zillow’s out of stealth and focusing on algorithmically-generated home valuations. Not what I expected, but still pretty dull – it doesn’t attack the huge 6% broker commission at all. Conceivably this could fuel for-sale-by-owner activity if the evaluations are solid, but Zillow’s not going to explicitly facilitate this.
UPDATE #2 – 02/08/06: Apparently Zillow’s getting crushed from the volume of traffic they’re getting, and through a bit of serendipity this page is the second result for ‘Zillow’ on certain Google data centers. Which is driving a lot of traffic my way. New visitors – I’ve written more about Zillow and its business model here, and if you want to check out an innovative real estate start-up that’s not currently snowed under by traffic, I recommend Homethinking.
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Spencer Rascoff’s blog posting on stealth real-estate start-up Zillow was a bit disheartening to read. Apparently Zillow
won’t be an agent or a brokerage — [they're] not going to collect commissions. Instead, Zillow will be advertising-supported at launch- [they're] agent and broker friendly. “If Zillow is successful, then agents and brokers will use Zillow as a marketing vehicle to reach customers.”
That’s a shame – I was hoping Zillow would live up to earlier rumors, and function as a nationwide FSBOMadison – by focusing on the for-sale-by-owner market and disintermediating the brokers, that scrappy start-up’s managed to take over 20% of the Madison, WI real estate market. Instead, Zillow’s working with the brokers and supporting themselves through broker advertising – a safer model, but one that conveys a lot less value to the end user.
The exact business model of Zillow remains unannounced, but Peter Coy at BusinessWeek offers enough info for me to guess. First, brokers are customers, and second, they’re not building a directory of homes to rival the MLS. That means there’s not going to be a lot of support for those who want to sell their homes themselves – you won’t be able to download the paperwork from Zillow, follow instructions, and get cracking on your own. Third, Zillow CEO Rich Barton mentioned the relatively low amount of work buyers’ agents have to do for buyers who’ve done their research on the Internet in advance. So, although Zillow’s customers are brokers, these are going to be brokers willing to work for less than the usual 3% share. Fourth, Barton mentioned a lot of user-contributed content – I suspect in the form of broker reviews, similar to Homethinking‘s.
So here’s my best guess on the business model: real estate agents will pay to be listed – either a flat fee or an auction-based model for premium placement. They’ll offer buyers who have already found a home they want to buy their services for a fee less than the usual 3% of home value – a flat rate, an hourly rate, or a percentage commission, either fixed for all comers or, as the For Sale By Owner blog suggests, a reverse-auction model. Users will be able to review and read reviews, so they know whether that one agent offering super-minimal commission is too good to be true. However, there won’t be an opportunity to do-it-yourself, and due to the reduced amount of work involved in closing an Internet lead, the brokers will still be comfortably overpaid.
In short, homebuyers will save money, but they won’t save nearly as much as they could if the brokers were removed from the transaction altogether. Progress, but not enough as I’d like. Perhaps Zillow got worried about their burn rate and decided to go with a business model likely to cause less upheaval? It doesn’t matter – in the next couple of years, some company will unleash a site that makes closing a simple real estate transaction painless, and when they do they’ll quickly grow to dominate the market.
{ 8 comments… read them below or add one }
Greg,
What is a “simple real estate transaction”? And why wouldn’t brokers just lower their commissions in response to any game-changing model?
I think the Realtors(tm) have a nice lock-in here, and aren’t really in danger – they’re in a bureaucratic haven of paper, like hospitals…
Check out your local newspaper, map, tourist information and the most prominent advertising sector is the real estate market. There is lots of money to make in advertising. It looks like this is where zillow intends to cash in. If that’s the case, they must provide a service that will assist these advertisers.
I am looking forward to seeing what Zillow offers but on it’s launch day the beta site is down due to overwhelming demand.
Zillow is up against the well established market leader, HouseValues, who are taking a fortune out of brokers’ pockets. They have proved themselves to be capable innovators and have come on stream with new products at regular intervals.
I read your review of the infamous zillow. I too have been awaiting a peak at their business model. What they have come up with is not what they originally revealed. However, I want to learn more about your obvious disdain for the Realtor(tm) community and industry. The concept of a simple real estate transaction is real. But many are not. Also, Sellers have no idea how to market themselves in a slow market. The recent few years have spoiled many, but these times are a changing. We will soon be back to a market where you will really need the skills, experience and background of a good Realor(tm).
But even in a swift market, where a seller can put a $4.00 fsbo sign in the front yard and get a contract, having a knowledgable Realtor(tm) is like insurance. You may not need it, but when you do, it more than pays for itself. I have saved my sellers thousands by knowing the market and negotiating for them when things turned sour, like high radon levels, evidence of mold, evidence of a cracked foundation, the list goes on.
Chris, thanks for the comment.
First of all, I don’t like any system that encourages anticompetitive practices. There’s no way commissions would be holding steady at six percent (despite the appearance here and there of discount brokers) without the broker’s guild.
Second, you’re underestimating the ability of a smart start-up to teach sellers how to market themselves; it’s a skill but it’s not an unteachable one.
Third, if it’s only difficult to sell in a down market, why punish people with the same commission rates in an up market? Shouldn’t commissions be declining during an up market, and rising during a down market? Shouldn’t they be pegged to the actual amount of work involved in the transaction?
Fourth, your point about insurance is well taken, and I’d never deny the need to bring in a broker in an atypical transaction. But a broker should be like a lawyer – paid an hourly rate for the work they actually do. I wouldn’t give a lawyer six percent of my estate to write my will. Why would I give a broker six percent of my home’s value to sell my house?
I think it is interesting that so many Realtors highlight the “marketing” side of their business as justification for a 6% commission. Once a savy business develops a workable nationwide marketplace for homes, accessible to owners, much of that justification will disappear (good or bad market). Another justification for the commission is the somewhat complicated paperwork and legal issues involved in even a “simple” real estate transaction. But when marketing is taken out of the Realtor equation, I would rather pay $200 or even $300 an hour for an experienced real estate attorney to review contracts, and even negotiate on my behalf. Even 10 hours billed by an attorney–and that is a lot of time–would be much less than 6% or even 3% of most residential real estate transactions. (i.e. $2,000 to $3,000 rather than $12,000 of commission on a $200,000 home).
What may be really interesting about potential inroads into the real estate marketing niche is that as it reduces transaction costs, the market real estate market will become more fluid. Sellers will have more room to adjust prices based on personal needs and market conditions, and will have more reason to shop for competitively priced real estate services.
I think many people here are missng the potential of what Zillow.com has done and will likely do in the future. I am an engineer and a licensed Realtor. First, Zillow is the first tool to give consumers easy, free access to to information that has only been easily accessible by real estate agents. Consumers now have a powerful tool to figure out the value of any house. They can now be as educated about CMA data as a real estate professioal. This was the major value add of the agent value proposition. Second, the database is nationwide, not limited to counties like MLS information. This fragmentation is the integral to real estate brokers keeping their power. If you want access to the MLS, you must play by the MLS rules for that county. Third, Zillow is the first tool Ive seen that attempts to graph the price curve of an individual house. Before, published data aggregated by city, zipcode, etc. It should be interesting to see the psychological impact Zillow telling a homeowner THEIR house has gone down (or up) in value. The first person I showed Zillow data to said he couldn’t show this data to his wife because she would freak. Their house has been sitting a long time on the market. Nobody has told them directly their home has gone down in value (agents avoid this conversation). And lastly, Zillow is a national valuation and CMA database. They are one easy step away from creating a national free or low cost MLS system open to the consumer. Zillow can charge a low fee for any one to create an MLS-like for-sale listing open to the nation. Once a Zillow national database becomes popular, all the Realtors who use the fragmented Reltor-owned MLS systems will be forced to also put their listings on Zillow. If they don’t their client can easily put it on Zillow themselves. The power of the traditional real estate industry will then be broken. Real estate fees would then tumble. I predict Google or E-Bay will soon pay a huge amount of money for Zillow.
I agree we should get rid of realtors, and I think we should take it a step further….why do we have to pay for doctors, dentists, computer gurus, massage therapy, nail painters, garbage collectors, electricians, house cleaners, lawyers, bakers, bill collectors, cable installers, phone technicians or any other thing that people so-called specailize in. I can do all of those things myself and damn their overhead anyway! Power to the people, people!