Zillow (Z) and Redfin (RDFN) are publicly traded companies, and I believe that they offer an interesting investment opportunity, both in the purchase of property and through owning their stock. They have only been trading on the market for the past 2-3 years, and have a ton of room to grow. Zillow and RedFin have just rolled out new programs that are revolutionizing the real estate industry.
How Residential Real Estate Has Evolved:
Way back in the day, a Realtor would obtain a listing from a seller (documentation stating that the realtor had exclusive right to represent the seller). The Realtor would drive down to the Real Estate Division, and post it on a cork board alongside all of the other homes for sale in the area. The Realtor would look at all of the homes for sale, think of each buyer she represented, and see if any of the properties fit their needs. Now, let’s fast forward. The MLS (Multiple Listing Service) was born! Real Estate Agents, usually coalesced by area, formed groups to share listing information over an intranet. For example, the Las Vegas the local Realtors association is called GLVAR. Only paying members had access to the MLS, which safeguarded all of the access information to the homes currently on the market. The MLS provided a great source of historical information, from which realtors could pull comps also known as a CMA (comparable market analysis). A CMA is the estimated current market value of a property (see a prior blog on real estate valuations).
The Current Situation:
With the proliferation of the internet, even the government is finally getting on board! One can find tax assessment values, home characteristics (sqft, bedrooms/bathrooms, etc), and search home addresses to find who the owner is and how to contact them. Disclaimer: some states are non-disclosure states, and finding information on properties in these areas is next to impossible (even real estate agents need to estimate square footage). Example: certain areas of New York, Pennsylvania, and Maryland (mostly the Northeast).
Zillow, RedFin, and Trulia saw this niche in the market, and have aggregated the public data into a user friendly free website. Of course, nothing in this world is truly free. When an internet user finds a particular property of interest, they willingly give their contact information to Zillow, who then turns around, and sells the “lead” to a Realtor. Zillow and RedFin have revolutionized the real estate industry by providing current and historical data to the public. I would relate this to the scale of how the printing press revolutionized the transmission of knowledge.
Zillow’s Instant Offers:
Zillow is now attempting to replace the MLS system (multiple listing service), by connecting homeowners with sellers directly. Zillow’s Instant Offers provides homeowners with offers from investors alongside a comparative market analysis (from a local real estate agent). To use Instant Offers, the homeowner provides Zillow with some basic information (bed/bath count, square footage, remodel information, views, etc.), and photos of the home. Once an offer is made, there is no obligation for the seller to accept any offers.
RedFin is another company that is disrupting the traditional residential real estate industry process. RedFin is a vertically integrated technology company that is also now a brokerage firm. “RedFin Now” allows Redfin to buy and resell homes directly with its customers. RedFin is now essentially double-ending transactions (earning commission for being the listing and buyer’s agent). One benefit, from the seller’s perspective, is that they will not have to worry if the buyer’s funding will fall through.
With these new programs, it is possible that many residential real estate agents will be squeezed out of the market. I could see a future where a company like “Rocket Lawyer” could provide all of the paperwork to buyers and sellers for them to complete in front of a notary. I believe that the landscape of the real estate industry is evolving rapidly due to Zillow and Redfin’s new programs. There are so many possibilities that Zillow and RedFin could engage in, for example RedFin could create a subsidiary company and flip the homes to increase their return on investment.
Throughout history there are many industries that have evolved and positions that have become obsolete. A few examples are the whaling and automotive industries (most car factories are now automated). There are many areas within the real estate industry that cannot yet be outsourced. This transition will cause a shift of residential real estate agents into other areas of real estate (commercial, flipping, mortgage/portfolio analysis). What do you think? Comment below.
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