Rich man, poor man

Rich Barton wants Zillow to have a bigger piece of the homebuying pie. Where does that leave agents?

Apr.April 19, 2021 07:30 AM

Rich Barton

The lights were dimmed. Soft music played in the background as Dan Levy, clad in paisley pajamas, parted his lips and tossed his head. “I need a new fantasy,” he moaned.

“Are you in your 30s? You need something new,” a satin-clad woman purred in reply. “The pleasure you once got from sex now comes from looking at other people’s houses. You need Zillow.”

Rich Barton’s company had made it to “Saturday Night Live,” in a skit that went viral. Acknowledging the pop culture milestone, Barton tweeted: “Wait. Have we been marketing @zillow wrong all these years???”

It would be hard to make that argument. Last year, Zillow’s mobile apps and websites racked up nearly 10 billion views, cementing its status as the ultimate destination for real estate porn and a cash cow whose stock price has more than quadrupled in a little over a year. But for Barton, a serial entrepreneur who’s made a dent in three major industries over his career, that isn’t enough. His return to the helm of Zillow in 2019 was spurred by an even loftier goal: Expand the firm’s purview beyond voyeurism and search and turn it into the central nervous system of the homebuying experience.

With more and more parts of the real estate transaction going online, Barton is setting Zillow up to capture a bigger piece of the action, from the buyer’s initial search and home tour to mortgage origination, closing and reselling.

In 2018, the real estate giant started buying homes directly from sellers through Zillow Offers, its venture into iBuying, a capital-intensive, high-risk business with unproven economics. Over the past two years, it has spent at least $600 million on acquiring businesses that expand its product mix. The  goal, Barton says, is to turn homebuying into a one-click trade-in nirvana.”

But that nirvana for consumers could be limbo for hundreds of thousands of residential agents, who have come to depend on the site for leads and have for years been its largest source of revenue. Will Zillow’s latest moves see them become the new decade’s travel agents, put out to pasture by technology?

Rodent rage

Six feet tall and permatanned, Barton has a preppy haircut and plastic-framed glasses that give him the look of a “1950s sitcom dad,” as the Atlantic once put it. He goes barefoot in the office, is a Burning Man veteran and says inspiration strikes when he’s surfing or snowboarding.

Other CEOs might quote from the Harvard Business Review; Barton, 53, peppers his talks with references to “Dilbert” and “Bill and Ted’s Excellent Adventure” and draws heavily from “The Wizard of Oz” (“You gotta have heart”) and Greek mythology (“Great expectations beget great results”).

Raised in New Canaan, Connecticut, Barton graduated from Stanford University and did a consulting stint before landing at Microsoft in 1991. Frustrated by his own experiences as a road warrior constantly coordinating trips through a travel agent, Barton pitched Bill Gates on the idea of selling travel online.

“I wanted to jump through the phone, turn the screen my way, and do it myself,” he said in a talk at his alma mater in 2017. “Putting barriers between people and information is unsustainable in the world of technology.”

Gates let him run with it, and Barton built Expedia within Microsoft. Expedia ultimately spun off in a 1999 IPO, at which time it had $70 million in revenue. In 2003, Barry Diller’s USA Interactive bought it for $3.6 billion.

After a sabbatical in Florence, Barton returned to Seattle and launched Zillow with Lloyd Frink, a fellow Microsoft and Expedia alum. Again, Barton homed in on information transparency, this time in the housing market. They were so stealth in the early days that Zillow’s first 35 employees were hired without knowing what the company did.

“We were begging for meetings, not knowing what he was going to do next,” recalled Bill Gurley, a general partner at Benchmark Capital, which participated in Zillow’s $26 million Series A in 2005. (Barton joined Benchmark as a venture partner that year, a role he kept until 2018.)

In 2004, Zillow started testing a digital auction concept for homes. But the startup limped along until 2006, when the team dreamed up the Zestimate, a tool that put a price tag on every home. The day it went live, users crashed the site, which was down for more than a day.

The Zestimate “started out fairly inaccurate, but it didn’t matter, Barton recounted on the “Invest Like the Best” podcast in October. “It was provocative.”

Glassdoor was born in 2007, after Barton accidentally left Zillow salary information on the printer. The document was rescued by his assistant, but he and Robert Hohman (who also worked at Expedia) dreamed up a site where people could intentionally share details about the culture and finances of their workplaces. He sold that company for $1.2 billion in 2018.

On the podcast, Barton broke down his now-renowned “power to the people business strategy.

“A regular person armed with a connected PC thats plugged into the internet was going to storm the best deal, was going to be armed with a weapon to tear down every wall that separated that consumer from information that may have heretofore been withheld from them by industry people who made a living based on withholding that information, he said. “It was pretty clear that that was going to be busted.

That philosophy has been lucrative for Barton, who became a billionaire after Zillow’s stock soared last year. (In December, he and his wife, Dr. Sarah Barton, pledged half of their fortune to charity.)

Barton may empower consumers, but he knows how to squeeze rivals. Trulia co-founder Sean Black described Zillow’s successful move to acquire his firm for $2.5 billion in 2015 as: “They were more ruthless than we were.”

Its a philosophy Barton has expressed in his own colorful terms.

“Don’t swerve just because there’s a squirrel in the middle of the road,” Barton said at a Tech Alliance lunch in 2013. “My dad used to say, kill the squirrel.

Wartime CEO

In November 2018, Zillow shareholders were not a happy bunch.

Over a two-week period, the stock plunged 30 percent, in part because investors feared the housing market was softening. That’s when Barton, already the biggest shareholder, bought $19.2 million worth of stock, betting that better days were ahead.

Shareholders werent just worried about the market. Since 2016, Zillow’s revenue growth from agent advertisers has slowed. (During the fourth quarter of 2018, Premier Agent revenue grew 11 percent, compared to 32 percent in 2016.) The emergence of iBuyers in the market posed what Barton called an “existential threat.”

In February 2019, Zillow announced that Barton would take over as CEO, replacing Spencer Rascoff after nine years. Publicly, the company touted the “triangle of leadership” model embraced by Barton, Frink and Rascoff, with each taking turns as the company quarterback. But a source with knowledge of the handoff said it was “painful” for Rascoff.

“There are always little things from the outside that you ask yourself, ‘Would I have done that little thing or not?’” Rascoff told TRD in November. “But the overall strategic direction I agree with.”

If Barton was uninspired by the drudgery of operating a steady business, he embraced the role of building something new.

“I really, really like to lead teams through moonshot-type missions,” he told Geekwire at the time.

The mission wasn’t all about iBuying. Barton later explained that he wanted to build the “Microsoft Office for real estate” by adding title, escrow and moving services. “We think the real consumer magic … is when all the disparate, complex, expensive elements are brought together into an integrated, seamless package,” he told Geekwire.

In 2018, Zillow got into the mortgage business after buying Mortgage Lenders of America for $65 million. That year, it also got brokerage licenses; in 2020, Zillow said it would put the licenses to work by hiring agents to represent the company on iBuying deals.

This February, it announced a $500 million deal to buy ShowingTime, a home tour scheduler.

Barton also updated his C-suite. In February, President Jeremy Wacksman was promoted to chief operating officer and Susan Daimler, who oversees Premier Agent, was named president.

Soon after, Zillow said it would use its Zestimate to make offers on homes. Some balked, given the controversy around the notoriously flawed appraisal tool. (In 2016, Rascoff sold his Seattle home for 40 percent below its Zestimate; in 2017, it even launched a two-year contest to improve the Zestimate, offering the winner a $1 million prize.)

But on Twitter, Barton made it seem like using the Zestimate this way was Zillow’s plan all along. “Almost 15 years to the day the Zestimate launched & subsequently crashed @Zillow’s servers,” he wrote. “We’re now a small, but important step closer to realizing the Big, Hairy, Audacious Goal (BHAG) … of putting a real price on every rooftop and enabling home shoppers to magically fly over neighborhoods and see those prices.”

Wall Street sweetheart

Wall Street has been willing to be patient with Barton. John Campbell, a Stephens analyst, likened Zillow’s pivot to “turning a battleship.”

Barton “has a history of founding and building successful companies,” he wrote in a research note when Barton returned as CEO.

During the third quarter of 2020, shareholders were rewarded for their faith when Zillow turned a profit for the first time in three years.

Eric Jackson, of hedge fund EMJ Capital Group, has said Zillow could be one of the next FAANG companies, an acronym referring to Facebook, Amazon, Apple, Netflix and Google.

“He knows how to just keep cranking on the business to get the most out of it,” he told Bloomberg.

In February, Deutsche Bank analyst Lloyd Walmsley published an influential 53-page report upgrading the stock to buy.

“Zillow may be on the cusp of actually becoming a true marketplace for residential real estate,” he wrote. The same month, analysts at Canaccord set a price target of $220, up from $52 in June 2019. Zillow stock is currently trading around $139 per share, up from around $39 a year ago.

Barton further fleshed out Zillow’s vision on the October podcast.

“Look, I’ll give you a fair price for your house, he said. “I will handle the renovations you’re going to be required to do before you sell it anyway. You can pick the date you move; I’ll help you finance it. You can line up your buy transaction with the sell transaction so you don’t have to move into your mother-in-law’s house for three months while you do it.

But Zillow’s path to reinventing homebuying is crowded with some familiar names.

Last month, iBuyer Offerpad said it would go public in a $3 billion deal with a blank-check firm sponsored by Rascoff. Instashowing, a tiny startup that’s taking on ShowingTime, raised $1.5 million from Trulia co-founder Pete Flint as well as Zillow veterans Greg Schwartz and Carey Armstrong, who founded mortgage startup Tomo; Austin Allison, who co-founded second-home startup Pacaso with Rascoff; and Justin LaJoie. (See related story on page 32.)

As the incumbent giant, Zillow has also become the target of skeptics.

“Big Short” investor Steve Eisman has called Zillow Offers a ticking time bomb. “In a recession, you’re going to get your head handed to you,” he told TRD in 2019.

Trulia co-founder Black, who has since launched home finance startup Knock, said iBuying works for sellers who are willing to take less money for a quick and certain sale. But he argued that sellers and iBuyers are fundamentally at odds.

“The buyer’s goal is to get the house as cheaply as possible,” he said, “and the seller is out to get as much as possible.”

Since going public via SPAC in December, Opendoor’s stock dropped nearly 35 percent. Shares are down 47.7 percent from a high of $39.24 on Feb. 11.

Zillow competitor Realtor.com has made a point of avoiding iBuying. “Our aim is to be a genuine digital marketplace, not to have any vested interest that might complicate that,” Robert Thomson, CEO of News Corporation, Realtor.com’s parent company, said at a Morgan Stanley investor conference in March.

“We’ll leave the unkempt gardens and the ruptured paving stones to Zillow,” he added, “because the revenue may seem higher, but actually, it’s not really revenue, it’s turnover.”

No agency

Zillow has long played the bogeyman in brokerage circles.

By putting listings online in the early aughts, it sidelined agents from the home search. Many listing agents despise Premier Agent, which they claim unfairly steers potential buyers to agents who advertise on Zillow’s platform. In 2017, when Zillow subsidiary StreetEasy rolled out Premier Agent, it was lambasted — and briefly boycotted — by several prominent New York firms. And the basic premise of iBuying, in which the iBuyer purchases a home directly from the consumer, freezes agents out of the transaction.

In September, when Zillow said it would become a full-fledged brokerage, some agents believed it was the final straw.

“I’ve heard agents today saying, ‘Well, why am I buying leads from my competitor?’” Hoby Hanna, CEO of Howard Hanna, said at the time. Bill Raveis, founder of William Raveis Real Estate, likened Zillow ads to “dealing with the devil.”

Zillow rivals have stoked those fears. In January, CoStar Group CEO Andy Florance dismissed the idea that his company — which has been edging into the residential sector — was going after Zillow.

We are not Zillow’s competitor,” he told Inman. “The residential agent is Zillow’s competitor.” He cited Barton’s “power to the people” approach, saying, “If you want to understand what someone’s playbook is, you can look at what playbook they’ve used in the past.”

Zillow has taken pains to counter that narrative.

In a nearly four-minute video circulated to agents in September, Errol Samuelson, Zillow’s chief industry development officer, used the word “partner” or “partnership” nine times to describe Zillow’s relationship with brokers and homebuilders.

“Let me address one thing right off the bat,” he said. “We are not recruiting agents from other brokerages.”

In fact, if sellers reject an offer from Zillow, the real estate giant connects them with a Premier Agent to list the home on the open market.

In high-end markets, agents’ fear of being displaced is less pronounced.

Zillow may be able to value cookie-cutter housing, but it’s unable to apply machine learning to one-of-a-kind homes. People who are shopping for a $25 million estate still want a trusted advisor to guide them through the sale. And as for competing to hire top agents, the best brokers can earn far more as independent contractors than salaried agents at Zillow.

Most compelling, at least for now, is the fact that one-third of Zillow’s total revenue — roughly $1 billion — still comes from agent advertising. Alienating agents would jeopardize that business, said Nick Bailey, chief customer officer at RE/MAX, who was previously head of industry relations at Zillow. (“I felt like I was a translator,” he said of the job.)

Bailey insisted that Zillow is not going head to head with brokerage firms. “Can you buy advertising from me? No,” he said. “We’re in a different business, but we happen to serve the same consumers and customers.”

Not all agents are reassured.

When Zillow said in February that it planned to buy Showing Time, some agents had a “complete meltdown,” said Steve Murray, a longtime industry consultant. He said agents feared that by owning ShowingTime, Zillow would have access to their customer data and could go after their business.

“Everyone always thinks there is an ulterior motive,” said Rob Hahn, managing partner of 7DS Associates, who has advised Zillow on PR.

Like Bailey, Hahn is unmoved by those who say Zillow intends to replace agents altogether. But he acknowledged that there’s something confusing about Zillow pursuing iBuying, which requires massive amounts of money but yields low margins, even as Premier Agent generates $1 billion a year.

But Gurley says that ability to self-disrupt — to “lead a company as a CEO and also … think strategically and think like an investor — is Bartons defining talent.

Black, of Knock, believes that agents who advertise on Zillow are funding their own demise.

“Slowly, the economics will get worse for them,” he said. “It’s like boiling a frog in water. It’s slow and not obvious.”


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