Zillow (NASDAQ:Z) (NASDAQ:ZG) is floating trial balloons in Las Vegas and Orlando that have sent the real estate community into a tizzy. The company rolled out its latest pilot program called "Instant Offers", which allows homeowners to link up directly with investors through Zillow. The buyer makes an all-cash offer for the property, allowing the homeowner to sell without the hassle of putting the home on the market. As a result, realtors are up in arms that the homeowner can complete the transaction with or without their services.
By giving consumers that option, is Zillow about to disrupt the residential real estate industry and put over 70% of its ad revenue at risk?
Realtors' love-hate relationship with Zillow
Realtors have been skeptical about Zillow's motives from the first day it entered the business. There is concern that the internet is going to disrupt the traditional residential real estate business model and the lucrative commission structure that has attracted many agents to the profession.
On the other hand, realtors who have been advertising with Zillow are enjoying more leads, more sales, and increased commissions.
Contrary to popular opinion, the Instant Offers program encourages home sellers to use a realtor even if the homeowner chooses to forgo the traditional listing and sales process by accepting an offer. The real questions are: What will the realtor do to earn a commission, and how much will that commission be?
Upending the traditional sales process
All real estate commissions are fully negotiable. A typical listing fee is 6% of the selling price of the home, paid by the seller, which is split 3% to the selling office and 3% to the listing office. The listing agent is responsible for holding the open house, advertising the property, and in general, engaging with potential buyers and their agents as well as negotiating the contract and facilitating the escrow process.
In the case of Zillow Instant Offers, most of that work disappears. The seller is already accepting an offer, so there is no advertising to pay for or open house to hold. There is also no listing since the buyer has already been found, so even if a homeowner feels more comfortable using an agent, why would they pay a 3% listing fee?
The irony of it all: Realtors turn to the internet to fight ... the internet
Realtors have taken to the internet to voice their displeasure with Zillow. Over 14,000 people, including realtors, attorneys, appraisers, and homeowners have signed an online petition asking for the National Association of Realtors to threaten Zillow with being removed from access to listings if Instant Offers is not discontinued. Without access to the various listing services, there wouldn't be much left of Zillow Group's websites.
However, the National Association of Realtors has already responded to the disgruntled agents, saying "[It] would be unlawful for NAR to discourage its members from using any product or service provider. Such decisions must be made by the broker or agent independently." It went on to add in a blog post: "NAR cannot sponsor or encourage a boycott ..."
In response, Zillow itself has always contended that the company is not looking to get rid of realtors. The fact is that the internet is changing the way business is done in many industries, including real estate. In response to the latest uproar over Instant Offers, Zillow Chief Business Officer Greg Schwartz wrote, "Seventy percent of our revenue is from working with more than 80,000 agents, teams and brokers who advertise with Zillow Group. We believe in agents, and we always encourage consumers to work with them."
How will this get resolved?
Look for a compromise of sorts. A reduced fee for representing clients who accept an offer through the new program may be the answer. Since the realtor will not have to list, advertise, or market the home, or even look for a buyer, it will take up far less of their time and far less effort to service the homeowner. In addition, they may be able to represent the seller if they decide to buy another property.
The bottom line is that technology marches on. If you have to place a wager on Zillow and the internet versus the traditional real estate business, go with the the former. Because in the end, if homeowners like the Instant Offers platform, it will be the realtors that have to adapt to the new environment.
Frank DiPietro owns shares of Zillow Group (A shares) and Zillow Group (C shares). The Motley Fool owns shares of and recommends Zillow Group (A shares) and Zillow Group (C shares). The Motley Fool has a disclosure policy.