Zillow has now officially taken a stand on private listings, AKA listings that are not immediately placed on the MLS and then syndicated out to Zillow. If you do not immediately get your new listings on Zillow, you can now never list them on Zillow. We’re going to examine the pros and cons of this shortly and why they would take such a stance. But first….
Let me begin by saying there is a huge difference between knowledge of something and true depth of knowledge on a topic. We should always learn from those around us who have a different point of view. That is how you get true depth of knowledge and understand the unintended consequences of choices. The old saying the road to hell is paved with good intentions is very true. I had a clear position on this issue until I encountered the compelling perspectives of Rob Hahn and Steve Hawks, who hold entirely different opinions on clear cooperation. When honest and intelligent people look at things differently than you do, you should reconsider your point of view. I recommend following the work of Rob Hahn and Steve Hawks, as their insights on this subject have been particularly valuable in challenging my thinking.
I would like to clarify that after talking to these two guys my position has not changed based on what I think should happen in a perfect system but what would happen in reality is what we have to consider.
Understanding Clear Cooperation
I believe to wrap your mind around this problem, you need to understand three things and understand how those three things interact with and influence each other:
- What clear cooperation was and now is
- Just how powerful Zillow is and how they make money
- How #1 and #2 helps and harms the consumer
First, a Cliff Notes explanation of clear cooperation, this was a key problem in the Department of Justice lawsuits. With the clear cooperation policy, agents were required to list properties immediately in the MLS, and they were also required to offer a cooperating agent a commission. Due to the lawsuits, the ability to provide a cooperating commission is now gone. Those listings that were placed on the MLS were then shared out to every real estate website using something called an IDX feed.
My point of view on sharing all listings immediately to all websites through an IDX feed has always been that it’s a good thing because it gives the public more access to data and information. However, I have learned that it’s not that simple. On the surface, it seems good, but in order to understand how it’s also bad, you have to understand how that data is used to increase consumer fees dramatically.
How Zillow’s Model Works
Next, let’s understand the Zillow business model (understand that when I say Zillow, I mean a lot of companies; other companies are employing the exact same model Zillow is, just the biggest, so I’m singling out their model by using their name). Zillow gets nearly half of all real estate related search traffic. Zillow is worth about $13 billion solely because so many listings are syndicated to Zillow, and they have all that search traffic they can sell the fruits of. Without ALL of the listings being pushed automatically to Zillow, their business model does not work. Zillow makes all of its money by selling advertising space to lenders and real estate agents and by funneling leads to them. So when you click on speak to an agent, Zillow is selling your click to an agent for hundreds or even thousands of dollars, or worse, they are charging your new agent a 40% referral fee that they will push on to you without your knowledge.
The moment you request to speak to an agent, you are funneling money from a real estate agent’s pocket into Zillow’s (or any other lead provider). They are very, very likely to pass that fee on to you.
The Hidden Cost to Consumers
So, if you work with a Zillow Flex agent, that agent is paying about 40% of your commission back to Zillow in the form of a referral. They are likely not going to just absorb that fee. The consumer is paying that upcharge. So if you sign a buyer broker agreement with a Zillow Flex agent at 3%, that agent only makes about 1.8% of that. Only a few team leaders or brokerages are granted these Zillow Flex leads in each market, meaning they can charge a higher split from their agents because they have premium inbound leads daily. So instead of joining a brokerage that takes 10% from the agent, a team leader is taking 30, 40, or even 50% from that agent ON TOP of Zillow being owed a 40% referral. That makes it even MORE LIKELY to pass these fees to their clients.
This means that on a 10,000-dollar commission, Zillow makes 4,000 just for procuring that lead and sending it to one of their preferred agents. Of the 6,000 that is left, a team leader also takes about 40% (sometimes more), which is another 2,400 dollars gone. That means the agent charging a client 10,000 is netting 3,600 from that deal. All of the rest of that huge fee is referral fees baked into that deal that the consumer has to bear.
- Original Check: $10,000
- Zillow Referral Fee: $4,000
- Team Leader Split: $2,400
- Agent Net: $3,600
Now, pardon me while I hop on my soapbox for a second because agents look down on companies like ours for charging the client less money. The reason we can do that is because we aren’t reliant on a middleman (Zillow or others) to provide us leads. We rely on our value proposition to drive the public to us directly. So that huge fee, we can toss it out the window, and we choose to pass that savings along to our consumers. Most do not make that choice. In fact, their business model thrives when they don’t make that choice. Let me explain…..
That agent mentioned above, who is taking home 3600 from that closing, is making way less money per hour worked than one of my agents, who is charging 1% to list the house they represent the buyer on. So why would they continue to dislike companies like ours and love that system? We push down the native fee, making their system more difficult to operate. Also, activity breeds activity, which means your Zillow deals lead to non-Zillow deals that you don’t have to pay a referral fee but still pay the same high fee. Watch how much better the math gets with Zillow out of the equation.
- Original Check: $10,000
- Zillow Referral Fee: $0
- Team Leader Split: $4,000 ($1,600 increase)
- Agent Net: $6,000 ($2,400 increase)
Now, here’s where you have to think about it a little bit deeper and let me really make sure you grasp these key points:
- If an agent has to pay a very large referral fee to an outside company, they will likely pass that cost to the consumer.
- Once a team, brokerage, or agent becomes accustomed to getting a fee, they will charge that fee whether they have to pay an outside referral source or not.
- Zillow Flex teams dominate markets because the biggest website portal force-feeds them leads.
- When a large number of agents charge a higher fee, the public becomes accustomed to it, and it becomes a fee that the public will accept by default.
- Real estate fees stabilize at a higher number because many have a large referral fee attached.
- The above facts increase the fees on ALL real estate transactions, even if no referral is owed.
Let me clarify: The purpose of this article is not to blame Zillow for anything. They have a great business model. My concern lies with brokerages and teams who charge clients the same high commission regardless of whether they’re paying a referral fee to Zillow or not. When agents receive clients directly, without paying referral fees to Zillow, they still charge clients the same rates as when they do pay those fees. Ideally, consumers would understand this dynamic and know they could negotiate lower rates directly with agents. Unfortunately, most clients aren’t even aware this is happening.
Convenience vs. Cost
So what is the benefit of clear cooperation remaining in place and all of these listings immediately being pushed onto all real estate platforms, specifically Zillow? This doesn’t take a ton of words. This is simple. Zillow, and others like it, is a place that allows the public a one-stop shop to get all of the information they want on real estate. It is VERY CONVENIENT for the consumer, which is a great thing.
The byproduct of that, this goes into unintended consequence is that the public is now being funneled to agents with whom they are doing business strictly because those agents have proven themselves to be great at charging high fees and paying large referrals back to Zillow. A lot of these agents are great agents. I’m not going to say they are all bad. I will say that they are getting these leads not based on their abilities to help a consumer but on their ability to get the consumer to sign up for a high fee and reliably pay that back to Zillow.
As long as we are helping the public, making everything more transparent for them, and ensuring they understand all the fees they are paying, why stop at real estate brokerages? Would it be so awful for the government to require a disclaimer be placed on every single property on Zillow where it asks you to be connected to an agent that makes it clear “your information is going to be shared with a real estate agent they are paying us a premium for this which could result in higher fees being charged by your agent.” Why not have a requirement that all agents that are paying a referral back to a lead source have a straightforward one-page document that explains how much they are paying back to that lead source and that disclosing that fee may be passed along to the client?
The point is there is a lot of effort and a lot of focus being put on the real estate industry, real estate agents, and brokerages to be more transparent with their fees to drive down costs to the consumer. However, as long as this system exists behind the scenes where billion-dollar lead providers are funnelling a large number of transactions to a small group of agents who are expected to charge very high fees so very large referral fees are paid, the consumer will not receive any relief.
Real Change Requires Real Transparency
There are only two ways this changes that I can see:
- If at every turn, agents, teams, brokerages, and the lead providers themselves are required to disclose the amount of referral being paid and make it clear this can increase fees to the consumer or….
- We decentralize these big lead providers from having access to all listings nationwide so they do not control such a huge amount of leads.
Now, there are a few real estate brokerages leading the charge to get rid of clear cooperation because these referral sites are eating away at their profits, and they want to regain control of their leads. I have SERIOUS doubts that those companies will pass along any of those savings to the general public. These companies are not frustrated that their clients are not paying high fees, they are frustrated that their leads are taken and resold to them by Zillow, and those high fees are currently shared.
Either way, as long as the public sees those websites as the number one trusted place to shop and these websites are flooded with new leads, these people will unknowingly be paying excessively large fees. If the goal is to bring more affordability to the consumer, we can’t just look at industry outsiders; we have to look at outside influence as well.
So, my point of view has evolved to forcefully shoot every new listing online. Initially, more transparency, more data, and more listings in a centralized place for the public sounds great until you realize just how much they have to pay to have that convenience. The problem is compounded when they have NO IDEA why the fees remain so high. Brokerages might be evolving, but until other things change, the song remains the same.