Author Archives: Rob Hahn

Special Guest Post: James Dwiggins on Zillow/Trulia

The following was posted on Facebook by a friend, James Dwiggins, earlier today. James is not only a very smart guy — also one of the tallest guys in the industry — he’s also the CEO of Nexthome in San Francisco. Because this is long, detailed, and worthy of saving past what Facebook thinks it ought to be, I repost it as a special Guest Blog, with his full permission.

The original thread may be found here. I’ve taken the liberty of minor formatting for legibility but have not otherwise edited this. The image/photo to which the comments were attached is at the top.

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I’ve been traveling the past week so I haven’t been able to comment on the Zillow/Trulia buyout and I know many of you have asked for my thoughts.

Let’s set the stage first: Trulia was founded May 1st, 2004 and according to CrunchBase, they received 32.8M in venture funding before going public. Zillow was founded in January 2005 and according to CrunchBase, they received 92.5M in venture funding before going public. Both companies set out to change the way consumers search for real estate online and make money off the advertising revenue.

According to NAR, in 2001, homebuyers used Realtors 69% of the time when purchasing homes. In 2013, that number is now 88% of the time. While homebuyers continue to search more and more on non-real estate company sites, ironically they are also using Realtors more as well. My take: finding a home online is the easy part and constitutes about 5% of the entire home buying process.

The hard part begins once you want to make an offer and actually purchase it, which consumers understand to some degree. If they didn’t, those numbers would not be increasing like they have and lots of alternative models that past several years that tried connecting buyers and sellers online would have succeeded. In fact, almost all of those companies have failed. I’ve attached the actual chart showing the increase in Realtor usage from the 2013 NAR Profile of Home Buyers and Sellers.

With regards to everyone worrying about Trulia and Zillow becoming a real estate company or franchise. We all need to understand that this is not their model whatsoever or for their shareholders sake, shouldn’t be.

At the end of Q1 2014, Zillow had 52,968 premier agent subscribers. At the end of Q1 2014, Trulia had 66,700 premier agent subscribers. As everyone knows, their business model depends highly on having real-time listing data on their sites which is provided by brokerages and agents who in many cases are paying for premier placement.

If they became a real estate company, you could almost guarantee two things: 1.) 52,968 & 66,700 premier agents subscribers would likely stop advertising on these sites, destroying their revenue, and eventually the companies as well… and 2.) If Zillow and Trulia were real estate companies, they wouldn’t want competing agents advertising on their sites either. That would be allowing competitors to take away buyers and sellers from their own agents which makes no sense. It’s exactly why every real estate company and franchise doesn’t allow its competitors to advertise on their sites now. That would be counter productive to making money.

In other words, I can’t possibly see how Zillow and Trulia becoming a real estate company would make any sense whatsoever so we should stop worrying about this. If we as an industry are scared of this idea, then we should be paying closer attention to Redfin who is trying to make this kind of model work to some degree. They are not the first and they certainly won’t be the last.

Are Zillow and Trulia dominating the online real estate space and will they continue to grow? The short answer is yes… until either “organized real estate” starts listening to consumer needs and builds something they actually want and will use, or another outside entity creates it. Lots of companies create game-changers and then lose the throne. Think AOL, Netscape, Internet Explorer, IBM. It can be done and it will happen again including our space.

In closing, this is just two major online portals consolidating their businesses in a market that is fast becoming oversaturated as it is. They have just over 110,000 combined subscribers in an industry that has 200,000 potential subscribers at best. They’ll combine resources, streamline operations – (job consolidation) and hopefully become profitable. Please feel free to chime in if you see something different. RobKeith,ImranNobuAaron, I would love to get your take on this as well.

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I will add my thoughts in the comments.

-rsh

As the Real Estate World Turns

There is something about Zillow that brings out the melodramatic in the real estate commentariat, both of the professional variety and often more hilariously, of the amateur variety. The big bombshell from yesterday, of Zillow acquiring Trulia, has brought out some of the finest performances in a drama and in a comedy.

It’s an odd thing to see both massive over-reaction and huge under-reaction. But such is life in the funhouse that is the American real estate industry.

I’d like to look at a few and just… well… comment, I guess. I don’t know if I have much useful stuff to add, except snarky maybe. Though to be honest, sometimes, snark can be useful!

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Why Are Referrals Still Legal?

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A brief question, born out of discussions online and offline in the wake of the Zillow-Trulia deal…. Let me set the stage.

More than a few people think that Zillow will ultimately want a piece of the commission (as evidence, they point to the brokerage licenses that MarketLeader once owned, which then Trulia owned, and in the future, the combined Zillow-Trulia entity will own). But no one thinks that Spencer Rascoff is going on listing appointments. The thought is that Zillow will just charge 25% referral fees for sending a lead to one of its Premier Agents.

That 25% referral fee, of course, is standard industry practice. Your seller is moving to another state? You find an agent, refer your client, and you’ll get 25% of the commission if/when she buys a house.

In fact, this practice is so common that it is widely abused by “paper brokerages”. (See Inman’s excellent coverage of the issue starting here.) From Inman:

“Paper brokerages” — companies that join multiple listing services in order to access and display MLS listing data online, but don’t provide brokerage services to consumers — could be the next big thing in online real estate. But only if the traditional brokers who control the nation’s MLSs continue to tolerate them.

The missing piece from the Inman story is how these paper brokerages make money: referrals. I mean, why else join MLS’s and display listings online while not providing any brokerage services if it weren’t for the fact that they can make money simply from referrals?

Thing is, once upon a time, these kinds of referrals were commonplace in the larger real estate industry as well. Mortgage companies, title companies, escrow companies, etc. all routinely paid referrals to real estate agents for sending them business. Until Congress passed RESPA (Real Estate Settlement Practices Act) in 1974 banning pretty much all such practices. Sure, there are narrow exceptions today (affiliated businesses, etc.) but for the most part, it is illegal for a mortgage company or a title rep to provide anything of value to a real estate agent for sending leads their way.

So… the question is, given the obvious problem of paper brokerages, and given that the spectre of Zillow-charging-referrals would be eliminated overnight by extending RESPA to agent-to-agent referrals… why aren’t we advocating for this as an industry?

Well, yeah, sure, the obvious answer as to why not: it’s all about the Benjamins. I get that. But is there any reason that isn’t patently self-serving not to prohibit referrals altogether?

If what’s good for the goose (the title companies, mortgage banks, and escrow companies) is not good for the gander (real estate agents paying 25% of the commissions to each other), I’d like to understand why. I think I’m pretty knowledgeable about the industry, but this is one of those practices that has me scratching my head….

-rsh

Zillow Acquires Trulia; I Speak With Greg Schwartz & Paul Levine

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By now, every reader of this blog knows that one of the biggest deals in recent memory (if not ever) just went down this morning:

Zillow, Inc. (NASDAQ: Z) today announced that it has entered into a definitive agreement to acquire Trulia, Inc. (NYSE: TRLA) for $3.5 billion in a stock-for-stock transaction. The Boards of Directors of both companies have approved the transaction, which is expected to close in 2015.

It appears the rumors were in fact true. The reaction so far this morning might be characterized as stunned confusion, leavened with the expected amount of zaterade. For a variety of reasons, including my business relationship with Trulia, I haven’t commented on the rumors. But now that it’s a done deal, and I’ve spoken with both Greg Schwartz, Chief Revenue Officer of Zillow, and Paul Levine, Chief Operating Officer of Trulia, about the deal, I think it’s worth discussing at least a little bit.

At this early stage, however, everything that isn’t directly stated is conjecture. They two companies announced the acquisition; it hasn’t gone through due diligence, the normal amount of litigation, and the long integration process. I’ll do what I can to provide actual information, and then speculate away.

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First Ever Notorious Reader Contest!

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So… earlier this year, at the T3 Summit, I listed as one of my Black Swans the possibility that the 1099 independent contractor status for real estate agents might go away. The reason, I thought, was that state and federal governments would want MOAR taxes. You know, Social Security, Medicare, Obamacare, whatever taxes that are tied to “employment”.

Fast forward to the California Association of REALTORS event earlier this week, and Joel Singer, CEO, mentions that this exact issue is one of the big challenges that keeps him up at night. I heard much the same thing from Budge Huskey of Coldwell Banker. There are a couple of lawsuits making their way through California courts that may result in real estate agents being classified as employees.

Here’s the thing. One of the points that Joel made was that if agents became employees, that will be horrible for organized real estate, for franchises, etc., but it might be great for others. And in all of the discussion that followed, I kept asking myself a question… that I could not answer.

A few days later, I still can’t answer the question. So this post/contest. I figured I might as well outsource my thinking to some of the best and brightest in the industry and outside it.

Here’s the deal. Please email your best answer — as long or as short as you’d like — to the question below to rhahn@7dsassociates.com. I will select a few that I think are the best, then post them on the Notorious Rob Facebook page. The top vote getter (by Likes) will then win.

What will they win, Chuck? The first place winner will receive an all-expenses paid vacation for a week to Houston suburb of Katy in August! The runner-up will receive two weeks to Katy in August! No, not really.

I think $20 gift certificate to iTunes, Amazon, or Starbucks — your choice — to the winner seems about right. Woot! Free cash from Notorious!

The Question

Here is the question/topic for your participation in this lovely contest:

In 2015, Congress proposes changing legislation such that real estate agents would be treated as W-2 employees. Now, imagine that you are speaking to a regular homeowner, not to another real estate professional.

Please provide the best consumer-centric reason why real estate agents should remain 1099 independent contractors, instead of employees. How does the home buyer or seller benefit from having real estate agents be 1099 independent contractors?

Again, your answer may be as long or as short as you’d like. Email them to me. I’ll pick the top few and post them. We’ll give this a week maybe? Then I’ll post the winner. Share with your friends! The deadline for entry will be… Wednesday, July 30th, at noon central time. We’ll pick a winner by Friday.

Here’s wishing you better luck than I had trying to think of the answer to that.

-rsh