Though the emergence of marketplaces and a focus on data-driven decision making has transformed many industries, real estate has been relatively slow to adopt technology. Companies like AirBnB and WeWork have successfully capitalized on “access over ownership” trends, but when consumers buy and sell houses, transactions still require massive amounts of paperwork, large transaction costs, and an inordinate amount of time. In a standard buying process today, both sellers and buyers work with agents who help them navigate the complicated processes of listing & pricing, arranging financing, and negotiating offers, and closing the transaction. Agents work on a commission basis, and the commission is typically 5% – 6% of the sale price, split between the buyer’s and seller’s agent. Many people argue that this low-tech, highly agent-dependent model has persisted because these are big ticket, emotional decisions that mean buyers/sellers value quality over convenience. On the seller side, because a large percentage of the owner’s net worth is tied up in the house, sellers tend to be laser-focused on price maximization, even if that comes with a long, time-consuming sales cycle. On the buyer side, a purchase tends to be the largest purchase a consumer will make and one they’re unlikely to repeat, so “discount” tends to be associated with “low quality,” rather than a clear benefit.
Zillow’s Strong Position
Regardless of these market dynamics, there are many entrants attempting to change the way residential real estate is bought and sold, and Zillow is well-positioned to win this market. Zillow launched in 2006 as a basic marketplace for real estate information. When they released the Zestimate, an algorithm that estimates home prices, it was the only website available with such information. And they ambitiously decided to assign a value to every home, which instantly attracted users to their site who were interested in the value of their own homes, their friends’ homes, and homes in aspirational neighborhoods. This transparency created a huge amount of value in the real estate market, and paved the way for Zillow to become one of the largest housing marketplaces in the industry.
Despite the fact that non-brokers were typically unable to access the housing supply aggregated by multiple listing services (MLSs), the Zestimate attracted so many consumers that brokers frequently opted to list housing supply on the Zillow marketplace in order to generate leads. Ultimately, MLSs granted Zillow direct access to supply as the value of Zillow’s user base grew. For years, Zillow has created value for consumers by providing easy access to accurate information about rental and purchase properties, and has created value for real estate agents as a lead generation tool. Advertising was Zillow’s primary revenue source. In 2018, however, Zillow announced entry into a new market – buying and selling homes directly. Given their strong hold on the buyer side of the market, Zillow’s push to corner the seller side makes sense.
With the new Instant Offer program, Zillow provides sellers with a direct offer to purchase their house in its current condition. The immediacy of the offer completely changes the way consumers think about selling their houses. Rather than weighing what renovations are needed to increase home value, setting a price, and expecting a long negotiation process that requires consideration of many varied, hard-to-compare offers (cash purchase v. financing contingencies, appraisals and inspection, different closing timelines, etc), the seller walks away immediately with a deal, leaving Zillow to compare competing buyer offers at a later date. It becomes much easier to coordinate the timing of selling one’s current house and purchasing the next, and much clearer early in the process how much money the seller can expect from the transaction for use in their next purchase. After purchasing the houses, Zillow makes small renovations, and then lists the houses the marketplace. Because of their scale, Zillow is able to make these necessary touch-ups at much lower rates than individual sellers would be able to. Buyers also benefit from transacting directly with Zillow rather than individual sellers: the houses they’re viewing are already vacant, ensuring faster, more predictable closing timelines.
Skeptics of this model expect that sellers will ultimately pay a large fee (possibly double the traditional 6% commission) for these services, and, as a result, Instant Offer will appeal only to a niche population that values convenience and speed vastly more than price. The CEO of Redfin, another player in this space, notes however that “Homeowners are extremely price sensitive. They try to figure out whether they get more money if they sell it themselves, than if they sell it to an institutional buyer.” Given this fact, it’s clear that Zillow will only win in this market if they provide the best prices to sellers. Given the amount of transaction data on their platform, Zillow is well positioned to make competitive offers. Short term, Zillow’s profit on these houses will likely come from their ability to touch-up houses at low cost due to scale, their cost of capital for holding the houses, and their inventory turn. Zillow’s immense database of housing trends should help them locate properties that can easily be renovated for sale and identify growing or declining neighborhoods. Longer term, as consumers adjust to this new model, I would expect to see fewer agents facilitating these transactions. Even if Zillow were to share the commission savings with the seller, that would represent significant revenue opportunity for the company.
There are likely to be two sets of losers as the real estate market shifts. Firstly, other startups in the space, such as Opendoor, will lose out given Zillow’s brand reputation. Opendoor entered this market in 2013 with a model similar to Zillow’s Instant Offer program. Despite some fear among consumers to conduct such high dollar transactions online and in near real-time, Opendoor has successfully raised funding, and expects to be operating in 50 markets by 2020. Despite the fact that Opendoor’s value creation and capture model are very similar to Zillow’s, they are likely to suffer as Zillow enters this market. In contrast to Opendoor, Zillow’s history with Zestimate and their marketplace means they have access to an inordinate amount of data on housing transactions and trends. They have also built a brand name that consumers and agents alike trust. Zillow’s reputation gives them a huge advantage over Opendoor, assuming they are able to offer comparable service. Though sellers will likely index towards the highest offer price when picking which platform to sell their house to, quality and trust will be central to a buyer’s decision. And, the size of Zillow’s shopper base likely means they’ll be able to sell housing inventory more quickly than Opendoor, allowing Zillow to offer more competitive prices due to lower inventory holding costs.
Long term, real estate brokerages and real estate agents will lose. To date, entrants like Zillow and Opendoor have positioned themselves as complements to agents rather than replacements. So far, rather than working to improve service offerings to secure their position in the transaction chain, real estate agents and brokerages have dismissed new entrants, claiming they’ll never be able to replicate the value created by agents’ personal touch, local expertise, and trust that agent relationships bring. Though Zillow and Opendoor have aligned with agents for now, by treating these platforms as tools rather than competitive threats, agents confirm their fate. Housing transactions might be the largest, most complex deals a consumer makes, but over time, it is hard to imagine that a long, opaque process relying on agents’ restricted access to listings, subjective “local insights” and individual negotiation skills will produce more successful outcomes than a fast, transparent, data-driven marketplace. As these “tools” become commonplace and illuminate the “rules of the game”, agents’ expertise will no longer be needed.
 “Modernizing Real Estate: The Property Tech Opportunity,” Valley Voices, Forbes, February 22, 2019, https://www.forbes.com/sites/valleyvoices/2019/02/22/the-proptech-opportunity/#656f08e58264, accessed February 27, 2019.
 “How Real Estate Commision Works”, Redfin Website, January 2019, https://www.redfin.com/resources/how-much-is-real-estate-agent-commission-buyer-seller, accessed February 27, 2019.
 “Disruption is Not Coming to Real Estate,” Homebloq, November 27, 2018, https://homebloq.com/blog/2018/11/27/disruption-is-not-coming-to-real-estate, accessed February 27, 2019.
 John Cook, “Zillow at 10: Rich Barton, Spencer Rascoff, and Lloyd Frink on the rise of the real estate media titan,” GeekWire, Februrary 4, 2016, https://www.geekwire.com/2016/zillow-10-years/, accessed Februrary 27, 2019.
 “Zillow, Aggregation, and Integration,” Stratechery, April 16, 2018, https://stratechery.com/2018/zillow-aggregation-and-integration/, accessed February 27, 2019.
 Taylor Soper, GeekWire, May 17, 2018, “Zillow’s next $1B business? Online real estate giant makes risky bet buying and selling homes,” https://www.geekwire.com/2018/zillows-next-1b-business-online-real-estate-giant-makes-risky-bet-buying-selling-homes/, accessed February 27, 2019.
 Matthew Lynley, “Opendoor raises $325M to make buying and selling homes a near-instant process,” Techcrunch, June 13, 2018, https://techcrunch.com/2018/06/13/opendoor-raises-325m-to-make-buying-and-selling-homes-a-near-instant-process/, accessed Februray 27, 2019.