Zillow chief Spencer Rascoff thinks the real estate market is ripe for disruption.
He started at the company in 2005, watched it become a household name during the real estate boom, then held on as the housing bust rippled through the entire industry, finally taking the company public as its CEO last year.
Zillow has changed a lot since he started — it used to be best known for its "Zestimate," the housing price estimator that everybody used to see how much their neighbors' houses are worth. That got people checking the site and established it as a nationwide brand.
But now it provides a full array of services to real estate agents and brokers, and has added new sites for consumers to find rentals and shop for loans. It makes most of its money from selling advertisements to the real estate industry, and has been able to increase revenue 100% (year over year) in each of the last five quarters.
Still, Zillow is valued at close to $1 billion, which is pretty amazing for a company that earned only $1.1 million on $66 million in sales last year.
We sat down with Rascoff this week to talk about the company. He couldn't say TOO much about finances, since the company reports earnings on May 2, but here's what we learned:
- Real estate agents spend $6 billion a year on advertising. He thinks Zillow can get way more of that money: "Agents collect $60 billion in commissions a year and they turn around and spend about 10% of that in advertising, $6 billion a year. So despite our significant revenue growth — five straight quarters of over 100% year-over-year revenue growth — we have less than 1% wallet share of what agents spend on advertising. Think about that for a second. We are the biggest real estate site on the web, by far the biggest real estate site on mobile, and yet agents spend 99% of their ad budgets elsewhere."
- A lot real estate advertising is on silly giveaways: "In my junk drawer in my kitchen where I have the rubber bands and paper clips, I have everything from refrigerator magnets to pens to post-it notes that real estate agents have dropped off over the years."
- He wants Zillow to do for real estate agents what OpenTable did for restaurants: "[OpenTable] have a great website and a suite of mobile apps, which consumers use to book restaurant reservations. If that was all they provided to the restaurant, then any time another media model came around to try to move inventory for the restaurant, Open Table would be strategically exposed to that .... So what Open Table has done is provide extraordinary technology to the restaurant .... It provides everything from software to manage paid time off, to tip allocation, to frequent diner programs, to rewards programs for the diners, and so on."
- Real estate agents are no longer just information providers, they have to be expert helpers: "They know that the client sitting in the backseat is going to have the Zillow smartphone app. When they pull up to that house they will be able to tell the agent what the seller paid for the home, how long it's been on the market, what the pictures look like, what the Zestimate is, what the price history has been, whether or not the seller has dropped the price and so on. It's the agent's role no longer to tell that information to the client, but to interpret it."
- But agents shouldn't worry because Zillow will NOT compete with them: "When we launched six years ago there was much more industry consternation than there is today because people were unsure of what our ultimate grand vision was. We have been very clear with the industry that our grand vision is to be a media company, and not to be a brokerage."
- What he thinks is going to happen to the housing market: "The way I look at it is nationwide we are through the worst of it but not out the other end yet, and when we come out the other end you can expect several years of basically flat home values, not any type of a quick recovery off the bottom. That having been said, there are some areas including parts of the Bay Area that are already seeing year over year appreciation. There are other ares like Atlanta that are still declining quite rapidly."
Here's a lightly edited transcript of our chat:
Spencer Rascoff: We bought a company based in Orange County about 6 months ago called Diverse Solutions with about 20 employees. Diverse Solutions is the leading provider of Multiple Listing Service (MLS) source data for real estate agent websites. If you're a real estate agent you undoubtedly own a website and Diverse Solutions connects to the MLS's and provides the back-end functionality for your website. This is all part of our strategy of shifting from a seller of ads to a seller of services to real estate agents.
BI: Tell me about the strategic shift. Don't most real estate agents already have their really spiffy website with their MLS data? What do you add to that?
SR: Companies that merely provide leads to small business are susceptible to disintermediation by other media properties, online or offline.
Let me give you an example. Open Table seats diners in a restaurant. They have a great website and a suite of mobile apps, which consumers use to book restaurant reservations. If that was all they provided to the restaurant, then any time another media model came around to try to move inventory for the restaurant, Open Table would be strategically exposed to that, whether it was Yelp or Groupon or Facebook ads, or Google Ad Sense etc...
What Open Table has done is provide extraordinary technology to the restaurant, so the software that runs most restaurants now is Open Table software. It provides everything from software to manage paid time off, to tip allocation, to frequent diner programs, to rewards programs for the diners, and so on.
LinkedIn is the other obvious example. LinkedIn is trying to become an HRIS (Human Resources Information System) for the whole enterprise, where the whole workflow of the candidate of the applicant runs through LinkedIn's software and then they sell media to the company as well.
That's what we're doing. We're trying to move to a world where agents wake up, roll out of bed, and pull out their tablet or PC and manage their day and their workflow based on the tools that Zillow provides to them. Undoubtedly the contacts that we sent to them from Zillow consumers will always be the most important part of that bundle, but other things will matter as well.
For example, we just rolled out a free CRM to all real estate agents, not just those that subscribe to us, to keep track of their communications to their clients .... We bought a company called Postlets that does listing syndication. Agents upload listings to this website and it sends listings to a dozen websites including Craiglist. Listing syndication is a really important part of an agent's functionality.
BI: Are you targeting the bigger real estate brokerages or is this more aimed at individuals in small firms?
SR: This is functionality primarily in individual real estate agent regardless of whether they're at a nationwide brokerage or a local brokerage. It's workflow and digital marketing technology for the individual agent.
BI: Do you charge for it?
SR: Some parts of it they'll subscribe to, but it's a freemium model and so a lot of the functionality that we provide to these agents are available to everyone for free. We have over 50 widgets that agents can put on their website and several Facebook tabs that they can choose from to put on their Facebook page. These enhance their digital presence for free. As well as our CRM, which is now free. Then we also sell subscription products.
BI: What's the size of the market you're addressing? I mean, Zillow is valued at over a billion and there's a pretty spectacular P/E ratio associated with that right now. Where do you grow and how big do you think you can get?
SR: Well I look at the total addressable market several ways. Firstly, based on ad-spend.
Agents collect $60 billion in commissions a year and they turn around and spend about 10% of that in advertising, $6 billion a year. So despite our significant revenue growth — five straight quarters of over 100% year-over-year revenue growth — we have less than 1% wallet share of what agents spend on advertising. Think about that for a second. We are the biggest real estate site on the web, by far the biggest real estate site on mobile, and yet agents spend 99% of their ad budgets elsewhere.
BI: Where is that spend mostly going? Google ads? Newspaper ads?
SR: It is very fragmented in different places. Some of it's on newspaper advertising, some of it's direct mail, out of home advertising, the supermarket carts with the real estate agents photo on it, post-it notes. In my junk drawer in my kitchen where I have the rubber bands and paper clips, I have everything from refrigerator magnets to pens to post-it notes that real estate agents have dropped off over the years.
BI: What do consumers use the service primarily for now? I'm mostly familiar with the Zestimate, where you check the value of your home, or your neighbors' homes.
SR: We are probably best known for the Zestimate, which is our free and instant valuation on every home in America, as well as the Rent Zestimate where we have over 100 million rent values of homes and apartments in the U.S.
But most of our users now are coming to us to shop for homes. They are coming to look at the over 3 million listings of homes for sale, as well as the hundreds of thousands of new construction listings, foreclosure listings, "Make Me Move"" listings, and rental listings which are on Zillow, as well as to get market context on home valuations.
The big usage shift has been a platform shift though towards mobile. Today more homes are viewed on Zillow on a mobile device than on the web. Even in the last year — now we are at about 57 homes viewed per second on Zillow on a mobile device, only a year ago it was in about 20 homes a second on a mobile device. We have the number one real estate app on iPhone, iPad, Android, BlackBerry, Windows Phone 7, the Kindle Fire ... you name it.
BI: I've heard real estate agents go out of their way to say you can't trust the MLS listings on all these online sites like Zillow, they're old and out of date. How do you counter that?
SR: We connect to over 300 MLSs and thousands of brokerages and we run, all feeds nightly and many feeds intra day. When there is a stale listing on Zillow, it's because the listing agent forgot to remove it. Sometimes intentionally and sometimes inadvertently. We have a whole team dedicated to weaving this issue out and a lot of checks in place to ensure a listings accuracy, but it is an industry wide problem. I would agree with your agent's sentiment, it's something that the industry struggles with.
BI: Do you think real estate agents feel threatened by all this? They want to be the relationship broker, "look at this great listing I found." They don't want you to find the same listing because then you start to question their value. How do you overcome that?
SR: Most agents have shifted their business models and their value proposition to consumers as a result of the Internet, and those that haven't will either need to leave the business or shift quickly.
Agents are no longer information gatekeepers, they are now transaction consultants. I think the doctor analogy is pretty apropos. My wife is a doctor and every night she logs onto her hospital's website and she looks at the patients she's going to see the next day. Then she goes to WebMD and she looks at the web descriptions of these patients' issues. The reason she does that is not because she needs a refresher on what's wrong with them, it's because she knows that these patients are going to be doing that themselves.
When the patients come in to see her, they frequently pull out a smartphone and say, "I think I have this" or "you gave me this drug and this web app says the side effects are this etc..." She is no longer the one providing the information, she is the one saying "based on my years of experience, let me interpret that and massage that information for you."
That's very much what agents are doing now. They know that the client sitting in the backseat is going to have the Zillow smartphone app. When they pull up to that house they will be able to tell the agent what the seller paid for the home, how long it's been on the market, what the pictures look like, what the Zestimate is, what the price history has been, whether or not the seller has dropped the price and so on. It's the agent's role no longer to tell that information to the client but to interpret it.
BI: So agents aren't that worried about you anymore?
SR: When we launched six years ago there was much more industry consternation than there is today because people were unsure of what our ultimate grand vision was. We have been very clear with the industry that our grand vision is to be a media company, and not to be a brokerage. They want to make sure that we will not have Zillow real estate agents and we will not actually compete with them.
BI: And that's how you guys are different from Redfin, correct?
SR: Exactly. Redfin absolutely competes with Windermere [a large Seattle-based real estate agency]. Zillow does not compete with Windermere, Windermere is an advertiser of ours, they are a partner of ours, they put listings on the site and many dozens of their agents are premier agents and choose to advertise with us.
BI: Trulia is a little bit more of a direct competitor. How do you see them?
SR: Well we have competitors in every city, we compete with wherever our home shopper might get local real estate information. But nationwide Zillow has over 32 million uniques a month, we are the largest real estate site according to ComScore, we also operate Yahoo! real estate which makes us by far the largest real estate network.
The way we differentiate ourselves relative to any other real estate ste is that we focus on all homes, not just homes for sale. [Most other sites focus on] the 3% of homes that are for sale at any point and time. Now this is interesting inventory and interesting information but it is fundamentally commoditized, it is available on hundreds of thousands of real estate sites.
We have that data but it's not all that we have. Instead we add to that hundreds of thousands of rental listings, Make Me Move listings, for sale by owner listings, new construction listings, foreclosure listings etc... We provide market context by offering up information on every home in the country, we include 10 to 15 years' history of the Zestimate, the rent Zestimate, tax data, transaction data, etc... This living database of all homes is constantly being improved upon by our community of users. Over 26 million of those homes, 26 million out of 100 million, have been edited and improved upon by our community. Home facts are being updated, photos are being added, we have over 60 million photos of homes. It's a living, breathing, database of every home in the country.
BI: What about shopping for a loan? You help with that as well, right?
SR: We have a very large consumer marketplace, the Zillow Mortgage Marketplace, where our borrowers can shop anonymously for a loan.
BI: Are the offers binding? Because it seems like I have been poisoned by some of these sites where you click on something and then it turns out it's not accurate at all.
SR: That's where the ratings and reviews become so important. Because no, they're not binding, but you know lets you sort by lender rating.
Every quote can actually be flagged, and the lenders police it themselves, they police one another because lenders will see somebody giving a quote and they will know it doesn't make sense, and they'll flag it and then we ask for the rate sheet and we double check it.
BI: What about your rental product? Is that making money for you yet? (It launched in 2009).
SR: No, we intentionally don't monetize rentals right now, we have no revenue from rentals. This is still a usage game, we have over 300,000 rental listings.
BI: There are probably more sites and apps devoted to the rental market?
SR: Well there is a first generation, kind of a web 1.0 cohort of companies that are paid inclusion rentals companies. They typically have about 100,000 listings and they charge landlords typically $20 to $100 a month to list properties on their website.
This is very much like in the jobs category, where there was a first generation of paid classifieds companies and they became disintermediated by companies like Indeed that came in with a free model, and then other variants on a revenue scale.
BI: A lot of people use Craigslist to find rentals, right?
SR: Craiglist has a lot of the inventory which is why you use it, but there are a lot of disadvantages to using Craigslist as well, not the least of which is UI. Lack of mobile accessibility, lack of tools like the rent Zestimate, it's not map based. Their model is based on frequency, which creates this very difficult user experience and difficult property manager experience because they have to keep re posting in order to stay at the top of the list. It is a very sub-optimal product and so we're I feel good about our product plan as a way to compete with that.
BI: You guys have tons of housing data. How's the housing market doing right now?
SR: Well, the fledgling housing recovery has bifurcated at this point, where there's some markets that are still declining quite rapidly and others that have recovered or are recovering.
Nationwide home values are down around 25% from the peak, which was '06, some markets like Seattle peaked in '07. We're forecasting around another 1% or so to go.
The way I look at it is nationwide we are through the worst of it but not out the other end yet, and when we come out the other end you can expect several years of basically flat home values, not any type of a quick recovery off the bottom.
That having been said there are some areas including parts of the Bay Area that are already seeing year over year appreciation. There are other ares like Atlanta that are still declining quite rapidly.
BI: I would be stunned if prices dropped in San Francisco.
SR: Well it partly depends on your definition of San Francisco. It's really a local jobs story. (See more details here.) Burlingame for example is up 10 % year over year, and that's home values, the rent index is up 14%, Cupertino is up 1.6% year over year, rent index up 15.5%, Mountain View up 5.1% and rent index up 12.7%. As compared with San Francisco which is still declining but rents are way up.
So it's hyper local.
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