Each day, Zillow’s market capitalization ($4.8 billion today) creeps closer to that of real estate giant Realogy with a market cap of $5.51 billion. One year ago, it was one-third the size of the real estate brokerage and franchise giant.
Compared by profits and by revenue, Realogy dwarfs Zillow. Measured by consumer brand, growth in revenue and its fast-growing agent count, the online real estate media company’s hefty valuation makes more sense.
Screen shots of Zillow and Trulia home pages.
And the valuation gap between the two well-managed companies could shrink to zero and begin to tilt the other way if Zillow adjusts its business model, fills out its consumer offer and begins chasing the home seller and a piece of the real estate commission pie. For now, that is not what they are doing.
Real estate advertising dollars represent about $10 billion to $12 billion in annual spending. Commission dollars are closer to $65 billion-plus each year. Realogy gets to chow down on that bigger pie by charging its broker members a franchise split, which is a cut of commission dollars.
Realogy has a high margin and scalable business. Selling ad units and leads to agents is much trickier.
Spencer Rascoff, CEO of Zillow, said on a quarterly earnings call: “We think that agents will view online impression-based advertising in the same way they have traditionally viewed lead referral economics, which is to say that they’re willing to pay up to 40 percent of their commission to the channel that provides them with a customer.”
The company freaked out when an Inman News reporter wrote that Zillow was shifting its ad model to a referral scheme. While the reporter probably went too far, some sort of referral charge is where I believe things are headed, whatever you call it or however you parse it. But it is more complicated than a business model.
We earned $10 million of our revenue from referral fees (we called it success fees) at HomeGain, the online startup company that I sold in 2005. To earn our 20 percent referral fee directly from the agent, we built a consumer-focused anonymous service platform for home sellers to filter agents and negotiate commissions. We built our lead funnel from homeowners (selling or not) by offering the first consumer home valuation tool. What fun, and controversy. In the end, however, most of our revenue came from agent click buys, so that became our focus — my vision was diverted by opportunity.
But the current discussion should not be about revenue models, it is about who can fundamentally change the old ways of doing business. For now, everyone is focused on marketing and customer acquisition, including Zillow, Trulia, realtor.com, Homes.com, etc., not the overall consumer flow from home search to closing. Regrettably, the identity and the reality of the industry has always been about marketing, sales, recruiting and advertising. The old-school model continues to win, with the portals playing a role in the cabal.
Franchises and brokers acquire home sellers with sheer brute, recruiting hundreds of thousands of agents who chase millions of listings. To achieve its goals, many brokers hire every breathing, walking and talking agent — an expensive system that often fails the consumer. Add that to the fact that no single party controls the quality of the transaction from end to end and we are left with one messy cow pie.
Moreover, Zillow and Trulia do not discriminate between good and bad agents when they sell ad units. They have figured out the front-end consumer experience of home search, but everything can break down when the buyer and seller are kicked around like a soccer ball from vendor to vendor and get stuck with a low-performing or incompetent agent. That is why consumers end the marathon with a bitter taste about the industry.
Regrettably, good agents must carry around this crummy industry baggage.
We defend the system because many people get the house or the home price that they want. What a delusion.
(In fairness, the big portals are adding tools for searching and finding recommended agents.)
But more change is needed, and opportunity and lighter technology will drive it. The company that offers a complete and superior consumer platform will have valuations more like Uber and Airbnb — $10 billion today and rising.
The winner will present an integrated combination of a stellar front end with a robust CRM and transaction management system on the back end, offering a connected, elegant and easy-to-use online place for buyers and sellers as they go through the rigorous 90-day workout.
The process will start with the sellers, who list their homes on this new platform where everyone will then be forced to gather — agent, buyer, lender and title — and where the transaction will live until closing.
The easy-to-navigate and seamless software solution will offer access to the best agents through ratings and rankings and a free mobile transaction management platform that acts more like Uber or Dropbox than the current system, which is more like the U.S. Postal Service.
Enough already, I have been preaching some version of this for 20 years. Should I shut up?
Brad Inman is the founder and publisher of Inman News.