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What Are Zillow's Next Moves?

Nov 5, 2020 12:15:00 AM

Now that Zillow has entered the brokerage industry, what’s next?

As many of you already heard, Zillow announced that they would start employing their own agents to handle the homes they are buying and selling. In their view, it makes sense to better control the service they provide and lower the costs of this service given that, as of last quarter, they were still losing significant money on each deal they bought and sold.

 There are others that speculate that this is their first foray into full-blown brokerage. While it’s likely true, we are curious about their next moves. Why wouldn’t they take control of the consumer traffic they generate and access a larger piece of the commission revenues through controlling the process using their own agents? Essentially, it’s what Redfin already does and, of course, lead generation and the use of lower-cost inside sales agents is exactly what large teams are doing. While Redfin has yet to show that they can make a profit, the team financials we’ve seen show that well-run teams have far larger margins than most brokerage firms. 

Incumbents Still Have Advantages

For some, this sends a shiver through the market, as any new forms of competition do. However, incumbents still have some advantages. The first is that nearly two-thirds of all consumers now use an agent because they know one or they are referred to one. And many of these housing consumers use their own agent even after visiting websites like Zillow, Redfin and Realtor.com. Consumers thus far seem to prefer a personal relationship with their agent as opposed to one employed by an online brokerage.

Another point is how to scale the business. Redfin’s growth in closed transaction sides has slowed over the past two years and while the number of teams in our rankings has grown exponentially over the past few years, their average size in terms of closed transactions has not grown that much. Yes, there are a small number of teams that have grown quite large, but these are in the minority. Zillow has huge market share in online visitors and can direct hundreds of thousands of leads to their captive agents, or even those to whom they only refer the business. Their skills and resources in these areas are well established.

Finding, training and developing their own agent force is no small undertaking. Generating higher conversion rates and retaining great agents is not guaranteed. We do think Zillow could exchange their ad business model over time and switch to their own agent force or referral-based relationships and generate more revenue and even potentially higher capture rates on other products such as mortgage and other settlement services. It’s all possible, but not guaranteed. 

Zillow and others like them present formidable new competition. They have some equally formidable hurdles to achieve significant success. Getting there will take time.

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