How Does Zillow Make Money?
Homes Segment or iBuying
Data is extremely valuable in today's digital world. And Zillow has also capitalized on this segment and earned substantial returns. As noted above, Zillow has more than 110 million U.S properties on its database. In 2019, there were 128 million registered households in the U.S. This means that Zillow has data on almost all registered households in the U.S.
So, how does Zillow leverage this data to make money? In 2018, Zillow launched a service known as Zillow Offers. It's designed around the iBuyer (Instant Buyers) model that is commonly found on similar platforms like Opendoor and Redfin.
The iBuyer platform is more of an automated analysis process, featuring aspects like recent market trends, seller information, as well as inputs made by property management companies, to make instant cash offers to the sellers.
With the iBuyer platform, you can sell a home within a few hours, since offers are made instantly. After listing your home, Zillow will survey it within a few minutes using their algorithms and then send you an offer instantly. From there, an in-person valuation will be conducted, to assess the condition of the property and verify the accuracy of the details provided. From there, Zillow will send out an instant cash offer to the seller.
So, if you are selling a home, you can use the iBuyer platform to send Zillow your property's details. The company will then respond with a cash offer within a few days. The cash offered is normally below your home's market value. You can then decide whether to accept the offer, list the property on the platform using another agent or just decide not to sell. If Zillow buys your property, they will fix it, list it on their platform and then resell it.
Also, Zillow charges the seller some additional fees when buying properties from them. The fee is usually 6% of the property's value, which is in line with what other real estate agents will charge you when you hire them to sell your property. There are also some additional closing costs of approximately 1% to 2%, which cover the title, transfer tax as well as escrow. Zillow also demands a service charge of approximately 2.5%, designed for maintenance work, taxes as well as utilities.
The convenience and speed of this platform have enabled Zillow to buy some properties below market value and earn substantial profits from them - especially from sellers who don't want to wait. Zillow hopes that the iBuyer platform will generate approximately $20 billion annually, in the next 3 to 5 years.
Zillow also makes money from the sale of software, marketing services and various other technology solutions, commonly known as the IMT (internet, media and technology) segment. This segment is divided into 2 main categories - Premier Agent and Rentals.
- Premier Agent: The Premier Agent comes from Zillow's Premier Agent and Premier Broker programs. The two programs are basically SaaS (software as a service) tools, designed to enable brokers, property agents, and other professionals in the real estate industry to organize their work seamlessly, advertise their services on Zillow or track leads. The cost of leads and advertisement will depend on the market demand as well as competition. There are two main pricing models in this segment - cost per impressions and cost per leads. For the cost per impressions, the Premier Agents will pay according to the number of views that your ads generate. The more the views and impressions, the higher the cost. For the price per leads, the agents are charged depending on the market they are serving. The cost may range between $20 and $100. All Premier Agents have access to the platform's dashboard as well as customer relationship management (CRM) software to manage their leads and perform analytics.
- Rentals: Zillow generates additional revenue by selling advertising space to property management companies, rental professionals as well as landlords who want to list their properties on the platform. The charges are based on cost per lead, cost per lease and cost per click. As you may expect, the price will depend on the competitiveness of the market as well as the value of the property.
Zillow uses two main pricing models for the Premier Agent programs. The two models are auction-based pricing model and flex pricing model. For the auction-based pricing model, the number of customer leads an agent will receive will depend on how much they are willing to spend on the ads. The higher your auction bid, the higher the number of potential leads coming your way.
On the other hand, the flex pricing model is more of a flat-rate fee. Premier brokers and agents receive validated leads without paying an upfront cost. They only pay the advertising fee if the sale goes through. So, if you follow a lead from the platform but the sale doesn't go through, you will not pay anything. It's more of a win-win for both Zillow and the property agents.
According to their latest financial statements, the IMT segment generated approximately $1.27 billion. Most of the income came from the Premier Agent program, which generated approximately $924 million. Considering that property management companies spend billions of dollars every year on advertisements, there is a high chance that Zillow's IMT segment will continue growing and bringing in more revenues.
Ad Sales to Mortgage Lenders
In 2018, the Zillow Group completed the acquisition of Mortgage Lenders of America, which consequently made them a licensed mortgage lender. The acquisition was designed to help Zillow develop new tools and expand its clientele. This service was later renamed as Zillow Home Loans. With Zillow Home Loans, Borrowers can now refinance their homes or take on loans.
Zillow Home Loans works like a traditional lender. The company usually makes money from the interest charged on the mortgages. If you borrow a loan from Zillow Home Loans, the interest you will pay will depend on the loan amount you've borrowed, the duration of the loan and the down payment that you've used to cover the loan.
Zillow also allows other lenders to list their mortgages on the platform. The fee charged to the lenders depends on the number of leads generated. Basically, lenders will pay a certain amount of money for every lead or borrower Zillow connects with them. It's more of an advertising space but charged on cost-per-leads.
Also, Zillow generates additional revenue by selling advertising space to other businesses that want to connect with Zillow consumers. These businesses are normally other players in the real estate industry such as home organization retailers, interior designers, and general contractors. Other advertisers that use the Zillow platform include insurance brokers and sellers of various types of consumer products.
Zillow also makes extra money from a subscription-based mortgage company, known as Mortech. Owned and operated by Zillow, Mortech offers lending services via the Mortgage Lenders of America. The software is designed to simplify the lending process by matching potential borrowers with the right mortgages.
In 2019, Zillow generated approximately $100 million from mortgage revenues alone, which is an increase of 26% from 2018. Most of the income in this segment comes from Zillow's Home Loans business, with a smaller portion coming from the other businesses that advertise on the platform.
Most of Zillow's revenue comes from advertisements. And as you may probably know, the digital marketplace is constantly changing and evolving. So, Zillow's advertising revenues are only short-term.
If advertisers ended their relationship with Zillow and the company can't find viable alternatives to replace them, then their revenues will dwindle significantly. So, if Zillow's competitors become more competitive and take away some of their advertisers like real estate agents, property management companies and others, they are looking at a significant revenue decline.
Furthermore, their revenues may also drop considerably if advertisers in the Premier Agent program feel like they are not getting value for their money. Also, a drop in the number of home buyers or mortgage borrowers, both of which are outside Zillow's control can hurt their finances.
All in all, Zillow remains a key player in the real estate industry. It provides a great platform for property sellers, home buyers, real estate agents, home builders, as well as investors. Their expansive range of features and tools has helped thousands of people to buy, sell, rent and own properties. And unless there is a significant shift in the real estate industry, Zillow will remain the go-to platform for most players in the real estate industry.