Zillow Poised to Massively Disrupt Real Estate and Investors May Demand It

Zillow Group has been investing in growth and building consumer trust since inception. The company has not focused on profits, but growing audience and revenue. A day of reckoning may be on the horizon and the real estate brokers, franchises, and agents may be watching in horror from the sidelines if the company pivots.

In the early days, Zillow offered real estate brokers and franchises a fair exchange of value that give the company a massive jumpstart. As the incumbent, Realtor.com was charging agents and brokers for advertising; Zillow offered it for free. Firms providing listing content to Zillow got leads back from interested consumers. Those days are long gone. Zillow gets its revenue almost exclusively from their relationships with about 100,000 Premier agents, and now from the growth of their iBuyer program.

Over the years, mostly through acquisition of Market Leader, Zillow has developed licenses to operate as a broker in all 50 states. Moreover, Zillow is a FSBO website and has always allowed consumers to market and sell their homes on the site for free. Zillow has made some other interesting investments over the years, like dotloop – a transaction management service that allows buyers and sellers to work together to process their transactions. Zillow has also modeled a fee-per-listing service through acquisitions in the new home builder space. With Bridge Interactive, Zillow is also well situated to convert their website to an IDX website and add listings into the MLS – although some compliance alterations may need to take place. They have also created some excellent mortgage programs to help homebuyers sort out their financing.

Zillow is ready to pivot if they need to. They have the brokerage licenses in place, they have the technology in place, they have lots of cash ready to deploy if they need to go direct to consumer and compete with brokerage and agent services. Most of all, they can offer brokerage services for fees that may be free for do-it-yourself buyers and sellers, or for competitively discounted agent fees like Redfin if consumers still want that support (with 100,000 agents at the ready to help). I cannot even imagine the homeowner and homebuyer contact records that they have collected since inception.

Financial Stock Market Bubble May Burst

If you are an investor in the stock market, you are loving the performance in your portfolio. Indeed, growth companies like Zillow that earn no profits have been outperforming value companies that have earnings and dividends. Zillow's market value is over $13.5 billion on a revenue rate of $2.7 billion, a value of five times their revenue. It's hard to find a direct comparison in real estate, but CoreLogic has about $1.7 billion in revenue and profits. The value of CoreLogic is about $4.1 billion, a little more than two times revenue.

What happens if the stock market shifts from growth (Zillow) to value (CoreLogic)? Investors will flock to companies that have profits, and companies like Zillow who lose money will fall out of favor. That is the event that is most likely to trigger a shift by Zillow from growth to value. If they want to make profits, they can offer a hybrid service where consumers can just use dotloop for peer-to-peer homebuying and selling. Sellers list on Zillow for free, or for a small fee like they charge new home builders. Don't want to show your home? Zillow will pay you cash for it. Buyers can make offers on Zillow listings for free, too – especially if they use Zillow mortgage, title, or insurance services. Want the help of a top-rated real estate agent? Zillow has those too. Have it your way.

Through this lens, it is difficult to pick any company in the real estate industry that is better positioned to do whatever they want. I do expect that their stock will take a major tumble if the stock market goes the other way. Zillow was trading at $29 a share less than six months ago. It is up over $65 per share right now. That is amazing performance that is totally based upon potential. If the industry is worried about the impact of a company like Compass, who has just a little over $1 billion in play, they should be terrified by Zillow Group. At least Compass is operating a business that looks pretty familiar.

If I was an agent, franchise or brokerage today, I would have a lot of sleepless nights pondering this. The risk of doom and gloom is not existential—it's a real threat that is a CEO's decision away from happening. It does not look likely today, but Zillow has acquired every necessary ingredient and capability to blow up the real estate industry and become very profitable in doing it.