More Confusion From Analysts Regarding Zillow Instant Offers


“It’s pretty unusual to have this kind of business model change for a public company — it’s such a risky move,” said Mark Mahaney, lead internet analyst at RBC Capital Markets.

Analyst confusion regarding Zillow’s Instant Offers program is analogous to being stumped as to why NASA or Tesla would start shifting their business focus to space station and colonization technology in response to a giant, global destroying asteroid barrelling toward earth with a high chance of impact.

This is the asteroid on a collision course with the residential resales industry:

The firm overseeing the class action suit, Cohen Milstein, is terrifying. Their website states they recently won an $835 million dollar settlement in a nationwide price-fixing conspiracy. C.M., who’s won cases against big oil, big tobacco and Volkswagen, are alleging price fixing in real estate sales in that buyer’s agent’s commissions can’t come down by design, and sellers have no choice but to pay nothing less than what the buyer agent wants: An inflated 2.5–3% commission, that, by virtue of the exploitative seller-pays-all arrangement is not a reflection of where free market forces would price them. Buyers agents fees are eighty years old, despite the numerous advances in productivity.

They are seeking a permanent injunction per Section 16 of the Clayton Act, that would essentially ban sellers from compensating the buyer’s agent.

The Realtor community’s objection is slightly disingenuous: Technically, the seller agrees to give their listing agent 5 or 6%, and then that listing agent advertises a 2.5–3% commission to the buyer agent in the MLS. So they say, no-no, its the listing broker that pays the buyer’s agent. Que eye rolling… As though that solves all the problems. The source of the buyer’s agent’s pay is the homeowner’s equity, period. This arrangement restricts free market forces. Sellers pay the 2.5% because if they don’t, they’re afraid buyer agents will make good on their threats to not show the property. Anyone who denies there is an issue needs to explain how “free and competitive”, can exist simultaneously with “threats and fear”… A little more on the obvious antitrust implications later.

The asteroid hits: Zillow’s Premier Agent business is vaporized.

If a law goes on the books and homeowners are relieved from having to pay their buyer’s agent, those home buyers sure aren’t going to give their agent 2.5–3% of the purchase price, not even close. Zillow’s Premier Agent business would go up in flames. Their bread and butter is charging around $200 per buyer agent lead. Three to six percent of these leads convert into sales. About 100 million leads like these are generated each year across the internet, but only around 5.5 million homes sell. Agents can pay thousands of dollars a month for these iffy leads because they can count on one eventually closing and receiving a 2.5–3% commission, offsetting the high cost (Zillow’s profits). It goes without saying that no buyer in the world is going to agree to pay their agent 2.5% out of their own pocket, nor will they mortgage it. What would you pay your Realtor to open doors, advise you on price and push paperwork? A few hundred dollars? A thousand bucks? If you’re buying a $500,000 home, could you even dream of agreeing to pay your agent $15,000? You’ll contact the seller yourself, schedule your own appointments, do your own price research, and hire a title company or an attorney to write the offer. This approach would be especially appealing when dozens of VC backed firms inevitably enter the space and make it easy. This is the apocalypse for residential resale brokerages, half the industry’s profits would evaporate overnight.

Rich Barton has an extraordinary perspicacity for real estate. It’s not just likely Barton believes the plaintiffs will win this suite, I believe he WANTS them to win:

If the plaintiffs win their suit, it will pour gravy all over Zillow’s instant offer business.

A huge issue with accepting an instant offer, from the perspective of a homeowner, is that its a low-ball offer. It’s below fair market value because that’s the point of wholesaling. You get cash for your house so you don’t have to deal with the hassle of listing, showings, your buyer’s finances, etc. The wholesaler-iBuyer turns around and sells the home for fair market value and profits the difference. However, Zillow acquired Mortgage Lenders of America. When a homeowners sells to Zillow and then turnaround and buy their next home, Zillow is there to offer them the loan and make money on the mortgage origination fees. Lending is so profitable they can probably use instant offers as a loss leader for the lending business, and offer people very close to fair market value for the home, and not worry so much about the wholesale margins. Amazon will undoubtedly enter this space. Mortgage applications are the most efficient way to get intimate with your customer. The application is a vacuum for your data, which is currency. I digress. A large portion of the fee in selling to an iBuyer is the 2.5–3% buyer agent commission. Removing the fee improves the offer, and consumer adoption goes way up. Their 5% of all homes sell to Zillow projection can shoot up to almost half of all homes. Who would waste time and energy staking a sign in their yard and leaving for showings if you’re guaranteed you’ll get top dollar selling to Zillow?

With more and more vacant homes for sale, ‘self-touring’ will further push the buyer agent out of the picture:

The likelihood of Cohen Milstein winning the suit.

If the strength of your case is a predictor of outcome, they absolutely, undoubtedly have a very strong case. As outlined in their case filings, homeowners can’t advertise less than 2.5% without worrying agents will refuse to show their home (which is illegal). Say a seller is offering the buyer agent a 1% commission instead. Their buyer goes to the open house and wants to purchase the home. The buying agent sends the offer along with a special little form that NAR conveniently doesn’t require the buyer to sign, even though they have to sign off on everything else imaginable. “Not to be used as addendum to agreement of sale”, because if it was the buyer would see it and have to sign it. He or she will never know what’s going on this way:

The seller gets the offer — they like the buyer’s price — they accept. But they don’t accept the 2.5% commission. They are firm on 1%. Well, the buyer’s agent just goes back to the buyer and says, sorry, they don’t accept your offer. They have no idea their agent’s commission got in the way.

The suit correctly implies that buyer-agents can essentially hold their buyer hostage for a completely arbitrary 2.5% commission. It’s totally arbitrary because a buyer agent could be thrilled to receive ten grand, if it happens to be 2.5% of a $400,000 home. At the same time a buyer agent will not be thrilled, and will protest and avoid a property offering a twenty thousand dollar commission, double the other fee they were happy to get, because perhaps the home is valued at $1.2 million, so they want no less than $30,000 for the same work. Percentages commissions are an illusion. They create expectations among Realtors and cause mood swings. You can’t be worth $15k and $30k simultaneously, either you are underpaid or overpaid.

The suit has merit and the current fee arrangement is an obvious antitrust issue causing sellers to pay in excess of the value a buyer agent provides. The buyer-agent role has been diminishing for years due to networks, software, internet, technology, etc. Buyers find homes on their own, but the buyer-agent ‘finders fee’ has yet to come down. Of course it is inflated. One brave firm, Trelora, tried to offer buyer’s agents a flat $2,500. Buyers-agents responded by throwing rocks through their windows. Cohen Milstein also points out that the US has some of the highest sales commissions in the developed world, and in comparable international markets, when buyer-agents are used they are paid directly by home buyers, rather than by home sellers.

If believe there’s a good chance C.M. will win the suit, then how can you argue with Zillow’s decision to enter the iBuyer space? I can’t imagine what better course of action there is for Zillow to take other than the one they are on.



Proptech contemplative. Obsessed with marketplaces. Fundraising for

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store