Why the World (and you) should be Watching Zillow

No matter what you’re doing, you need to closely watch what Zillow is up to.

At this point you’re thinking one of two things - either you’re thinking “what in the world is a Zillow?” or “why should I care about a real estate-related company?”.

Well, let me explain.

First, I want you to imagine that you’re a car dealer.

Your occupation is quite simple on the surface - you buy cars and you sell cars. But obviously, you want to make a profit while doing so.

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Here’s a scenario:

The above car - Car X - is available for sale from a private source for $1000.

Do you purchase it?

It’s tough to answer - you don’t know whether you can sell it at a higher price, because after all that’s the sole determinant of your success as a car dealer.

Now what if you had the following data on how much other people had sold the same car model for:

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Do you purchase it?

It’s a lot easier to say yes now, with data that supports that $1000 is well under the market sell price. In other words, after looking at some additional data, it’s a good idea to buy this car because you can re-sell it for a profit with a very high probability.

But what if you had the above data and a whole lot more?

What if you knew the selling and buying price for every car, for every given condition, for every number of miles traveled, for every color, and for every zip code in the United States.

You’d very easily be able to tell which cars listed were being sold for cheap, and which people were willing to buy cars for much more than their actual value.

You’d be able to make a profit pretty easily.

Why am I telling you all this?

Because there exists a company that has all that data, is getting ready to buy and sell to turn massive profits.

Okay, they don’t exactly sell cars - they list houses, and it’s a company called Zillow.

You see, In the past, this billion dollar company just used to list houses. People like you and me looking to sell could create free accounts and post our homes for a price that we thought was appropriate. People like you and me would also hop on the website when we were interested in buying a home and find a house that fit our price range, size, and location.

What results is a massive repository of housing transactional data for each house, neighborhood, city, and state.

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Here’s a neighborhood, marked with information that Zillow has acquired over the years (mind you, almost no one else has such a large amount of housing data) - House A was sold recently for $1100, House B and C are currently on sale, and house E is owned by Zillow.

It’s clear to Zillow that house C is dramatically undervalued - Zillow will buy it. It’s also clear that Zillow can figure out a price point using neighboring sell/buy data to sell house E for maximal profit.

And in here, lies the beauty of what Zillow is setting out to accomplish.

"We're entering that market and think we have huge advantages because we have access to the huge audience of sellers and buyers," Zillow CEO Spencer Rascoff. They’re piloting this program in a few cities and aim to own 1,000 homes by the end of the year.

Zillow wants to flip houses.

Why should the World (and you) watch carefully?

Because this is an experiment that hundreds of businesses need to learn from.

Zillow might succeed; it might not, but what’s important is what a listing company is evolving into.

You see, Zillow’s primary revenue stream was advertisements - They sold ads to viewers on the website, they showed certain houses over others for a price, they directed house-buyers to certain loan providers for a fee.

It’s not a sustainable source of revenue. They’ve bought two competitors thus far, and if real-estate agents start losing interest in Zillow - there goes the business.

A similar thought process can be applied to other companies that make money the same way - think of websites that list things for sale. Ticketmaster, Stubhub, Kelly Blue Book, Cars.com, etc. etc. can use Zillow as a case study for unique applications of data that they alone have.

You see, just like the 2nd car dealer who knew what the expected market price of that gorgeous car was, every listing website that has massive amounts transactional data can estimate a fair market price for a certain product.  

If you have enough data, you can figure out if something is being undervalued, and whether there will exist buyers willing to pay the fair market price in the near future.

The caveat that comes along with Zillow’s initiative - which it’s investors saw as well (indicated by the drop in stock price with that nice arrow) - is that buying and selling houses requires a massive amount of money.

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And you can’t buy/sell houses like they’re a 4-pack of Hanes T-shirts. It’s not a standardized product with reviews and guaranteed returns.

Homes are personal and an important decision which require thought, care, agreement from all parties, and irreversible (at least not with a UPS return label).

So - whether Zillow succeeds with their creative and incredibly intelligent idea is yet to be seen, and so is how long it takes for other listing sites to adopt this strategy, but in the meantime - What do you think?

Pure genius, unadulterated stupidity, or somewhere in between?

Post your thoughts in the comments on my website, and let me know!