Zillow's 15-year reign as the leading real estate portal is in jeopardy. With the era of 6% commissions coming to an end, Zillow's monetization model will need an overhaul. Costar Group, 3x the size of Zillow Group, believes their Homes.com portal can unseat Zillow in 3 years.
The End of 6% Commissions#
The 6% commission model in American real estate has been the norm since the 1940s. The longevity of this model makes America an anomaly. Per Professor Norman Miller, real estate commissions fell in other developed countries as real estate markets moved online. In many other developed countries, buy-side commissions compress more than seller commissions, and in some cases almost vanish:
On March 15th, the National Association of Realtors (NAR) settled several lawsuits that alleged realtors conspired to keep commissions high. NAR has agreed to abandon the longstanding industry practice of Cooperative Commissions. Starting in July, home sellers will not have to cover the cost of the buyer’s agent.
Brokers are scrambling to launch new service models. The business models of technology companies serving the real estate market must be reconsidered as well. And now Zillow, Realtor.com and Redfin face their most formidable challenger yet.
Costar’s Homes.com vs Zillow: The New Portal War#
Homes.com, a Zillow alternative bankrolled by parent company Costar, launched a 4-commercial campaign during the Super Bowl that marked the beginning of the New Portal War. Costar CEO Andy Florance recently said Costar will spend over $1bn in 2024 on “the biggest marketing campaign in real estate history” with the goal of unseating Zillow in 3 years.
Over the last decade, many proptech startups entered the market with new business models designed to capture a slice of the ~$100bn per year commission pie pre-settlement.
Zillow and Costar entered 2010 as the biggest names in residential tech and commercial real estate. Despite tens of billions of venture funding funneled into "Proptech 2.0" startups, Zillow and Costar emerged as the big winners:
Zillow might be a household brand, but Costar has three times the market capitalization. Zillow is not yet profitable, losing $158m in 2023. Costar has over $5bn in cash on its balance sheet and plans to spend $1bn competing with Zillow this year. Costar owns several leading marketplace brands:
- Loopnet for commercial real estate
- Bizbuysell for businesses
- Apartments.com, which Costar claims is now #1 ahead of Zillow in residential rentals
Following the news of the NAR settlement, Costar stock increased by 10% while Zillow stock fell 13%.
Now, these two companies will compete in a real estate market undergoing a structural shift.
New opportunities for Portal Business Models#
Ryan Tomasello, a long-time Analyst of Property Technology, said the commission de-coupling will lead to “fundamental changes in the way home buyers and sellers interact.”
Tomasello estimates the de-coupling will reduce the size of the commission pie by 30% - with the biggest chunk of commission lost coming from the buy-side (consistent with international markets).
In the old commission structure, home buyers had no incentive to negotiate with their buyer broker. The 3% cost of buyer representation was subsidized by the home seller. In a new world, homebuyers will pay their agent out-of-pocket.
Already, agents are beginning to advertise new service models. More demanding home buyers who want an agent to attend every tour may continue to use a commission model. Other home buyers may prefer a flat fee model, an hourly model, or to represent themselves. Elements of the buy-side agent duties may be unbundled into distinct a-la-carte service lines (e.g., navigating the inspection report, etc.).
Technology companies will have to align with new personas on both sides of the market. Counter-intuitively, the commission de-coupling also creates more opportunities to monetize listing agents as well. Only 12% of Zillow’s revenue comes from the sell-side, as the buy-side has been easier to monetize in the US real estate market. Here, Homes.com has a head start with its “Your Listing, Your Lead” model.
Ziltorfin's Monetization Problem#
The portals offered by Zillow, Redfin, and Realtor.com - referred to as ”Ziltorfin” by Costar CEO Andy Florance - mislead unsuspecting consumers into contacting a buyer agent who is unaffiliated with the listing. When a prospective home buyer fills out a form to learn more, their contact information is routed to the buyer agent for a fee - not the listing agent.
The basic premise of the new Homes.com “Your Listing, Your Lead” pitch is to offer an alternative. When a prospective home-buyer fills out a form to learn more about a Listing, this lead information is routed to the Listing Agent.
“Your listing, your lead” is probably how most uninitiated home shoppers assume portals work.
So why has Ziltorfin re-routed potential home buyers to buyer brokers? The short answer is that it's been more lucrative - at least to date.
In the 6% commission era, the buyer agent had a stronger economic incentive to buy the lead. At this juncture in the deal lifecycle, the Listing Agent has already signed a commission agreement with the home seller. Most buyers are going to seek independent representation. Duel Agency, where one agent represents both parties, is a tough pitch (and is illegal in some states).
To date, Zillow has monetized its ability to insert a buyer agent into home-buyer journey at the opportune moment. While Zillow is attempting to diversify away from the Buy-Side, the maneuver described above still accounts for 48% of Zillows revenue:
In many cases, Zillow pays a referral fee that is a direct percentage of the buy-side commission (referred to as the "post-pay success referral fee" in slide above).
| Transaction Price | Zillow Referral Fee (% of buyer commission) |
|---|---|
| $900k+ | 40% |
| $675k - $900k | 35% |
| $450k - $675k | 30% |
| $225 - $450k | 25% |
| $0 - $225k | 15% |
If buy-side commissions fall, the value of buy-side leads will fall as well. Zillow CEO Rich Barton spent much of the 2023 Q3 earnings call discussing monetization contingency plans if a de-coupling does become official (which it now has). Barton discussed the models used by portals in other international markets, which already have undergone this evolution. Zillows CFO Jeremy Hofmann downplayed the difficulty of a monetization pivot:
Changing business models and doing a paid inclusion business model is not the challenging piece of the puzzle. It's getting all the unique content, getting all the eyeballs, and that's where we've really, really excelled.
Andy Florance told investors that Zillow would be slow to transition away from a model, risking cannibalization of an offering that contributes $1bn in annual revenues. In any case, with the de-coupling approaching this summer, we will find out how quickly Zillow can pivot.
Homes.com Strategy#
Costar has a new value equation for both brokers and consumers. In addition to "Your Listing, Your Lead," Costar hopes to develop a new mousetrap at square 1 of the home buying journey.
Before home buyers begin to shop for listings, they must select a target neighborhood. Here, Costar is developing Neighborhood Profiles, School Profiles, and other resources out-of-market buyers need to orient themselves. Not only does this provide a differentiated value proposition relative to Zillow, it also creates a touchpoint with buyer leads early in the funnel. Instead of using the Listing Page to generate buyer leads, Homes.com will advertise agent profiles within Neighborhood Profiles.
(See Homes.com commercial A Goldmine of Local Intel to get a taste of Costar's positioning.)
For agents who subscribe to the new member subscription model, Homes.com will direct more traffic to their agent profile and their listings. In the "Your Listing, Your Lead" model, agents can refer the lead to another broker, pitch dual agency, or become their buyer agent (assuming said lead decides not choose to transact on that house).
Costar told investors the new Homes.com Subscription Member model could reach $200m in subscription revenue this year - which would be ChatGPT-like growth.
Costar's strategy is an outgrowth of its product DNA. Costar Suite - the Bloomberg Terminal for Commercial Real Estate - is powered by an army of 1,400 researchers, 600 journalists, 200 field researchers, and 100 economists - in addition to a fleet of drones, cars and planes. Costar has taken a similar approach with Homes.com, hiring 1,000 researchers to create their 20,000 Neighborhood profiles.
Zillow and Costar are driven by two different philosophies regarding product development. Costar believes in deep data integration to achieve content supremacy as a moat. Costar even attempted to buy CoreLogic for $7.35b - although the transaction failed due to anti-trust concerns. Corelogic is the #1 supplier of public record data. Presumably, Costar would have disabled the feeds to Zillow and every other competitor.
Zillows Consumer Lead & the Super App#
While Homes.com is likely already a household name for every broker, unseating Zillow as the category leader will require a winning pitch with consumers. As Zillow 2023 Investor Presentation makes clear, Zillow has a dominant position with a brand that is synonymous with real estate:
Zillow's Zestimate remains the most trusted home valuation tool in the industry. The Zestimate creates an ongoing relationship between Zillow and homeowners - who receive their Zestimate monthly.
Zillow launched a new Super App that promises to manage the full lifecycle of the home. As Zillow Founder Barton says, the Zillow Housing Super App attempts to “re-platform the whole industry into a single app.” Zillow will attempt to be the first consumer app that gives the home seller and home-owner a single app to quarterback the end-to-end journey. The scope of the Super App vision is ambitious, as it attempts to coordinate all the parties involved in a transaction - including brokers, lenders, title services and more.
Unlike Homes.com, which focuses on Neighborhood Discovery and Listing Discovery, Zillow aims to guide the consumer through the entire lifecycle.
Real Estate is suddenly a petri dish for New Business Models#
The battle between Zillow and Costar is over 15 years in the making. As much fun as it is to frame the competition between these two founder-led companies, it may not be a zero-sum contest. In fact, several technology companies may emerge in residential real estate.
According to Zillow CEO Barton, lower commissions bode well for technology players. Looking again to international markets for patterns, lower commissions support technology companies with higher market capitalization relative to transaction volumes.
Historically, real estate has been a hard market for technology companies to enter. Now that may change in residential. Pricing determines business models. It also determines how demand is shaped and value is shared among participants. Now, an industry that has been relatively stable for decades may become a petri-dish for different business models.