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CoStar vs Zillow

The CoStar Threat Part 4
The Strategy CoStar Could Use To Crush Zillow

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In the first article in the CoStar Threat series, I outlined the ongoing battle over agent commissions and the impact they would have on the property technology landscape. The second article explained why CoStar considered acquiring Realtor.com, and why that was not a good strategic move. The third article explained why 100 million visitors to the Homes.com website was not what it seemed. 

This is the fourth, and last article in the CoStar Threat series. This article will focus on what I believe CoStar could do to dramatically change the residential real estate landscape and make it hard for Zillow and Realtor.com to compete. I will make bold and provocative strategic predictions that warrant their own special disclaimer.

The predictions I am making are my own assessment of strategic options available for CoStar and Homes.com. I have not spoken to anyone at CoStar or Homes.com nor do I have any inside knowledge of their plans.

Now that we have that legalese out of the way, let’s dive in.

I have reviewed the statements, announcements, earnings transcripts, and actions of Andy Florance, CEO of CoStar, and came away convinced he is not interested in competing with Zillow and Realtor.com. Andy Florance is interested in dominating residential real estate to the point where Zillow and Realtor.com are no longer relevant or no longer exist.

Andy Florance
Andy Florance, CEO of CoStar

Andy has publicly stated numerous times that he thinks selling buyer leads to buyers agents is wrong, maybe even unethical, and results in a poor experience for home buyers. This is exactly how Zillow and Realtor.com make the vast majority of their revenue. Andy Florance believes the Homes.com model in which all home buyer leads are sent to the listing agent, who is actually selling the home, results in a better experience. 

Homes.com could continue to spend on search engine marketing, grow its monthly visitors beyond 100 million, and fight it out with Zillow and Realtor.com for years. Or, they could attack Zillow and Realtor in a way that undercuts their core business model and makes it difficult for them to exist. 

I am guessing Andy would choose option B. 

The Achilles heel for Zillow and Realtor.com has been, and will continue to be, its reliance on getting homes for sale data from the Multiple Listing Service (MLS). In Article 3, “Why Homes.Com 100 Million Users Isn’t What It Appears”, we discuss the MLS and how it powers the homes for sale listings you see on Zillow and Realtor.com. A listing agent enters a new home for sale in their MLS database and that information is sold to Zillow, Realtor.com, and many others. That is how Zillow and Realtor know what houses are for sale across the U.S.

What would happen if the MLSs ceased to exist? Maybe we will find out.

I think CoStar will attack its competitors and try to dominate the market by inducing listing brokerages to stop adding their properties to the MLS database.

I know this sounds crazy because the MLS system is well established and relied upon by the residential real estate industry but let me build the case.

Brokerages Would Not Abandon The MLS
Eventually, I think CoStar will ask listing agents to stop entering their new homes into the MLS database and only use Homes.com and other CoStar portals to market their properties. I have identified a few reasons why they might consider doing this:

  1. Credibility:  In Article 3, we talked about Homes.com reaching the 100 million monthly visitors milestone.  Homes.com needed to show the listing agents they have enough traffic to generate home buyer leads on a national scale. By the time Homes.com starts selling home buyer lead generation subscription packages in early 2024, they could be at 150 million monthly visitors. This visitor level makes them credible. Considering there were only 419,968 homes sold in September of 2023, Homes.com is getting more than enough traffic to supply a large number of high-quality home buyer leads to listing agents.
  2. Dual Agency: By removing homes for sale from the MLS, listing agents would be able to prevent those homes from appearing on Zillow and Realtor.com. This would prevent those companies from selling home buyer leads to buyers agents. If those houses for sale only appeared on Homes.com and all of those leads went to the listing agent, it would be possible for the listing broker to represent the buyer and seller in those states in which this is allowed. Dual agency would allow the listing broker to capture all of the commission on a home sale.
  3. The NAR:  If real estate firms did not need the MLS to advertise the homes they are listing would they still choose to be members of the National Association of Realtors (NAR)?  The NAR imposes rules and regulations that are often unpopular and problematic legally (Sitzer). Redfin seems to think leaving the NAR has some benefits so maybe other large firms will also. You could always have local real estate associations to add some discipline and standardization to the sales process but without the overbearing rules

If Homes.com convinced the largest real estate brokers in an MLS to leave, I believe it would prompt many of the mid-sized brokers to leave as well (that FOMO thing again). I believe this would ultimately lead to the MLS collapsing as the smaller brokers realize the game has changed and they see no value in remaining in a failing MLS. Once this movement begins, it could turn into a tsunami of MLS collapses across the U.S. as more and more real estate brokers realize the MLS system is failing and there is a new option available.

For those in real estate, another way to think about this is to understand CoStar has effectively created the first national pocket listing service at scale with 100 million+ monthly visitors!

Home Sellers Need The MLS
Do they really though? Some in the real estate industry might tell you home sellers will demand their house appear on the MLS to get the maximum amount of visibility and home buyer traffic. That is because the MLS is currently the only game in town to get local and national exposure for a real estate listing. 

Home sellers in general do not understand the MLS, NAR, or the technicalities of how a home gets marketed and sold. What a seller wants is a strong price and a relatively quick process. If Homes.com was able to deliver high-volume quality home buyer leads to listing agents, everyone would be happy. With 150 million monthly visitors, I think Homes.com would be able to meet that need and deliver home buyer leads at scale.

Listing agents don’t just sell houses, they also represent buyers as a buyer’s agent when the opportunity presents itself. Currently, listing agents recommend a buyer’s agent commission because today’s listing agent is tomorrow’s buyer’s agent, and they want the commission party to continue. In the first article in this series, “The Battle Over Buyers Agent Commissions” we explain how the buyer’s agent role is diminishing and it will be tough for them going forward.

If the listing agent received enough leads and made a larger commission if they kept a home off the MLS and only advertised a house on Homes.com, they would probably propose this as the preferred home marketing solution. Remember, the home seller does not care how the sausage is made, they just want results, so they will take the advice of the listing agent.  

Wouldn’t this also hurt Homes.com?
Not really. Homes.com currently gets an MLS data feed just like Zillow, Realtor.com, and many other real estate portals. As listing brokerages begin to only list their properties on Homes.com and leave the MLS, Homes.com is not affected. Those homes would exclusively appear on Homes.com and they would still get any listings posted by other brokers who continue to use the MLS. 

Could the MLSs retaliate against Homes.com for inducing their members to leave? Sure, it is possible, it depends on how the MLS rules are written and how CoStar suggests leaving the MLS. CoStar could also threaten legal action and get an injunction if the MLS retaliates by pulling its data feed access. I believe an MLS in that situation would fail due to members leaving well before a lawsuit could be resolved.

Zillow and Realtor.com
Homes.com would not need to convince all listing brokers to abandon the MLS for this to have devastating effects on Zillow and Realtor.com. If listing agents who are responsible for 20% of all real estate listings in the U.S. stopped adding those houses to the MLS, Zillow and Realtor would be in trouble. The fear of missing out we mentioned in article three would go from a myth to reality.

CoStar acquiring Realtor.com
CoStar vs. Realtor.com

As listing agents omit houses from the MLS, ZIllow and Realtor.com would begin to see holes in their national coverage. When home buyers visit Homes.com, Zillow, and Realtor.com, they will begin to notice that Homes.com has more houses listed than their competitors. I can almost see the Jeff Goldblum ads hammering home the fact that there are houses you can only see exclusively on Homes.com.

As a tsunami of brokerages leaves the MLS system, the harm to Zillow and Realtor.com magnifies. As more brokers defect from the MLS, more holes develop, more Homes.com exclusives, and more Jeff Goldblum ads. This could become a death spiral for the competition.

The Home Buyers
A bedrock rule in the world of business is whoever provides the best customer experience wins in the end. In the case of real estate portals, I believe this to be true. I believe CoStar has built a better mousetrap and it will resonate with home buyers.

If you are a home buyer and you are interested in learning more about a house you saw online, who do you want to speak to? When you inquire with Zillow or Realtor.com about a house you saw on their site, they will call you on the phone, ask you a few qualifying questions about your intentions, and then transfer your call to a real estate buyer’s agent who paid for that lead.

This is where the customer experience problems start. When they transfer that call to a buyer’s agent, that agent has not had time to prepare for the call, and most likely will not know much about it. This often causes confusion and frustration because that home buyer thinks they will be connected to someone who can answer specific questions. To make matters worse, sometimes a lead is made available to multiple buyer agents so a home buyer could get multiple calls over the next few days from buyer agents who want to work with them but who also have limited information about the house.

When a potential buyer inquires about a home on Homes.com, they get a call from Homes.com and after a few questions, they are connected to a listing agent. The listing agent has been in the house, talked to the sellers, has information that is not on the MLS, and knows the current status of that home. Tell me about the neighborhood, is that a granite countertop, when was the roof replaced? The listing agent can answer questions!

CoStar has stated numerous times its model will be “Your Listing Your Lead”.  This means all potential home buyer leads will go exclusively to listing agents. If you’re a home buyer, you want to talk to someone who can actually answer questions on the first call. Homes.com can deliver that experience, but Zillow and Realtor.com can not.

The Takeaway
The four articles in this series all build a strategic narrative for CoStar to significantly change the residential real estate industry and threaten Zillow and Realtor.com. The NAR lawsuit regarding agent commissions was a significant blow to the industry and will diminish the role of buyer agents in the future and weaken Zillow and Realtor.com. CoStar did not need to acquire Realtor.com when they had a chance because they could buy their way into credibility with search engine marketing. By unleashing a sizeable brand advertising budget, CoStar will be able to attract more high-intention traffic to their websites. 

All of this is true for Homes.com but it does not mean they will be successful. Execution is everything. Listing agents will have to buy Homes.com subscriptions, buyer lead quality must be high, CoStar will have to gain the trust of the residential real estate industry, and the competitors’ countermeasures have to be ineffective. These are challenges but certainly not insurmountable. The established leaders could make strategic adjustments to defend their business but they would need to act fast and accept the possibility that their core business model needs to change.

I think CoStar will be successful and will dominate the residential real estate leads-selling industry and here is why:

  • They have the financial resources necessary to win
  • Recent industry developments are helping their strategy
  • The future role of buyer agents is in question
  • The National Association of Realtors is weakened
  • Homes.com offers a better customer experience for home buyers

The last point in this list is the most important. All industries experience disruption at one time or another by newcomers who are faster, smarter, or have more resources. Usually, the winner during industry disruption is the company that innovates and delivers the best customer experience. No matter how it turns out, this battle will be exciting to watch.

Warren Walker is the Managing Partner of SpringRamp Consulting and has over twenty years of strategy consulting and analysis. Connect with him by email at info@SpringRamp.com or www.SpringRamp.com

SpringRamp Consulting Disclaimer:

The views and opinions expressed in this article are those of the author and do not necessarily reflect the views or positions of any entities mentioned in the article or of any platform that publishes this article. This article represents an opinion on the possible actions, activities, impact, and results of various companies and should not be considered statements of facts.

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