Friday, August 01, 2014

Zillow + Trulia = Bad Idea?

by Osman Parvez

A few weeks ago, I attended a workshop by the Boulder area MLS aimed at educating employing brokers on listing syndication.   It was a very informative meeting.   


We spent a lot of time talking about how listings disperse from the MLS to Zillow, Trulia, Redfin, and other third party websites.  We also talked about the importance of educating buyers and sellers on the pros/cons of these sites.   

This week, Zillow announced it has agreed to purchase Trulia for $3.5Bn.  

As a Consumer, Should You Care? 
Short answer:  Yes.

Pros:  There is no mistaking the innovation that Zillow and Trulia provide.   These sites are better designed and more intuitive than the majority of access points to the MLS (colorproperty.com is the direct access to our MLS).  This is especially true of the mapping features and the smart phone apps.   

Cons: The information provided by Zillow/Trulia remains grossly inaccurate (see: What's Wrong with Zillow, Wise up).  For casual observers, the inaccuracy is largely irrelevant but if you're serious about buying or selling, it has a huge impact - especially in a small market like Boulder.

I often find myself fielding emails about erroneous Zestimates (no, they're not appraisals and not even close to true market value:  read MORE).  I also spend a lot of time tracking down Zillow listings for buyers on the hunt for a house. Zillow will often show phantom listings of properties which sold years ago.   

After the third or fourth Zillow wild goose chase, my clients usually get the message:  The MLS is a better source for information on real estate listings.  It's faster, it's also far more accurate. 

Zillow creates a lot of busy work for real estate professionals because of this misleading information... and then they have the balls to call and pitch us on advertising.  As a Realtor, it's mildly annoying.   

Zillow - The New MLS?
Z vs the S&P 500 (click for larger image)
Zillow and Trulia don't really care about accuracy (read Zillow Continues to Mislead) as much as they care about eyeballs.  These companies are in the business of selling potential buyers and sellers to real estate agents.   Realtors are their customers.   

Don't take it from me.   Read Zillow's annual report:  "Our current financial model depends on advertising revenue generated primarily through sales to real estate agents and brokerages, mortgage lenders, rental professionals and advertisers in categories relevant to real estate."

It's also clear they don't care about making money - at least for now.   They care about growth.   Zillow lost $12.5MM last year on gross revenue of about $197.5MM.  Meanwhile gross revenue grew about 70% and they spent $147MM on SG&A (those annoying sales calls we Realtors keep getting).   They also spent nearly $50MM on R&D. 

Today, the stock market thinks Zillow is worth $5.5Bn and looks the other way when the CEO not only pays himself half a million a year in salary, but cashes out nearly $20MM in equity.   The analyst in me shudders. 

Forget the obscene market cap. Zillow's growth and continued investment is no joke.   Zillow is spending serious cash in its mission to become the new MLS and acquiring Trulia is part of the game plan.  The legacy MLS systems across the country are right to view Zillow/Trulia as a threat. 

 Nearly half of Boulder area Realtors think it has little or no impact.   source: IRESIS
Realtors, Wake Up! 
Real estate professionals already know that people are increasingly going to these sites. I've heard from reliable sources that Zillow and Trulia are now seeing anywhere from 40% to 60% of generic real estate related web traffic.  

You should also know that stats on inquiries from the web to Realtors clearly show that serious buyers and sellers still primarily use the MLS.   Listings on Zillow and Trulia get very few serious real estate inquiries compared to the MLS itself - at least in the Boulder area.  

For now, nearly half of Boulder area Realtors using our MLS don't think the merger will have any impact (see survey above).    

What About Investors? 

image:  Venturist
I'm no longer a stock analyst, but I'll end this post by waving a caution flag at potential Zillow investors.    

Remember that workshop for managing brokers?  During the event, organizers asked if we currently pay for advertising on Zillow or Trulia.   Several hands shot in the air.   I just had to know, so I blurted out my own question: "Who's tried it and then stopped paying?"   Even more hands shot up (including mine).  

A surprising number of managing brokers reached the conclusion that paying to advertise on Zillow/Trulia doesn't make sense because the cost is high and the few leads generated are low quality.   Meanwhile, managing brokers are starting to see Zillow and Trulia not as a business partner but as a serious threat to our industry.   Who wants to pay for a competitor to eat your lunch?  
From the risk factor section of Zillow's 10K:   
"We May Not Be Able to Maintain or Establish Relationships With Real Estate Brokerages, Real Estate Listing Aggregators, Multiple Listing Services, Property Management Companies, Home Builders and Other Third-Party Listing Providers, Which Could Limit the Information We Are Able to Provide to Our Users."

Final point:  if you're still chomping at the bit to buy Z stock, remember that real estate boards and powerful brokerages across the country control access to the MLS and they can turn it off with a switch (read:  Edina Realty Pulls the Plug).   

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