Is Zillow stupid, or is the industry fooling itself?

Zillow and News Corp each have $1 billion invested in the concept that there are soon to be enough homebuyer and seller leads on the Internet that they will make a substantial yearly profit from their investments.

The National Association of Realtors (NAR), representing the mindset of the real estate industry, said 400 percent-plus return on their investment come from referrals and prior business dealings, not from websites.

The entity that correctly predicts where leads will come from in the near future will determine who controls the marketplace.

The numbers don’t add up

In a previous Inman article, Gary Keller discussed NAR’s 2015 homeseller and buyer survey, stating that 400 percent-plus return on their investment come from direct referrals or the buyer having done prior business with the agent.

This same survey also states that only about a 30-percent return on their investment come from websites. According to the NAR survey slides, the homeseller leads from websites are just plain bleak, while direct referrals and prior business dealings create 400 percent-plus return on their investment of business for brokers — over 1,600 percent greater business.

Then why the multi-billion dollar investments from some of the smartest business people on the planet? Why each month do more and more brokers pony up thousands of dollars in fees and claim return on their investment in closed deals from the portals?

Either both the portals and this subset of productive brokers are stupid, or the industry is lying to itself about where leads are truly coming from.

Assuming Zillow Group controls half of these Internet leads — or only 5 percent of total buyer leads in the marketplace — are the executives stupid for their investment? Or do Spencer Rascoff (and Rupert Murdoch, for that matter) see something the industry doesn’t?

Would the largest franchises in the real estate industry drop $1 billion each for 5 percent of homebuyer leads?

Consumers’ affinity for Zillow

The public can’t stay away from Zillow, with 59 million unique visits per month. The only broker-related sites in the top 10 are Redfin at $6 million and Re/Max at $1.8 million.

(As a note, Re/Max’s Internet visits have grown since they instituted an AVM licensed from a third-party company — perhaps taking a lesson from Zillow Group’s results.)

What does Zillow offer that buyers and sellers prefer to get there than brokers’ sites?

Zillow offers home information nationally, but buyers and sellers mostly are interested in very hyperlocal information.

Theoretically, brokers’ sites should do this better. But Zillow has the name, the URL and the budget to outgun every broker, brokerage and franchise to be foremost in the market’s immediate memory, plus top results when they search using local terms. Zillow wins here with money.

Is Zillow Group’s spending an investment in the future or a stupid waste of cash? Would the largest franchises be willing to run in the red financially for a decade to dominate leads for their brokers at the Internet level?

Honestly, the only real innovation Zillow offers is an instant valuation and some fairly in-depth market information. Brokers’ sites could beat them on both counts locally, but they refuse to spend a lot of money investing in their future.

The winner is the risk-taker

Zillow Group wins here because of very large cojones relative to those of the industry incumbents.

Dominating a market entails great risk. There are few risk-takers in the brokerage industry. No one is willing to lay everything on the line for a shot at dominating the market.

If you have only a very few companies investing in the future, who is more likely to own the future — those who invest and take the risk, or those who do not? Would the total technology spend by all major franchises combined compete with the billions spent by Zillow Group and News Corp.?

If not, then we certainly have a distinct line of demarcation: those betting on the Internet and those not.

Gary Keller

Who’s going to be proven right in the marketplace: Gary Keller or Zillow Group and News Corp?

If Keller is correct that leads come from door knocks and handshakes, then Zillow Group and Move are out of business.

But what happens if the market chooses a different channel of distribution for researching and hiring brokers? This whole Internet thing does not seem to be waning.

As a broker, if you were being sued and no one referred an attorney to you, or you thought the referred attorney was a schmuck or too expensive, where would you turn to research another one?

Sellers and buyers aren’t doing real estate transactions very often, and their mindset is perhaps at the same level of intensity as you being sued. It’s pretty convenient to Google up some data to learn about what they are facing.

Did I say Google? Sorry, I meant “Zillow up some data” to learn about what they are facing.

The math done for you

For those not betting on the Internet, let’s check our math.

Only 12 percent of buyers used an agent they previously did business with. Meaning that regardless of intentions captured in the survey, a lot of homebuyers don’t use the same agent twice. They are finding brokers somewhere to help them buy a home. Where do you think they look?

Another part of the calculus is that when 41 percent of buyer agents receive business from a direct referral that does not mean the person referring the broker didn’t originally find them on a website. So be careful about assumptions and survey bias by design.

Homesellers claim 42 percent of the time they were referred to the agent, so the same caution holds here as for the paragraph above: where were those agents originally found?

Then per NAR, 24 percent of sellers hired the same agent to buy or sell a home previously. Statistically, this could mean 76 percent dissatisfaction with their previous broker or the process.

(Yes, I’m using a little hyperbole to emphasize how bias can contort the assumed meaning of surveys.) Nonetheless, 76 percent of the time the same agent was not used twice.

If you at the slightest level are considering dipping your toe into the Internet side of the future, then also consider this: As an industry, brokers will not take on Zillow Group and Move at the national level.

You have to attack the market at the hyperlocal level via the Internet. Your goal is to use the profits from knocking doors and shaking hands to fund your future on the Internet.

You are looking at great short-term financial sacrifice to build your future. And if the solution you propose comes from an automated IDX-style theme where you pick your colors and tell them where your headshot goes — you are doomed.

Investing in local control of the Internet is hardcore; it’s all or nothing. Most will not have the cojones to accomplish this.

So shake a lot of hands over the next five years, and then go to trade school to learn programming. I hear that Zillow is hiring.

Creed Smith owns QValue, REalMARKABLE, and Demon Of Marketing.

Email Creed Smith.

Editor’s note: This story has been updated to clarify some of the ROI statistics used.