As Promised to my Youtube viewers.
The rise of Zuul(ia)
July 29th 2014, a date that will live in infamy. Market leader Zillow announced the purchase of second place Trulia for a crap ton of money.
About 5 seconds later the real estate industry messed its pants. Hysterical shrieks rang out across the interwebs and the weeping and wailing of the damned rung up unto the heavens.
And about 5 seconds after that, the voices of calm and reason replied that all was well, and to settle down.
By the next day people were sending pictures of cats again.
So what does it all mean?
Zillow and Trulia (here after named Zuulia) calls themselves advertising companies, but they also sell information to Realtors. Zuulia lists properties on its website and encourages home buyers and sellers to use that information to assist in their real estate transaction. The information to the consumer is free, because it gets eyeballs on screens. It is effectively free to the Realtor to make sure their listing is placed on Zuulia, and that greatly helps the Realtor sell the home.
SO how does Zuulia make money? (They really don’t, take a look at their P&L’s). A large share of their revenue is from charging Realtors for information. In particular the names and contact information of the consumers that are accessing the listing information for free. (tanstaafl)
I can pay Zuulia a set fee and receive 10% of all new registered consumers in my zip code. The last time they pitched me it was an introductory price of $50. (I’ve seen other agents say they pay $500) So for $600 a year I get a list of people who have expressed some sort of interest in buying or selling a house. Now a quick Google Trends search of “85014” and “House for Sale” show that 96 people in June used that particular combo of search words. If for arguments sake we say that every person who ran that search wound up on Zuulia and registered that means for $50 I’d get 9-10 leads a month. Zuulia’s own numbers tell us that 2/3’s of those registered users are not represented by agents yet, so we can say that 6 of them are “good” leads.
These are not the Glengarry Glen Ross leads though. These are people who are just registering. And there are various reasons why they could be registering.
So we can see that Zuulia could make $6000 annually a zip code. There’s about 192 zip codes in Maricopa County so we’re looking at over a million dollars in sales.
That’s if they just sell the information.
But what they also do is they offer to sell me ad space on their website. So a small fee I can be a “Premier agent” and get my name and photo on the page when you are looking at a property. Hopefully if you want to learn more about this property, you contact me for the information.
Additional revenues to the company comes from ad space like any other website, which is why you can find a Cabela’s ad embedded on the page.
It’s a pretty good business model and seems to be performing well enough that investors are willing to buy and hold on to their stock.
What does the merger do?
Fundamentally nothing to begin with. They now control about 70% of the online market, with the reduction of competition they are now able to raise their prices. Which is a given. I would like to make the case that companies start merging and buying other companies when they discover they can’t grow their profits through normal expansion of services. But that conversation is outside of the scope of this article.
For you the consumer this means very little at this point. If you’re selling your house, it will appear on Zuulia within days of it being listed on MLS. And you don’t care how they buyer finds your property and long as it’s found. As for buyers, you’ll still have a site to search.
For agents, we can expect to see the prices for advertising on Zuulia go up soon.
But what does it mean for the future?
Well this is my “doomsday scenario” Put your tinfoil hats on guys it’s going to be a bumpy ride!
Sometime this week I saw a quote from the founder of Zillow, where he stated something to the effect of “We don’t want to replace Realtors, but I think they make too much money” If I can find that quote I’ll update this posting with it.
I think what will happen in the next 3-5 years is that after the merger is finalized and all the kinks are worked out you will see Zuulia partner with a national brokerage. Possibly Realogy Franchise Group with its brands (Coldwell Banker, Century 21, Sotheby’s, BHG, and ERA).
Zuulia will then offer sellers the chance to list their properties on the site for a flat fee. Say $5000. The transaction and listing will then be handled by the local partnered brokerage (LPB). Any buyers that found the listing on Zuulia will be sent to the LPB that will handle the showing and closing of the property. If the buyers do not choose to purchase that house, then the LPB now has a buyer to work with.
This business model already exists with HUD, Fannie Mae, Freddie Mac and banks that sell foreclosed properties.
The next step is the truly revolutionary part. They Don’t list the property on the Local MLS, and they don’t offer a co-broke to buyer’s agents. (translation: They don’t pay anything to other agents.)
This model also exists, it’s what New Home builders do to an extent.
The reason why Builders, Banks and Government agencies bother to list their properties for sale is that the local MLS is the only game in town. If you want to sell your house and it’s not on the MLS you might was well be offering it on Craigslist. And Zuulia gets it’s listings from the MLS.
But with this market share, and the majority of home buyers going online first before they even talk to an agent, Zuulia doesn’t really need to list the property on MLS, and therefore they don’t need to pay the buyer’s agent.
Little side note here. Buyers do not pay their agent. The seller’s agent pays the buyer’s agent out of the commission the seller’s agent earns facilitating the transaction. This is a contractual agreement the seller’s agent agrees to when they list the property on the MLS.
If you go into a New Home Builders office without your agent, the builder will not pay that agent anything. They are not obligated to. Even if you leave and come back with your agent, they are still not going to pay that agent. They will be happy to let you use that agent to negotiate the sale, because that spreads some of their potential liability onto your agent, but they aren’t going to pay them dime one.
So if we take the existing New Builder Model and apply it to the Zuulia LPB situation, we see where this is going. Instead of $6000 a zip code, we see a potential for much more. In the last year (7/31/2013 to 7/31/2014) there were 444 sales in the 85014 zip code. At $5000 a transaction you can see they don’t need much of the market share to make more money.
In return sellers get to feel like they are saving money. ($12000 is the average commission in 85014).
Now the buyers SHOULD see reduced sales prices since the seller no longer needs to price in the commissions into their sales price, but in Realty you’ll just see the seller trying to pocket the difference. Eventually this might even out, but there’ be problems with that…
If we take a look at houses that are “For Sale By Owner” (FSBO), you do not see those properties offered for 6% less than the market value. There is a reason we say FSBO = “For Sellers Benefit Only” so a good rule if you ever make an offer on a FSBO is to knock 6% off the top of your offer. Why not do this on a Zuulia listing? If I know you are listing your place for full price, and just paying $5000 to list it, I’m going to see how much of that extra $7000 I can get out of you. Now where is the seller getting their price? From Zuulia of course! And Zuulia is using normal (Realtor/MLS) sales to get pricing. It would be interesting to see how that plays out.
In a New Builder Model a buyer walks in unrepresented and they don’t know that if they brought their agent the Builder would pay that agent a commission. But they’ll still buy for full price. You won’t see a “3% off for using our agent” sign because of laws against that. They also won’t tell you all the extras and upgrades you can get by asking, and they won’t volunteer the knowledge that they can drop the sales price. Those perks only come out if they think they’re going to lose the sale. It’s just like buying a car, you’d haggle on the car, why not your home?
Will the Zuulia agent let you know these things? Can they if they also have an agency agreement with the seller?
Here is the most controversial thing I’ll say in this entire post. Reduced commissions will result in reduced service and less agents out there to choose from.
A real estate agent on average makes $39000 a year. And 80% of real estate agents make less then $40,000 a year.
How can this be?
Well there are a lot of “part-timers” and “Hobby Agents”, these people might only close one or two deals a year. They tend to have their license just for those clients that are generated by their networking circle. These numbers drag the average down.
Right now an individual agent can handle 2-3 buyers at a time, there are “Rock Star” agents that try and handle more, but there is only so many hours in the day, and so much agent to go around. Buyers only have certain times they can view properties, and those times tend to overlap. So if I’m showing the Johnsons on Saturday, the Smiths are going to have to wait till Sunday.
So if I’m an “average” agent making $39000 in 85014, I need to close somewhere around 8-9 deals a year. $6000 (half the $12000 commission) less 20%-30% brokers fees.
To close 9 deals I need to work with about 10-12 buyers, because deals will fall out. Clients will suddenly decide they don’t want to buy, or the lender tells them they can’t buy. They’ll close with another agent because they’ve been seeing someone else behind your back etc…
Can you see where this is going?
If we start seeing the LPB model an agent needs to close much more then 8-9 deals, how do they do that if they only have time for 2-3 at a time? Simple, spend less time per client. Outsource as much of the work to the buyer as possible, and the agent becomes a Facilitator instead of a Counselor.
You already partially see this at work with Real Estate Teams. Several agents working under the lead of a Team leader. The leader has the experience and leads, and the members do all the running around and showing pretty kitchens.
(and this is the kitchen…)
If you are working with a member and not the lead you basically are working with a Facilitator.
And in an LPB model your Facilitator is also working for the other side.
AS this business mode takes over it will have the same effect as Amazon did to the small mom and pop book store. Sellers will gravitate to Zuulia, and the buyers will follow. Your nice friendly local doctor who made house calls will be replaced with an HMO.
I could keep going but I’ve just broke the 2000 word mark and this has taken longer then I originally thought. The scenario I presented here may not come to pass, and might not work in all states due to local laws. But it’s my theory, and all my theories are correct until proven otherwise.
I will also mention as an aside that when I presented this theory on a Real Estate Agent Forum I had a Social Media person from Zillow jumping all over me within minutes saying that Zuulia didn’t want to become a broker. When I clearly pointed out to him that I never said anything about Zuulia being a broker he kept on message like a politician in a sex scandal. After a while I realized he wasn’t talking to me, he was performing for the audience. Take from that what you will.