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Zillow Pursues Brokerage Licenses That It Swears It Doesn't Want

By Rich Duprey – Feb 22, 2020 at 9:11AM

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The online real estate site keeps downplaying this potentially industry-shaking move.

Zillow Group (Z 3.04%) maintains it doesn't want to be a real estate broker, but as it acquires brokerage licenses across the country, its fourth-quarter earnings report shows it is but a step away from achieving that status. 

That would mark an important milestone for the real estate information site, because it would leave little reason for agents to not hang their shingle with Zillow. At that point, it would completely own the entire real estate transaction from beginning to end.

Smiling family in front of a home with a For Sale sign

Image source: Getty Images.

More than just a listing manager

Although Zillow is pursuing brokerage licenses, it's not always doing so on its own initiative. As it expands its services, such as generating leads for agents or improving landlord services, states are requiring it to obtain a license. In many places, you can't collect rents or pre-qualify potential leads by contacting them unless you are licensed.

Zillow has begun building out those kinds of activities, which makes its business more useful and valuable to real estate agents.

Zillow Rental Manager lets tenants pay their rent through Zillow, which forwards it to the property manager, while the company's Premier Agent uses Zillow's massive scale to advertise a property, which gives the site's preferred agents access to large numbers of potential buyers. 

It's a controversial program, however, and one currently subject to several lawsuits, because the advertised listing doesn't necessarily feature the listing agent, just one who's paid Zillow a fee to appear in the ad.

Premier Agent has been charged with being "unfair and deceptive," leading to consumer confusion, but CEO Rich Barton sees the program as a key driver of future growth, noting during Zillow's earnings conference call that Premier Agent "ended December with 12% year-over-year same-store sales growth in monthly recurring revenue, up from 5% at the end of September."

Working on commission

Because Zillow is now also involved in buying and selling homes, becoming a broker that directly employs real estate agents is the online company's next logical expansion.

Zillow Offers generated $1.4 billion in revenue in 2019, up from $52 million a year ago, and it ended the year with a run rate of $2.4 billion as the program accelerates.

Through Zillow Offers, homeowners ask the company to make an instant cash offer on their property, and using a combination of algorithms, owner-supplied information, local real estate agent contacts, and a physical inspection, the company makes an offer to buy the home.

Zillow then turns around and sells the home itself, keeping all the profit in-house. Since it began the program, Zillow has purchased approximately 7,200 homes and sold 4,500. It ended the quarter with over 2,700 homes in its inventory.

Zillow has also begun lending through Zillow Home Loans, which it launched last year.

Taking over the business?

So why not just become a broker? Like Premier Agent, it's a controversial topic, because it continues Zillow's transformation away from simply being a listing site to one that owns the complete transaction, a move that could cut many agents out of the transaction altogether.

Since much of Zillow's business has been built on the backs of the data the industry has provided (namely its listings), and agents have been a lucrative source of revenue for the site (as Premier Agent shows), the company appears to be walking a fine line at the moment.

Barton dismissed Zillow obtaining its New York state brokerage license as a nonissue, saying, "Look, most people don't know this, but we've been brokers for a long time in most places." That's true, but the company's nonetheless seeking national coverage at the same time.

Industry site HousingWire says Zillow should have brokerage licenses in all 50 states by the end of 2020, which would make it much easier to take the next step.

Just a matter of time

For agents, Zillow offers powerful lead generation, management, and conversion services; transaction management; and advertising. Zillow also buys and sells homes and lends to homebuyers. Becoming a broker, hiring its own agents, and taking a substantial cut of any deal would provide a powerful growth incentive.

Zillow may dismiss the notion now, but there may be no putting the toothpaste back into the tube once it is able to operate as a broker nationwide.

 

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Zillow Group (C shares). The Motley Fool has a disclosure policy.

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