Is Zillow “Uberizing” the Housing Market?

Zillow has a growing constituency interested in their continued evolution.  This group includes real estate agents, sellers and buyers of homes and investors such as hedge funds.

While Zillow’s Premier Agent Program remains its cash cow, dramatic changes are inexorably altering the program and the company.  Let’s begin with the basics. Premier Agents pay Zillow for their share of voice, determined by an agent’s budgeted monthly spend as a percentage of the total monthly budgeted spend of all Premier Agents in that zip code.  The cost per impression is dynamic, rising and falling as demand for impressions ebbs and flows.

In the last few years, Zillow set out to tweak the Premier Agent Program, for example, qualifying leads by only turning them over to agents after the prospect confirmed he was actively looking for a home, and confirming that he was not working with an agent.  Feedback from the Premier Agent community was swift; while lead quality increased, this benefit was more than offset by a sharp falloff in volume, accompanied by a spike in prices. Seeking to address PA concerns, Zillow eliminated some screening questions, while selectively capping costs. 

Confronted by issues such as increased churn, Zillow ultimately concluded that tweaking its model wasn’t enough.  Perhaps an entirely new model was needed. Zillow didn’t have to look further than OpCity, a competitor who charges for leads on a contingent basis, only the leads have been curated, and re-characterized as referrals.  OpCity , collects its fee only if and when a transaction closes. The model was brought into sharper focus when Move/ purchased OpCity. Subsequently, adopted OpCity’s contingent model. With the contingent model gaining traction and profile, Zillow decided the reward on the back end might just merit the up front risk.  

So, ploughing ahead, Zillow introduced its FLEX Pricing Model in selective markets, paying heed to the contingent model.  Using FLEX Pricing, Zillow provides Premier Agents with leads at no upfront costs. Premier Agents are responsible for a performance fee, earned only after a real estate transaction closes.  While the percentage of the commission charged is considered steep by some, the lack of risk holds the potential for broad appeal within the Premier Agent community.

While material, these and other changes to Premier Agent pale in comparison with the company’s recent emphasis on its iBuyer initiative, Zillow Offers.  Home Sellers in select markets can request a no-obligation cash offer from Zillow. Zillow touts the program’s ability to address the hassle and uncertainty that often accompany the sale of a home.  According to Zillow, people are ready for a simpler way to buy and sell homes; consequently, Zillow plans to “Uberize” the process.

Zillow envisions buying 5,000 homes per month within the next 3 – 5 years, with additional revenue from ancillary services such as mortgages, title and escrow, moving and more.  As Zillow has discovered its new business model won’t come without problems.

Zillow Offers is the company’s most recent version of the iBuyer model, with the earlier version branded “Instant Offers”  The Instant Offers model featured a group of fifteen large investors making cash offers. Conversely, Zillow will purchase your home under the Zillow Offers program, the company’s new model.  There are many other challenges including unknowns, such as the impact of a downturn in the housing market on already thin margins. Moreover, competitors are flocking to this new way of selling homes.  Companies such as RedFin Now, Offerpad, Opendoor, Knock and others are all vying for a piece of the iBuyer market.

We will follow up in subsequent posts, taking a deeper dive into prospects for Zillow’s new business model and the potential impact on the company’s prospects and stock.


Author: Randy Airst at Exceedant and Team.

Based in the Greater New York region and Tampa, Florida region of the USA, The Exceedant Group is an asset management and financial services firm. Exceedant specializes in private equity, credit and hedge fund investment strategies. Exceedant’s clients have included NYSE and NASDAQ traded companies, hedge funds, private equity firms, commercial real estate firms and other entities.

Randy has been involved in asset strategy and management with clients/investors for many years at Exceedant and its predecessors.

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