Real Estate News & Commentary

News Flash: Zillow Is NOT a Game-Changer in Real Estate

Expertise: Real Estate Investing Basics, Personal Development, Landlording & Rental Properties, Real Estate News & Commentary, Business Management, Flipping Houses, Real Estate Deal Analysis & Advice, Personal Finance, Real Estate Marketing
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Let’s talk about Zillow in terms of getting into home buying.

Over the years, there has been a lot of talk about these so-called “iBuyers.” One of the biggest ones is Open Door, which raised billions and billions of dollars.

You also have the likes of Offerpad, there is another one called Knock, and of course. the most recent one, Zillow Instant Offers. So this is my take on all of these iBuyers.

iBuyers in the Real Estate Industry

I’m a big believer in people and always have been. Even though the saying goes, “Business is easy—people make it difficult,” I still believe that a real estate agent is going to be the one to sell your property.

People buy people. Good real estate agents can do wonders in the home-selling process.

I get it, there are a lot of shady real estate agents out there, and real estate agents are starting to be viewed as secondhand car salesmen. It’s kind of unfortunate, but that’s the stigma that is starting to surround them. That’s why a lot of these iBuyers are coming out of the woodwork and setting up these unusual business models—concepts that are predominantly tech-oriented.

Related: Zillow Continues Quest to Take Over Real Estate With Move Into Mortgages

Why iBuyers Are Good for the Industry

Look, I like the way that all of that is going, because I do believe that real estate is in need of some sort of disruption. I feel that the real estate industry in general has not been disrupted by some kind of new revolutionary tech.

We still do transactions the way we have for many, many years. So I like where it’s going, but I don’t think these iBuyers are really going to take off or make any significant dent in the real estate industry.

Again, it’s because people buy people. I truly don’t believe that out of the five million transactions that happen in the U.S. every single year, iBuyers could take over the entire amount of sales that happen.

Realtor showing house to a young couple wanting to rent it

Why iBuyers Are a Bad Idea

Here’s another bit of caution. What happens if all of these iBuyers buy homes from various home sellers, and then the market pulls back 10 to 20 percent?

It can happen! I’m sure all of you guys remember in 2008 and 2009 with the global financial crisis and housing crisis. The market pulled back even more than that.

So of course in a market cycle downturn, it does happen and the market does pull back. That has me thinking what’s going to happen to all of these iBuyers if they’re sitting on too much inventory that they can’t sell?

Sure, they can rent out these properties, but that’s ultimately not their business model. They buy these properties at a cheaper price to market. They spruce them up a little bit, similar to a flipper. They relist them, and then hope to sell them and make their fee.

I like the concept, but I don’t believe that it’s going to disrupt the market the way the media is talking about right now.

Zillow Is Not Great

Another thing that I want you guys to remember is I’ve spoken to a number of investors over the years that use Zillow when they’re looking at certain investment criteria or numbers on a transaction—especially the Zestimate. Guys, in tertiary markets like Toledo, Ohio, the Zestimate is inaccurate.

The algorithm that Zillow uses is not good. It fails consistently.

So please, I’m begging you, make sure that you don’t solely rely on the numbers that you see on Zillow.

Pensive African man sitting in the office at the table making notes in a notebook

The Danger of Relying on Zillow’s Numbers

The property taxes can sometimes be inaccurate, and the Zestimate is inaccurate very often. So do your due diligence in other ways.

Check out the property taxes on the county record website, potentially get an appraisal on a property, and speak to other successful investors in the area who know the value of the market. Get a real estate agent to do a BPO, look at comparable sales on the MLS, or get an agent to do that for you.

Once again, as great as Zillow is—and they truly have done amazing things—they’re inaccurate in tertiary markets. So don’t solely rely on whatever you see on Zillow.

Related: Attention: PLEASE Stop Searching for Real Estate on Zillow and Trulia

THIS Will Overshadow Zillow as an Industry Disruptor

Last but not least, what I think is going to disrupt the real estate industry is 100 percent commission brokers. I see a new wave of brokerages coming up and truly taking the market by storm.

You have companies like EXP Realty, Fathom Realty, and there’s another one in California called Block Realty. These guys are doing some amazing things with the 100 percent commission model.

I see a lot of agents flocking to these types of companies because they are virtual and have no brick and mortar office. It’s a unique concept; it’s a different concept. No one wants to pay their broker a commission split anymore, because a lot of agents feel their brokers aren’t doing enough work to earn that commission.

If you look at iBuyers, where everything is done online and virtually, and then you look at 100 percent commission brokers, my belief is still in the real estate agent selling your home and doing a good job more than tech ever will. I truly think that could be the next wave and something that could revolutionize the real estate industry.

That’s my opinion on Zillow, all of the iBuyers and where I see the real estate industry going. Take it for what it is.

I think that 100 percent commission brokers that focus heavily on tech are truly going to take over.

What are your thoughts?

I’d love to hear from you in a comment below. 

 

Engelo Rumora, a.k.a.”the Real Estate Dingo,” quit school at the age of 14 and played professional soccer at the age of 18. From there, he began to invest in real estate. He now owns real estate all over the world and has bought, renovated, and sold over 500 properties. He runs runs Ohio Cashflow, a turnkey real estate investment company in the country (Inc 5000 2017 & 2018) and is currently in the process of launching a real estate brokerage called List’n Sell Realty. He is also known for giving houses away to people in need and his crazy videos on YouTube. His mission in life is to be remembered as someone that gave it his all and gave it all away.

    Ken Virzi from Long Beach, California
    Replied about 1 month ago
    The MLS racket has been what forced people to use an agent. I think the main things that any automated self system would need is a good pricing advice for the seller (this is the most difficult part probably) and protections for the buyer (this is pretty easy to bake in). What these services cannot and won’t replace are inspectors and appraisers. However, in the free market if the MLS was busted wide open and anyone could list and anyone could search, folks could list and buyers can offer. There would be a lot more back and forth and certain people may not want to deal with constant low ball offers and decide to hire an agent to deal with all the crap. Also, what happens when the inspection finds something egregious. Are two noobs going to navigate that complication? If it is a basic sale with no complications then I think these systems can work. But even though I did all the work and searching, and I came up with the offer price etc. Having an agent to hang out with during the process was nice, but not the point. Having them navigate the madness of documents and offers and back and forth with the listing agent etc was well worth any money they made. Of course, as a buyer it costs me nothing, so any disruption will come from the sellers side.
    Nina Grayson Real Estate Agent from Los Angeles, CA
    Replied about 1 month ago
    The iBuyer (Internet Buying and Selling of Real Property) service makes their money on the fees, not on the resale. They are not ‘flippers’, yes they will do touch-up to present the property on the market, but they are offering a service of convenience to Sellers who don’t want to 1) go through the process and tasks of selling their home, and 2) who don’t want to wait 30-45 days to close on the sale. So, the iBuyer charges them a fee; 6-10% (7% avg.), and they resell between 3-8% (4% avg.) above acquisition price, according to Mike DelPrete: https://www.mikedp.com/ibuyer-report. These Sellers are willing to pay for the no-hassle, on their own time, and no financing fall-out risk. However, they are not represented by a Listing Agent. Real Property is the highest form of asset value in the world. Historically, localities, states, and the government established rules and regulations to protect both parties on each side of the transaction, and then established the representative capacity for both sides by creating the requirement for licensed salespersons to act with care to ensure the fiduciary interest of the side they represent. In the case of dual agency, they act as mediator for both sides with no fiduciary responsibility to either. With the iBuyer, each party represents themselves, but the iBuyer is a brokerage – they have to be to sell property on the open market. So, there is a question of fair representation and consumer protection. But, overall, I do not see this as detrimental to either the real estate agent, but the investor needs to prepare for the future that this disruptor is presenting to REI. There are many sellers who want the face-to-face representative relationship of an agent who is acting in their best interests, and they would also rather save on the iBuyer fees compared to Listing Agent fees. As for Investors, I think the iBuyer is a direction that Investors need to consider for their business. The motivated Seller who wants to sell fast, is willing to sell low, and does not want to work with an agent is the one the Investor wants, and in several of my recent listing appointments, the Sellers are mentioning iBuyers as option they have looked into. Investors will need to implement the iBuyer model into their business. This is where it will become more competitive and those iBuyer fees will start to drop, because Investors know they can resell and make a profit with a sweet rehab. Once iBuyer fees drop, that’s when the real estate salesperson wills start to see the impact. But many large brokerages, like mine, KW, are moving into the iBuyer space and will integrate their agents to represent Sellers. The fees will then be split, as they are now, with the agents. But I think in 3-5 years we will see those fees decline, and thereby, real estate salespersons earnings will drop as well.
    Nina Grayson Real Estate Agent from Los Angeles, CA
    Replied about 1 month ago
    The iBuyer (Internet Buying and Selling of Real Property) service makes their money on the fees, not on the resale. They are not ‘flippers’, yes they will do touch-up to present the property on the market, but they are offering a service of convenience to Sellers who don’t want to 1) go through the process and tasks of selling their home, and 2) who don’t want to wait 30-45 days to close on the sale. So, the iBuyer charges them a fee; 6-10% (7% avg.), and they resell between 3-8% (4% avg.) above acquisition price, according to Mike DelPrete: https://www.mikedp.com/ibuyer-report. These Sellers are willing to pay for the no-hassle, on their own time, and no financing fall-out risk. However, they are not represented by a Listing Agent. Real Property is the highest form of asset value in the world. Historically, localities, states, and the government established rules and regulations to protect both parties on each side of the transaction, and then established the representative capacity for both sides by creating the requirement for licensed salespersons to act with care to ensure the fiduciary interest of the side they represent. In the case of dual agency, they act as mediator for both sides with no fiduciary responsibility to either. With the iBuyer, each party represents themselves, but the iBuyer is a brokerage – they have to be to sell property on the open market. So, there is a question of fair representation and consumer protection. But, overall, I do not see this as detrimental to either the real estate agent, but the investor needs to prepare for the future that this disruptor is presenting to REI. There are many sellers who want the face-to-face representative relationship of an agent who is acting in their best interests, and they would also rather save on the iBuyer fees compared to Listing Agent fees. As for Investors, I think the iBuyer is a direction that Investors need to consider for their business. The motivated Seller who wants to sell fast, is willing to sell low, and does not want to work with an agent is the one the Investor wants, and in several of my recent listing appointments, the Sellers are mentioning iBuyers as option they have looked into. Investors will need to implement the iBuyer model into their business. This is where it will become more competitive and those iBuyer fees will start to drop, because Investors know they can resell and make a profit with a sweet rehab. Once iBuyer fees drop, that’s when the real estate salesperson wills start to see the impact. But many large brokerages, like mine, KW, are moving into the iBuyer space and will integrate their agents to represent Sellers. The fees will then be split, as they are now, with the agents. But I think in 3-5 years we will see those fees decline, and thereby, real estate salespersons earnings will drop as well.
    Barry H. Investor from Scottsdale, AZ
    Replied about 1 month ago
    Great info / opinion. As a Buyer and Seller, I agree with the opening comments. It has been about 3:1 useless agents vs productive agents. As a Seller, I consistently put up a better listing onto Zillow / Trulia / Realtor.com / Craigslist (as a last resort) than any my agents put up onto MLS. As a Buyer, there are tell-tale signs of a lazy agent (most of them are) when you look at the listing online. In the age of tech, Agents claim their #1 job is to put up a great listing, and most of them fail. As for showing the property – Agents don’t do this anymore. They use lockboxes. Their only value (as stated by @KenVirzi) is processing paperwork. After dozens of transactions, I can do that more efficiently as well, but there is a benefit to having the buffer – on that I agree. If you approach an agent about just handling paperwork and doing nothing else, they still do not want to reduce their 6% commish (in most cases). In summary, as Sellers reduce the role of the Agent, the Agent still over-values their contribution to the transaction (opinion). Agents going to virtual brokerages so they do not have to hang their license with a local brick/mortar agency sounds like a natural progression. Unfortunately, I do not believe the increase in “net” pay will make these agents more efficient.
    Paul Gugger
    Replied about 1 month ago
    I have a condo on the central coast of California and something sells across the street (on the beach) and Zillow say’s my condo is worth 1.3 million then a shack sells in the next town (less desirable area) and they say my condo is worth $600.000.
    Michael P. Lindekugel Real Estate Broker from Seattle, WA
    Replied about 1 month ago
    the quantity of ibuyer transactions is very very small. it is a very low margin business that relies on volume of homogeneous product. it would never work in NYC, Seattle, SF outside of large planned developments. and, so, how is the zillow house flipping business going? not so well. Since its ipo in 2011 zillow reported has annual losses. House flipping brought that to all new low in losses. Sold 414 homes Revenue – $128.5 million sales proceeds ave selling price of $310,400 Cost of Sales – cost of homes $122.4 million ave purchase price of $295,700 Net $6.1M for ave gross profit (selling price minus purchase cost) for only $14,700 or 4.9% per flip Oh, but wait. There are more costs to buy homes, ready them to flip, market, finance until sold, and deal with the transactions in a corporate manner. Expenses associated with its home flipping operations: $20.8 million in sales and marketing expenses $12.3 million in tech and dev expenses $14.4 million in general and administrative expenses $3.8 million in interest expenses Revenue $128.5m OpEx $173.7m Net Loss Loss $109k per house or 37% $128.m is a 51% increase to corporate revenue with a soaring 263% increase in losses. Hope redfin does a better job.
    Rob Massopust Real Estate Broker from Garden Grove, California
    Replied about 1 month ago
    Zillow loses a boatload and wall street loves it. do you see how skewed this is and its only going to get worse. Everyone thinks they got to get market share.
    Christopher Smith Investor from brentwood, california
    Replied about 1 month ago
    Zellow?
    Michael Steven Harris
    Replied about 1 month ago
    Finally an article by this author that I find well done. These ibuyers could even amplify housing crashes if they were to take over. A local or regional dip could turn national like in 2008 with CDOs. Markets can really go sideways and in a hurry in my area a house that was worth an easy 150k in 2007 by 2009 was worth maybe 35k. Hasn’t anyone ever heard of systemic risk
    Engelo Rumora Specialist from Toledo, OH
    Replied about 1 month ago
    Glad you liked it 🙂 Thanks for your comment ps. I’m not an author but rather a real estate entrepreneur lol
    Kevin Polite Flipper/Rehabber from Decatur Atlanta, GA
    Replied about 1 month ago
    The iBuyer model hurts the individual investor more than agents. Basically if you are trying to buy properties off market direct from the seller iBuyers are now your competitors and not a very good one imo. These sellers sound like the FSBO and the ones trying to get agents to discount their commission, those most likely to sell to an investor or iBuyer. BTW I’m agent as well as investor and the 6% doesn’t go to one agent, it’s split equally between the listing and selling agent. A common misconception. A good agent will have contacts when problems arise like buyer requested repairs, guiding the seller to price right based a a good CMA, knowing what if any seller paid closing cost are paid in your area, being able detect a buyer with a bad mortgage company, the list goes on. You are paying for what the agent knows not just what he or she does. Especially important to have an agent who specializes in your geographical area. RE/Max was first then Keller Williams uses the 100% commission for active agents, but hits you with all kinds of fees. Someone had to pay for that national branding and advertising campaigns. A lot of sellers want a well known agency especially if they are relocating.
    Kevin Polite Flipper/Rehabber from Decatur Atlanta, GA
    Replied about 1 month ago
    The iBuyer model hurts the individual investor more than agents. Basically if you are trying to buy properties off market direct from the seller iBuyers are now your competitors and not a very good one imo. These sellers sound like the FSBO and the ones trying to get agents to discount their commission, those most likely to sell to an investor or iBuyer. BTW I’m agent as well as investor and the 6% doesn’t go to one agent, it’s split equally between the listing and selling agent. A common misconception. A good agent will have contacts when problems arise like buyer requested repairs, guiding the seller to price right based a a good CMA, knowing what if any seller paid closing cost are paid in your area, being able detect a buyer with a bad mortgage company, the list goes on. You are paying for what the agent knows not just what he or she does. Especially important to have an agent who specializes in your geographical area. RE/Max was first then Keller Williams uses the 100% commission for active agents, but hits you with all kinds of fees. Someone had to pay for that national branding and advertising campaigns. A lot of sellers want a well known agency especially if they are relocating.
    Vaughn K. from Seattle, WA
    Replied about 1 month ago
    My 2 cents: Most people are too lazy/stupid to sell their own cars private party… They trade them in for far less money most of the time. The idea that with real estate, a vastly higher priced and more complicated commodity legally speaking, that people will start dealing with more things themselves… I don’t buy it. Perhaps big businesses will snag a few properties here and there and reno/flip them under some big corporate umbrella, but I suspect most sellers will continue to hire agents to sell their properties because they don’t want to deal with it. Too much paperwork, what to price it at, etc for most people to be bothered. The only way this might change is if Zillow or some big company manages to convince people that they’re not ripping them off, and giving them as much cash as they would net going through an agent, while still taking all the burden of doing things off of them. But Zillow will never be able to compete overhead wise etc with just local agents, especially if they’re actively buying the homes and taking on the carrying costs… Therefore unless some company develops a massive localized work force that specializes in reno/flip stuff, and does it as efficiently as local investors (not possible with corporate overhead), I just don’t see it ever going anywhere big.
    Dev Horn Flipper/Rehabber from Arlington, TX
    Replied about 1 month ago
    I have a related article out in REI INK magazine this month – “Here Come the iBuyers!” – https://rei-ink.com/ibuyers/ I believe the impact of iBuyers on real estate is going to be far greater than the author proposes here. Consumers love the new ability to view homes for sale by using an app (not an agent), and listing agents that can’t provide that feature will be passed over for those that can. More importantly, iBuyers solve the (BIG) problem of “I can’t buy my dream home because I haven’t sold my current home yet.” iBuyers don’t seek to own inventory or make money on flips like investors. iBuyers only buy houses because that’s a part of a holistic process that they want to own from end-to-end. They are also offering home loans, insurance, title work, etc. as they facilitate the sale and purchase of homes in the residential market. Are there still opportunities for “traditional” agents and investors to thrive in this new world? Sure. But don’t be lulled into complacency. There is a massive shift underway in our industry and Zillow is one of the leaders of this revolution.
    Jacob Radkey-Pechacek Investor
    Replied about 1 month ago
    I am curious as to if you see Redfin and it’s services beign adopted in the real estate market. They have the Instant offer, similar to the ibuy craze, but I agree in that it is a fad that only works when demand is soaring. As demand fades, I think the ibuy concept will collapse. What I do have great interest in is how the 1-2% realtor fees could shakeup the industry, and allow for quick transactions that allow for house flippers to pocket the extra closing costs. In my opinion it could change the game if the margins were 3-4% higher on a deal done through Redfin up front. Thanks!
    Bevla Reeves Real Estate Agent from Scottsdale, AZ
    Replied about 1 month ago
    These companies are scammers! They make their money on the Buy because they charge the seller up to 20% in “Fees” to buy their property! Sellers don’t even realize that they actually paid these companies MORE in fees than they would have paid 2 agents in commissions! It’s “bait and switch” trickery. Once sellers figure out they’ve been duped hopefully, they’ll stop falling for this scam. I only charge a flat fee of $3000 to list and I offer full service. I had a friend fall for Open Door’s bullsh*t, I couldn’t believe it! She could’ve saved over $8,000 of her “stolen” equity if she had hired me over Open Door! When I explained that to her she realized how she’d been tricked. I believe my business model is the future, because selling and buying homes is very personal, and as you said, humans want to do business with humans.
    Carl Howard from Las Vegas, Nevada
    Replied about 1 month ago
    It’s not just in Ohio where Zillow is constantly incorrect, Here in the Las Vegas, NV area and most of Clark County the numbers posted from Zillow don’t even match the country assessors office records. Always do your due diligence.
    Brian Shannon from Stuttgart, Germany
    Replied about 1 month ago
    Thanks for the article Engelo. As a new investor coming from the Information Technology world, I see LOTS of opportunities to disrupt (read that as improve) an old system. While one specific type of tech improvement may not be the end all disruptive change for an entire industry, the spread of technology-enabled improvements is happening regardless of the establishment’s opinion on the matter. As an example, Myspace is long dead but started the Social Media revolution. Uber completely disrupted the long standing historic taxi monopoly and if you talk to people on both sides of that issue, you’d see similar arguments as the article and comments above. It’ll be fun to see how this all shapes up over the next decade but I’m sure many things will change and many things will be the same. Thoughts?
    Brian Shannon from Stuttgart, Germany
    Replied about 1 month ago
    Thanks for the article Engelo. As a new investor coming from the Information Technology world, I see LOTS of opportunities to disrupt (read that as improve) an old system. While one specific type of tech improvement may not be the end all disruptive change for an entire industry, the spread of technology-enabled improvements is happening regardless of the establishment’s opinion on the matter. As an example, Myspace is long dead but started the Social Media revolution. Uber completely disrupted the long standing historic taxi monopoly and if you talk to people on both sides of that issue, you’d see similar arguments as the article and comments above. It’ll be fun to see how this all shapes up over the next decade but I’m sure many things will change and many things will be the same. Thoughts?
    Mas McArthur
    Replied about 1 month ago
    Interesting Article….as things always tend to change go with the flow, the market will eventually make the necessary corrections. Netflix vs Blockbuster similarities.
    Brian Ploszay Investor from Chicago, ILLINOIS
    Replied about 1 month ago
    On the whole, the article has lots of merit. First, the iBuyers have successfully hyped their model, but it will only be a niche. Fully marketing one’s property is the best way to create value. And that would be through full exposure using the MLS. Groups have always been trying to buy properties. This is just an example of bringing tech to this platform. Second, he’s right about the brokerage commission splits changing. This has really hurt traditional brands such as Reology, who owns C21, Coldwell Banker and Sotheby’s. Look at their stock. Good sales, but less revenue. Third, I think we all know that Zestimate values are inaccurate and quite frankly dangerous. Tech disruptors have predicted that commission rates will go down and the number of agents will go down as well in the next ten years. For sure, a lot of proprietary agent information is now accessible by clients. Many start their search on Zillow to look at properties. It’s organized, easy to use and for the most part captures most of the agent’s proprietary information. This is only going to get better. I’ve always been a real estate broker, but increasingly my time is focused on rental property ownership. And this can’t be disrupted. Matter of fact, it is getting easier with online, cloud based management tools.
    Brian Ploszay Investor from Chicago, ILLINOIS
    Replied about 1 month ago
    On the whole, the article has lots of merit. First, the iBuyers have successfully hyped their model, but it will only be a niche. Fully marketing one’s property is the best way to create value. And that would be through full exposure using the MLS. Groups have always been trying to buy properties. This is just an example of bringing tech to this platform. Second, he’s right about the brokerage commission splits changing. This has really hurt traditional brands such as Reology, who owns C21, Coldwell Banker and Sotheby’s. Look at their stock. Good sales, but less revenue. Third, I think we all know that Zestimate values are inaccurate and quite frankly dangerous. Tech disruptors have predicted that commission rates will go down and the number of agents will go down as well in the next ten years. For sure, a lot of proprietary agent information is now accessible by clients. Many start their search on Zillow to look at properties. It’s organized, easy to use and for the most part captures most of the agent’s proprietary information. This is only going to get better. I’ve always been a real estate broker, but increasingly my time is focused on rental property ownership. And this can’t be disrupted. Matter of fact, it is getting easier with online, cloud based management tools. Reply Report comment
    Rob Massopust Real Estate Broker from Garden Grove, California
    Replied about 1 month ago
    If agents or Realtors had kept the MLS to themselves like they thought there would never be a zillow as we know it. The MLS provides listings to Zillow and then Zillow turns around and sells crappy leads back to those same agents that do not have listings but are willing to pay over $1000-2000 per month for the luxury and hope. Thats the Zillow scam. Back in the day when I was getting my license and saw this on wall thinking why bother the internet is just going to “Priceline” RE agents just like travel agents. Guess what the Realtor Lobby is big. They fight for those commissions and their monopoly.