Zillow's New iBuy Brokerage: What Agents and Investors Need to Know

Zillow is an emerging industry leader in iBuying, and other established organizations such as Opendoor and Offerpad focus solely on the iBuy model. Previously, Zillow used its iBuying potential to match sellers with agents not affiliated with their company. But now, after years of denying plans to do so, the online real estate behemoth has announced it will further its iBuying operation by employing salaried agents.

Zillow will begin these in-house transactions in three cities in January 2021, adding more locations throughout the rest of the year.

This launch means that Zillow is looking to capture a larger part of the residential home sales sector. As a company, they have stated that they only plan to use their in-house brokers for the iBuying process as opposed to in the traditional sense.

So, what does this look like for the real estate investor community?

Why Zillow Shifted Focus So Quickly

iBuying has quickly revolutionized the way residential properties are listed and sold over the internet. Short for “instant buying,” iBuying uses proprietary algorithms to make offers on homes that clients can buy or sell directly over a platform, rather than through a traditional agent. While it lacks the in-person chemistry that the traditional listing process entails, there’s a reason it’s becoming popular. iBuying has proven to be extremely convenient for buyers and sellers by skirting negotiation headaches and offering flexibility in the status of the deal. As a real estate investor, this is attractive.

Companies profiting from iBuying only work with a small portion of the total residential housing market. Yet, over the past few years, iBuying has helped generate a growing amount of Zillow’s total revenue. In 2019 alone, iBuying accounted for around half of Zillow’s total income ($2.7 billion). As such, technology investors are beginning to realize the monetary capacity associated with iBuying and the role it will play within the industry going forward.

However, traditional agents still stand to gain business from Zillow if the seller is not interested in using iBuying. For now. The emergence of COVID-19 and growing dependence on technology put Zillow and other industry leaders in a position to forever disrupt the “old school” listing and selling experience.

What Agents and Investors Should Do in Response

As it stands, the traditional real estate purchase model is still thriving. It’s the majority of the inventory and thus demand will flock. Real estate investors are still looking for someone they trust to help with their investment, as it’s not an emotional decision but one that requires validation on the numbers.

But that doesn’t mean the real estate investment community shouldn’t diversify their skills to remain relevant and competitive.

Here are some ways how:

Become familiar with iBuying technology. Even though Zillow has become a brokerage and can handle the full offering lifecycle with in-house agents, they have stated they will only use their own agents for iBuying offers. It is common for sellers to receive an iBuy estimate and then seek the help of a traditional agent for guidance. Having a detailed knowledge of the process will help agents position iBuying as an ally, rather than a competitor.
Be a local market expert. One of the shortcomings of iBuying is that sellers will be working with online agents who have limited knowledge of the area they are servicing. There are also cities where iBuying has proven to not be effective, such as New York. It is valuable to know detailed information about the local area to demonstrate your value to clients.
Prioritize relationships. A relationship can get you a better price, more knowledge into a market, or an opinion you may not have considered. Continue to build relationships as the iBuy model tries to improve algorithms and local expertise.

Why iBuy May Have Little Impact on Agents Working With Investors

Over the next decade, the traditional real estate industry will continue to be taken over by technology through proprietary algorithms and remote transactions. However, there is still a need for licensed agents!

When I’m purchasing an investment property, it’s more attractive to look out-of-state rather than in my backyard, San Francisco, where cap rates are low. I physically need someone there who has the inside knowledge to understand neighborhood trends, seeing beyond the numbers, and more. And, because I’m not there to look at the property in person, I need someone to be that connector.

What does the real estate investor need after purchase? Leasing and management.

To me, it’s very attractive to have an agent who can serve as this resource. I primarily need them to be on-the-ground for leasing and annual inspections, but their referrals for service professionals and other local experts is an added perk.

With this in mind, agents are still necessary in my model and can differentiate by offering additional real estate services. But what about the liability of management, requiring trust accounts, and being available 24/7 for repair coordination? Surely an agent doesn’t want to do all of that. Of course not.

That’s why Hemlane provides an option for an agent to serve as a leasing agent and local support, without having the increased liability of property management for their clients. With this in mind, the iBuy model is not as attractive as a real estate agent with a focus on investor clients.

By becoming a brokerage, Zillow has positioned itself to become a huge competitor in the space. But, the industry is built on human connection, and traditional agents can utilize online tools and their local expertise to differentiate.

While it is necessary for agents to take steps in order to adapt to changing market forces, rest assured that the role of a local, on-the-ground partner will not be replaced for the foreseeable future.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.