Zillow (NASDAQ:Z) has become the place where most people start their homebuying journeys, with over 195 million unique visitors visiting the site on a monthly basis. For real estate agents, advertising on the platform can generate a host of new leads for customers, leads that until earlier this year they had been willingly paying up for.

But growth ground to a trickle in 2019, and though the situation seems to have stabilized in the third quarter, with revenue rising 5% to $241 million, Zillow may have another problem that could cause this once-lucrative revenue stream to come undone.

Family in front of for sale sign

Image source: Getty Images.

Lawsuits could hit home

The real estate site has been hit with two lawsuits charging its Premier Agent program is "unfair and deceptive" because it advertises real estate agents on listings for which they are not the broker. The suits allege consumers can get confused and potentially end up entering into dual agency transactions, where the real estate agent is working for both the buyer and seller.

The first lawsuit targeted Zillow's Trulia division and focused on its New York market, but the second lawsuit is against Zillow itself and broadens the scope to include New York, Pennsylvania, "and States where defendant conducts business," potentially making it nationwide.

While lawsuits are part and parcel of doing business these days, and these efforts could merely be symptoms of an enterprising trial lawyer looking to make a quick buck from a settlement, the facts of the suit suggest there may be more meat to them than typical proposed class action lawsuits. 

Also, because the program is controversial with agents themselves, and the Real Estate Board of New York has proposed rules that would ban steering customers to agents simply because they advertised on Zillow's site, the lawsuits could endanger the program's existence.

Searching for alternative streams of revenue

Zillow has been using its massive online audience to leverage its position. Most consumers are probably familiar with the real estate site's Zestimate value of a home's worth. While there is a lot to be desired in the figure calculated, it at least provides a starting point for thinking about a home's value.

Getting in front of all those eyeballs is why many real estate agents reluctantly sign up with Premier Agent. If the lead leads to a sale, then the commission, even with the "success fee" that's paid over to Zillow, is still worth it.

Yet the lawsuits come at a time when the site is also ramping up its involvement in buying homes through its Zillow Offers business, where it will make an offer to buy the home for sale. In the third quarter, revenue from this segment exceeded its traditional revenue stream for the first time, coming in at $385 million.

While viewed as a success, the new program is also costing Zillow a lot of money, leading its losses to balloon to almost $65 million in the quarter. Year to date it has now lost more than $204 million, versus a loss of just over $22 million in the first three quarters of 2018.

A change in business

Zillow has said it supports the transparency the New York rule change brings, and defends the Premier Agent program, saying it provides the tools consumers need to do additional research on any particular property.

Because it pairs up customers with agents who have no nexus to the listed property other than that they advertised with Zillow, from a layperson's perspective there would seem to be a good chance the case will be found to have merit. While Zillow has changed the way we think about buying and selling a house today, that could still be a real hindrance to finding its way to profitable growth.

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