Drawing agent ire, Zillow bets on brokerage to deliver profits

“I’ve heard agents today saying, ‘Well, why am I buying leads from my competitor?’”

Zillow CEO Rich Barton (JD Lasica via Flickr; iStock)
Zillow CEO Rich Barton (JD Lasica via Flickr; iStock)

At the risk of alienating agents, Zillow is also banking on them to reach an elusive goal: profitability for iBuying.

Starting in 2021, Zillow said it will use salaried agents to purchase homes through Zillow Offers instead of relying on local brokers to represent it in those deals. To start, the agents will work with homeowners in Atlanta, Phoenix and Tucson, Arizona who want to sell their homes to Zillow.

“Many customers found the handoffs and the back-and-forth between the Zillow employees and the agents to be confusing,” Errol Samuelson, Zillow’s chief industry development officer, said in a video circulated Wednesday to brokerages.

Cost was also a concern. By relying on outside brokers, Zillow was paying agents on both sides of the transaction. When you’re trying to buy low and sell at a profit, those expenses add up.

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Rich Barton (Credit: iStock)
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“The move should help Zillow improve unit economics on the [sale] of homes from Zillow Offers,” Deutsche Bank’s Lloyd Walmsely wrote in a research note Wednesday. With salaried agents, he said Zillow will also have more control over the customer experience, and it will be able to cross-sell its other products including mortgage and title insurance.

Since 2018, Zillow has poured money into iBuying, something CEO Rich Barton has called a “moon shot” opportunity. In 2019, Zillow bought 6,511 homes and sold 4,313, according to company financials. The business generated $1.4 billion in revenue in 2019, up from $52.4 million a year prior.

But Zillow loses $6,939 per home, according to the company’s latest quarterly report. In 2019, its iBuying losses topped $300 million.

“In order to operate such a business at scale, it will be essential to drive as many costs out of the process as possible,” according to Yousuf Mafuda, an analyst at Morningstar.

Wall Street approved of Zillow’s pivot on Wednesday, with the company’s stock hitting a record $100 per share before closing at $96.32. It was up more than a dollar on Thursday morning.

Zillow stock is trading nearly five times higher than it was in early March, when it bottomed out at $20 per share. On Wednesday, several analysts raised the company’s price targets, suggesting they think its true value is higher than the current share price.

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Needham & Co. analyst Brad Erickson called it a “watershed moment” for Zillow, and raised the company’s price target to $125 from $110. In particular, he cited Zillow’s announcement, also on Wednesday, that it planned to streamline its back-end data feed. Until now, Zillow has relied on a patchwork of data-sharing agreements with MLS systems and brokerages. As a brokerage itself, Zillow now plans to join the National Association of Realtors and local MLSs and will be able to accept their data feeds.

“It allows direct access to MLS data for the first time, which could further sew up Zillow’s position as the digital winner in U.S. real estate,” Erickson wrote.

But among traditional brokerages, the reaction to Zillow’s pivot was swift and largely unforgiving.

“We always knew there would be a day that Zillow, on some level, would decide to create a brokerage firm,” said Hoby Hana, president of Howard Hanna Real Estate, a family-owned firm with $22.5 billion in sales last year.

Hana said his company stopped all corporate advertising with Zillow three years ago as a result of its Premier Agent program. “We don’t look at a partnership with Zillow as a long-term, sustainable way to grow your business,” he said. “I’ve heard agents today saying, ‘Well, why am I buying leads from my competitor?’”

Some have cautioned that Zillow’s cost-savings could come at the expense of lucrative agent ad dollars. Last year, Zillow generated $923.9 million in revenue from Premier Agent, up from $898.3 million in 2018. Premier Agent accounted for 69.1 percent of Zillow’s revenue that year; last year, it accounted for just 34 percent as Zillow pivoted to iBuying.

Zillow has taken pains to reassure brokers they would not be cut out of the equation.

“Let me address one thing right off the bat. We are not recruiting agents from other brokerages,” Samuelson said in the video message to brokers. Instead, Zillow will ask current employees who work on Zillow Offers to get licensed.

Not everyone was convinced.

Bill Raveis, founder of William Raveis Real Estate, said he suspected agents would vote with their pocketbooks rather than advertise with a perceived competitor.

“Will agents keep using Zillow? That’s like dealing with the devil,” Raveis said. “They’re trying to get revenue from agents, but not supporting agents … Eventually agents will get upset with that.”

Morningstar’s Hafuda agreed. “The conflict inherent to the change is difficult to avoid,” he wrote. “It is clear that [Zillow] is willing to risk its traditional business in pursuit of the iBuying opportunity.”