From the turn of the century, most industries embraced online operations. This was highlighted by the launch of parallel online platforms in the online food delivery, classifieds, social media, and listings niches.
These platforms threatened to change the way we interacted with various niches, and today, we can look back in hindsight and laud the founders for making huge strides to transform the world.
The real estate space was not left behind as Zillow, one of the leading marketplaces today, was established around the same time. This company is an exciting pick since many people wonder how it makes enough money to remain sustainable when it is free to list a property for rent.
We will break down Zillow’s revenue model and uncover the various ways to gets enough money to remain one of the top real estate listing platforms globally.
Overview of Zillow
Zillow is an online real estate marketplace that offers multiple services for people looking to buy and sell homes. It essentially contains anything related to buying and selling homes, for instance, loan financing, searches, and rentals. The company’s mission is to give customers all the information they are looking for related to homes.
For buyers, it offers homes they can buy directly from them through the Zillow Offers program. However, one can buy a home directly from the owner, through foreclosures, or via the Zillow Premier Agent program.
On matters rental, Zillow has an array of features that can help customers get a place to stay. Besides the basic feature where users can search for a rental unit, they can also request the company to expedite their background checks and use an automated affordability feature to get their optimal budget.
Sellers have a few features, with the first one letting them list homes directly on the site. The Zestimates tool allows them to assess the value so that they can price their houses optimally. The second feature gives them a chance to work with an accredited agent who will help them sell property.
Zillow’s agent finder gives them access to a pool of realtors, home improvement experts, property managers, photographers, and just about any service they need to sell the house. Lastly, they can sell their house directly through the Zillow Offers program.
Zillow also offers home financing options for customers. It offers mortgages, backed by its acquisition of Mortgage Lender of America in 2018. It also partners with other financing service providers to provide loans and financing options to interested parties.
Zillow’s History
Zillow was established in 2005, in Seattle Washington, by Rich Barton and Lloyd Frink. Barton is a top technology entrepreneur, and he moved to Seattle in the late 80s to work for Microsoft. In 1984, Microsoft had a venture in the travel industry distributed by CD-ROM at the time.
Barton came to the rescue. He sensed an opportunity for the company through HTML-based services that were taking off.
They improved the agents’ reach and let them work from home, which would be lucrative for the company. He pitched this idea to Bill Gates and Steve Ballmer, who agreed to the project that eventually launched as Expedia.com in 1996. It was an instant hit.
In 1998, it separated from Microsoft and later went public as an independent company in 1999. Barton was only 27 years old at the time and led it for another four years before InterActive Corp acquired it in 2003 for $3.6 billion.
Barton became stinking rich from this acquisition. In the same year, he left the company under Dara Khosrowshashi, who became CEO for 14 years before moving to Uber as CEO in 2017.
Barton took a little break and came back into the scene, looking for his next venture. While seeking an opportunity to invest, he had two main things that lingered over his mind; information asymmetry in the market and the ability to allow users to generate content themselves.
These were the founding principles that defined the solution he developed at Expedia.
While trying to shop for a new house in Seattle, he was continually frustrated and felt insecure. Public housing data was not easy to get as it was distributed across various archives and databases on the internet and in bureaus.
Real estate agents took advantage of this and made huge profits by exaggerating prices since buyers did not have options. These problems led to the formation of Zillow in 2005, alongside Frink.
With the problem statement top of mind, they got to work immediately. They onboarded Stan Humpries, who was leading Expedia’s analytics unit to handle the algorithm teams.
They spent a lot of time collecting housing data from multiple sources, digitizing it, and making it publicly available on the platform. Barton also hired Spencer Rascoff, who had founded Hotwire in 1999 and sold it to IAC but opted to stay there for two years before joining Zillow.
To get things running, Barton’s team received financial backing from two VC firms worth $32 million. This enabled them to hire 75 employees and improve the product, which launched into beta in February 2006. People stormed the site immediately it went live, as recorded by the 2 million who visited it within the first two days.
They did not expect this kind of traffic, and it crashed. This was attributed to the Zestimates feature that let one assess how much a house is worth.
The real estate market was at its all-time peak in the mid-2000s, and homeowners saw their houses double in value overnight. This created the craze of home buying that culminated in the financial crisis in 2008.
Zillow’s timing was perfect as it was launched right in the middle of that craze. Its remarkable team was also a factor behind its success, but these were not the only things driving growth. The intent from the word go was to make Zestimates as controversial as possible.
It sparked conversations within the real estate niche and was often the subject of debates since home values were now publicly visible. In addition, the company structure was in product-related silos, which made it easy to adjust to market changes. One notable result of this was the launch of the iOS app a year after Apple was launched.
The team hired a dedicated team to work on the app, and a year after launch, it accounted for over 20% of its user base.
Data was a core part of Zillow’s operations, and it partnered with various players in the media to develop insights on housing prices. In addition, it partnered with large websites to display housing data; for instance, in 2008, when it started powering all for sale listings on Yahoo Real Estate, the most visited Real Estate site at the time.
The 2008 financial crisis did not have a significant impact on the company. While it was forced to lay off 25% of its employees, it quickly recovered and surged forward. Before the crisis, people visited the site to see their home value rise, but after, they visited to get a reliable estimate and quickly sell off their houses.
Zillow went public in 2011, which allowed them to raise an additional $69 million at a valuation of $540 million. It was the third visited real estate website in the United States, with over 20 million monthly visitors. Barton had stepped down as CEO and handed the helm to Rascoff, COO at the time.
As expected, this rapid growth came with its fair share of challenges. The most significant ones were lawsuits from its employees, competitors, and homeowner associations. These associations claimed that Zillow had undervalued their homes, making it hard for them to sell.
The most significant legal battle came in 2016 when Move Inc that runs realtor.com, claimed that Zillow hired two of its executives to gain access to the company’s secrets and other confidential information. This was settled for $130 million.
Zillow had engaged in various legal battles with competitor Trulia. The company was formed a year after Zillow and had taken swipes at each other over the years. It came as a surprise when Zillow announced acquiring Trulia for $3.5 billion in an all-stock deal.
The main reason for the acquisition was to increase the user base by taking over Trulia’s customers and reducing the amount of money used to fight Trulia’s battles.
In 2019, after more than a decade of leading Zillow, Rascoff stepped down and handed the keys back to Barton. He took another direction and positioned the firm as a purely online player geared towards investing in real estate themselves.
They started by buying and flipping homes in Phoenix and Las Vegas area.
2020 was a landmark year for the company as the work from home conditions forced by Covid-19 forced people to relook their living options and get away from locations near their physical offices. In addition, stimulus checks and low-interest rates gave people access to capital.
To make operations efficient, Zillow launched a licensed brokerage unit in September 2020. It planned to hire its real estate agents. This was received harshly because it had previously vowed to avoid such a direction as it would put it in direct competition with the agents it served.
By the end of 2020, Zillow registered about 245 million unique monthly users, with annual revenue of 3.339 billion. Check out how Craigslist, another successful listing company, maintains its revenue as well in this complete guide.
How Does Zillow Make Money?
Zillow’s revenue model is broken down into three categories; Homes, IMT, and Mortgages. When it was launched, the company got revenue from advertising revenue.
It worked since the company was focused on one niche and could provide advertisers with better-targeted placements.
Home Revenue Model
Zillow’s dominance lies with the data it has as it lists over 110 million homes in America. It arguably has data on almost every home in the United States. This came into play with the launch of Zillow Offers in 2018, based on the iBuyer model.
Instant buyers take advantage of in-depth analysis, looking at broad market sets, seller information, and various metrics to make instant cash offers to sellers.
Their convenience lets them buy houses below the market value, particularly for sellers looking to get cash for their homes quickly. The algorithms improve with each buyer, making it even better for the iBuyer.
Zillow Offers makes money from this model. It makes money whenever it sells a house for more than it paid for, plus all the associated costs. In addition, the company charges some fees when buying homes from sellers. They include a selling fee of 6%, which is in order since agents charge around the same amount.
Closing costs ranging between 6 and 7 percent are also applied, covering title, escrow, and tax. Lastly, the firm charges a service fee of about 2.5%, which handles maintenance works, utilities, and taxes.
A home can be sold, and all these processes are completed within a few hours.
IMT (Internet, Media, and Technology)
Here, Zillow makes money from the sale of marketing services and other solutions. The business unit is split into Premier Agent, Rentals, and Others.
Premier Agent revenue is obtained from Zillow’s Premier Agent and Broker programs. These are SaaS tools that agents and brokers use to organize their work and advertise services on Zillow. The company makes money on a cost-per-leads basis.
This amount depends on the market segment and agent services and can range between $20 and $100 for properties above $500,000. Agents can not only reach out to customers on Zillow but its affiliates such as Trulia, StreetEasy, or HotPads.
Rental and Other parts of the revenue are from the sale of advertising services to rental pros and landlords, inspectors, photographers, home improvement professionals, and builders, among others. Zillow gets money here on a cost-per-lead basis which depends on the market’s competitiveness.
Zillow garnered $1.45 billion for the fiscal year 2020 from this revenue segment.
Mortgages
This was launched in 2018 following the acquisition of Mortgage Lenders of America, and the company rebranded it to Zillow Home Loans. It lets users get money to buy homes or refinance their homes.
In this section, the company makes money on interest charged on the mortgages. It depends on the principal, duration, and down payment. In addition, Zillow works with other lenders on its platform through a bespoke marketplace that has over 50 lenders.
The lenders here pay Zillow on a cost-per-lead basis. The fee depends on the agreement with the lender.
Lastly, Zillow makes money from the subscription of its Connect services. This lets lenders and agents use special tools created by Zillow to advertise their services on their platform.
In 2020, Zillow posted mortgage revenues of $174 million, a 73% increase from 2019.
Frequently Asked Questions
Question: Does Zillow Make a Profit?
Answer: Zillow has constantly been making profits, which have helped sustain its position as the most dominant real estate listings website in the United States.
Its most profitable quarter was recorded in Q4 of 2020, reporting a net income of $46 million. This was remarkable to many, especially those who kept a keen eye on its newly launched iBuyer program.
Question: Why is Zillow Flipping Houses?
Answer: This is part of the transformation the company aims to spearhead in the online real estate industry. By helping sellers and buyers connect, Zillow also buys houses and flips them depending on a few factors, making it easy for buyers and sellers.
Question: Is Zillow a Broker?
Answer: Zillow was licensed as a broker amid a lot of uproar in 2018. This was after it launched its iBuyer program. As a broker, it enlisted its real estate agents and brokers to help handle this aspect of the business. It has steadily got licenses to run its iBuying business in other states.
Bottomline
Zillow is still the dominant real estate platform in the United States, a position that was primarily helped by the acquisition of Trulia. However, no company can hold this position forever, as they need to keep changing and innovating to find better solutions to their customers’ problems.
This is what Zillow does, and it has not been shy to take controversial directions that led to a lot of uproar but strengthened its position at the helm. Zillow is in a great position, and it is interesting to see the direction it takes from here.
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