Zillow to Acquire Trulia for $3.5B

Some background: The US real estate industry is broken up into regions (e.g. SF bay area, Orange County, Lake Tahoe, etc.). In order for a brokerage [1] to operate in a region, it needs to employ agents specifically licensed in that region, and have a real office there. Importantly, each region also has its own data feed of listings, called an MLS feed [2]. Amongst real estate agents, the MLS feed in each region is considered the primary source of real estate listings. If a house is not in the MLS, it's not for sale. BUT, only brokerages have access to MLS feeds.

There is no standard for MLS software. It's truly terrible. No joke, in some regions, the MLS service -- responsible for all real estate listings in that region -- is an archaic Windows program running on a desktop in some guy's Lake Tahoe cabin. Generally, MLS feeds are similar in structure, but there is no semblance of standardization, API, or developer-friendly solution for accessing it. Every region has its own MLS feed with its own structure, access restrictions, weird rules, etc. It's a nightmare to develop against.

Zillow and Trulia set out to solve this problem. They are listing aggregators, essentially filling the same role as MLS software. But because Zillow and Trulia are not brokerages, they cannot access the MLS feeds. So they have to get the data on their own. They depend on real estate agents manually inputting their listings into the Zillow/Trulia platforms. Nowadays, most agents do input this data, but that was not always the case, and IIRC Zillow/Trulia still only have something like 80% coverage compared to MLS feeds.

So Zillow and Trulia are simple listing services. They are basically advertising platforms for real estate agents. Their revenue model depends on agent referrals, paid listings, etc. They have no direct role in selling a house.

REDFIN IS A BROKERAGE. Redfin actually employs real estate agents who will help you buy a house. And instead of earning commission proportional to sale price (a huge moral hazard -- see: Freakonomics), they earn commission based on customer satisfaction. So Redfin agents are inherently motivated to work in the customer's best interest, instead of their own, which is getting the price as high as possible.

Because Redfin is a brokerage, it is entirely different from Zillow and Trulia. This is the reason that you only see Redfin in "some" areas (although they have coverage in most major metropolitan areas at this point), while Trulia/Zillow are nation-wide. When Redfin expands to a new area, it needs to establish an office, hire and train agents, file paperwork, etc. This takes time, but often when Redfin gets to a new area, there are already thousands of customers who have been waiting for them to launch there.

Also, because Redfin is a brokerage, it has access to MLS feeds. So Redfin gets its data directly from the source, instead of depending on real estate agents to enter their listings directly into its platform. Because of this, Redfin has 100% coverage in all the regions it serves, compared to ~80% (IIRC) of Trulia/Zillow.

So now it looks like the market will come down to Redfin vs. Trulia/Zillow. I'm curious to see how this plays out. On one hand, Redfin has a far more defensible model -- they have an office in every region, and actually make a lot of money from each listing. And they have a far better value proposition for the customer. Why would you use a real estate agent trying to pump the price as high as possible, when you can use one who will be paid entirely based on your satisfaction rating?

On the other hand, Zillow/Trulia have wider reach. There is nothing stopping them from opening a brokerage in their most popular markets and simply copying Redfin's model. But if they do that, they are already way far behind.

Personally, and I'm biased because I worked there, I think Redfin is going to "win" this battle. There's no reason why Zillow/Redfin can't coexist harmoniously, but I expect we will see Redfin making far more money in 10+ years than Zillow.

[1] http://en.wikipedia.org/wiki/Real_estate_broker [2] http://en.wikipedia.org/wiki/Multiple_listing_service

(EDIT since this is getting so many upvotes: I DO NOT SPEAK FOR REDFIN AT ALL, I DO NOT WORK FOR REDFIN. I worked there one summer last year.)

For example, it puts my house at about $50k under my next-door neighbor's house, despite my home being larger, with more upgrades (about $100k worth), with one more bedroom and an additional full bathroom.

The identical house to mine, a block over, is $30k more than mine, but still $20k under the neighbor's home. A home another block away, similar to my neighbor's, but slightly smaller is actually on the market for $2k more than theirs.

Another house, identical to mine, half a block over in a different direction is Zestimated at almost $90k more than mine. And a similar house down the road is on the market for $75 more than mine.

My neighbors, directly behind me, have a model one size smaller than mine, and have done a tremendous amount of work on their home. Custom landscaping, high-end playground for their kids, fences, completely remodeled basement, and one more bedroom than my house, Zillow puts it at $10k under mine.

So within, basically 2.5 blocks, in a cookie cutter suburb, we have almost $100k variance, with Zestimates at least $50k under market prices in some cases, and $50k over in others, and smaller homes Zestimating to be worth more than larger homes next door.

Believe it or not this is an improvement from a couple years ago, but no reputable agent in my area uses Zillow for anything.

Trulia, by way of comparison, puts my house at $20k more than Zillow and flips the relationship of small/big houses so they make slightly more sense pricewise.

Redfin seems to be the closest.

>They depend on real estate agents manually inputting their listings into the Zillow/Trulia platforms

Are you sure that Zillow isn't just scraping the MLS data from broker sites?

You definitely need an agent to sell a house. Because no other agents will show your house if you do a fsbo (for sale by owner). In fact, agents will actively discourage their customers from buying your house, even if they offer to pay the agent their half of the commission.

If you are buying a house. The main thing is they can open the doors of other agent listed houses and show them to you.

They have a tightly closed network, and it's held in place by laws. The NRA (national association of realtors) has a strong political lobby.

Here is a good run down of the situation on 60 minutes. It's old (2007 before bust) but not much has changed.

http://www.cbsnews.com/news/chipping-away-at-realtors-six-pe...