Believe or not, the United States unquestioningly supports an archaic, opaque marketplace where information asymmetry misallocates billions of dollars every year.[i] At the heart of this marketplace is a professional service industry with drastically different financial incentives than the buyers and sellers they represent. Realtors are puppet-masters, controlling the largest transactions most Americans will ever participate in. But hope is on the way; Zillow is using technology to marginalize the power of the listing real estate agent, in the process generating billions in savings for the American people.
The incentives in a home sale transaction are thoroughly misaligned, particularly for the seller. A seller, looking to maximize the value generated from the sale of their home, keeps (on average) 94% of the sale’s value with the realtor companies – buying and selling – split 6%. Of each firm’s 3% share, 1.5% goes the firm while 1.5% goes the individual realtor.[ii] For a fully paid-for, $100,000 house, this amounts to $94,000 in the pocket of the seller while the selling realtor pockets only $1500. If the seller was willing to sell for $90,000, the seller would get $84,600 while the realtor would get $1350. A $10,000 price reduction only impacts the seller by $9,400 while only reducing the listing agent’s bottom line $150.
What this means is that the seller’s realtor secures the majority of their value upon executing a binding listing agreement. By contractually limiting a seller’s influence on the process, a realtor can use their leverage in the process to pressure and mislead their sellers to execute a suboptimal contract with a buyer. Further, if there are issues with the execution of the transaction, most standard real estate contracts absolve the realtor for any liability. Listing agents are paid to essentially draw up standard contracts.
But hope is on the way. Digital real estate platforms, most notably Zillow, are loosening listing agents’ iron grip on the system. Zillow is bringing transparency to both the market and the process, normalizing the information asymmetry and bringing power to the people.
First, Zillow is building a comprehensive database of home values to help sellers better understand the nuances of their local market. These “Zestimates” are generated through a combination of publicly available information and user-submitted data about special features, location, and market conditions and help serve as a proxy for possible listing prices.[iii] As machine learning is further incorporated into Zillow’s functionality, the accuracy of the residential transaction market will improve. With a more transparent marketplace, the need for real estate agents to participate in the negotiation process will decline, fundamentally changing one of the primary roles of agents in today’s market.
Second, Zillow provides information about the transaction process that can be helpful to sellers as they embark into negotiations not only with potential buyers but also their listing agents. This information includes strategies for pricing and negotiation techniques, as well as access to a forum that connects and enables discussion between like-situated people.[iv]
In their coming updates, Zillow is positioned to help usher in an era of user-empowered, a la carte real estate services that meet the needs of users while reducing the transaction cost associated with selling a home. Below are a few simple steps Zillow can prioritize to help them lead an epic disruption of the real estate industry.
- Ensure Zestimate market information is as accurate as possible
- Empower users with an interface for updating property details
- Provide database of standard real estate agreements with explanations
- Offer high-quality, remote real estate expert, photographer, and legal services
With these services geared specifically to selling a home, the home-owner is empowered to optimize the sale of their own home. Zillow could charge for these services and owners would be willing to pay – it would be far less of an expense that the current marketplace. If, for some reason, a home-owner wishes to use the conventional process (i.e. an agency) to sell their home, Zillow could also employ agents to conduct this normal business at a fraction of the cost, leveraging their scale to drive traditional marketplace costs down.
Home owners, the investors, are losing billions of dollars each year to real estate professionals. By harnessing and personalizing technology, we can empower the home-owners to realize the full value of their investments.
[ii] Investopedia. 2011. Understanding Real Estate Commissions: Who Pays. [ONLINE] Available at: http://www.investopedia.com/financial-edge/0611/understanding-real-estate-commissions-who-pays.aspx. [Accessed 18 November 2016].
[iv] Zillow. 2016. Real Estate Advice: Home Selling. [ONLINE] Available at: http://www.zillow.com/advice/US/home-selling/question-discussion-guide/. [Accessed 18 November 2016].