On Monday 6th Aug 2018 Zillow Group announced its Q2 financial results. Zillow’s shares fell sharply late Monday after the company announced plans to buy a national mortgage lender and reported second-quarter revenue that fell just short of expectations. Per Nasdaq, Z stock was down about 15.8%, while ZG stock declined 16.4% after the bell on Monday.
While everyone is talking about this decline but that was not the real news. What caught our attention was the acquisition that Zillow announced. We found Zillow’s acquisition of a Kansas-based online direct mortgage lending company Mortgage Lenders of America LLC (MLoA), to be the most interesting and far reaching move not just for Zillow but more so for Agents and Lenders. This is something we expected to happen after Zillow’s foray into the iBuyer segment with its Zillow Offers.
Why is Zillow getting into lending?
This strategic shift allows Zillow to establish itself as a one-stop shop, get deeper in the funnel and closer to the transaction. Zillow is no longer content with being a marketplace that connects buyers, sellers, agents, and lenders. It wants to go deep down in the real estate transaction funnel and become a service engine and not just a search engine.
This enables Zillow to go after more lucrative revenue pool since each mortgage origination might generate thousands of dollars per transaction.
This new revenue stream will help counter the slowing growth of the premier agent program.
This strategy has dramatically expanded Zillow’s total addressable market from single-digit billions of dollars in real estate advertising spend at the time of their 2011 IPO to tens-of-billions of dollars in housing-related transactions, advertising and services today.
Is Zillow Mortgage only for Buyers of Zillow Offers Homes?
Zillow’s Quarterly Update letter talks about Zillow wanting to provide buyers of Zillow-owned homes with a faster, more streamlined mortgage origination experience and reduce hold time. We think Zillow will not restrict their mortgage lending service to buyers of Zillow-owned homes. Zillow’s messaging optic is most likely meant to assuage lenders and agents.
Per Inman, Mortgage Lenders of America (MLoA) reported it originated 4,400 mortgage loans in 2017 through the Zillow platform. During the second quarter of 2018, Zillow Offers purchased 19 homes. Even if the number of homes purchased via Zillow Offers were to increase many folds, that cannot still get them the huge additional revenue they want to generate. Apparently, Zillow will offer their mortgage offering to all buyers.
What does Zillow’s entry into lending might mean for Agents and Lenders?
The biggest game-changing part of this acquisition is the impact on Lenders and Agents. Lenders who are advertising on Zillow now faces direct competition from Zillow for the mortgage business. Since Zillow owns the data pipe, they will have much early indications of which users are most likely going to buy and would need a mortgage. Zillow can pro-actively reach these buyers, before other lenders can.
Zillow mortgage can pre-qualify buyers and then sell the referral to the agents for a referral fee. This sale back to the agent won’t be advertising but rather for a percentage of their total commission. Zillow has a brokerage license (for now in Arizona), so they might do this as a broker-broker referral.
If lenders were to move their marketing budget away from Zillow, agents who do co-marketing with lenders will have their advertising budget reduced significantly.
Zillow is acutely aware of this dynamic and it will be interesting to see how they manage this dynamic.
What are the key takeaways for Agents?
Real Estate Industry is in the midst of a major disruption. The digital transformation that has disrupted other industries, is making its impact on the real estate industry in a big way that fewer agents/brokers can imagine. This is not yet another technology advancement but a fundamental shift that is taking place. Look at what Airbnb did to the hospitality industry. Or Uber did to the taxi industry or Netflix did to Blockbuster and cable.
A perfect cocktail of forces is about to tear the existing business model down, and if you’re not prepared for it, you’ll be left behind.
It is imperative for you as agents/brokers to protect your business by:
✅Up-skilling yourselves to stay relevant. For example, you can become true real estate investment specialist. This is a hugely under served and untapped opportunity. Most wealth managers and financial planners do not sell/recommend real estate to their clients for one simple reason – they don’t get their fees by recommending real estate. They make money when they sell and manage other asset classes but not real estate.
✅Establish yourself as a trusted real estate investment advisor for life and not be viewed as someone who is in it just for the transaction. By doing so will allow you to potentially have multiple transactions with each client.
✅You need to invest in and truly embrace cutting-edge, well-thought out technology that amplifies your expertise. There will be some learning curve but it will be worth it. You just can’t scale and thrive the old way!
✅You need to provide superior differentiated service to stand out and not to been seen as yet another commodity agent. Pick a niche and become an expert in it.
✅Find new lead sources. Don’t become a uber driver – showing up for work every day, making money for Uber so that they invest in autonomous cabs to eventually replace you.
About the authors:
Vinod Sharma and Jo Dixit are co-founders of www.inBestments.com, a new residential real estate investment platform by agents, for agents. InBestments removes the guesswork from investing and enables everyone to make smart investment decisions with analytics.
InBestments enables agents to stay ahead, stay relevant, stand out and grow their business. InBestments does the grunt work for them, freeing up their bandwidth so they can focus on Job #1: taking care of customers and growing their business.