Zillow CEO Spencer Rascoff: Startups that try to disrupt real estate commissions are doomed to fail

Zillow CEO Spencer Rascoff delivered the keynote address this morning at the TechNW event in Seattle, discussing the process by which the online real estate company went public and dishing on the recently approved JOBS Act.

But one of the most interesting moments in my opinion came when an audience member asked Rascoff when the traditional real estate commission structure — one that frustrates so many home buyers and sellers — will be disrupted.

Rascoff explained that Zillow really has “no skin in the commission game” when it comes to what real estate professionals get paid, comparing Zillow to information provider WebMD.

“You have as much information sometimes as the doctor, but you are still seeing the doctor because they are the expert,” he said.

Rascoff said the best real estate agents today are those who understand complex real estate transactions and are good negotiators, adding that the “door opener” agents who have “access to a secret database” are fading away.

In terms of seeing radical changes in the commission structure, Rascoff said “don’t hold your breath.”

“There are other startups that are trying to break down those agent commissions, and I think most of them will fail,” he said. “And I think those that haven’t failed yet, probably will for the reasons I just explained, but we are not one of them.”

Rascoff did not refer directly to Redfin, but the Seattle company is one of the leading online brokerage companies that’s experimenting with new ways to provide cash back to consumers during the real estate purchase process.

In fact, Redfin just today put out its own report on the effectiveness of sites such as Trulia and Zillow. See: Redfin study: Trulia and Zillow lack listings and show out-of-date information

UPDATE: Some readers in the comments asked for more context about Rascoff’s comments, so we reached out to him to get additional details. Here’s what Rascoff had to say:

In my opinion, most home shoppers select a real estate agent based on their expertise and their overall fit with the potential client more so than based on price. For evidence of this, look no further than the many companies that started out as discount brokerages but which have reduced their discount over time, in most cases to the point where their product differentiation has become the quality of their agents rather than their price point. Brokerage after brokerage that have tried to gain market share based on offering discount services have tried and failed, because consumers don’t respond to it. The real estate transaction is too infrequent, too expensive, and too emotional for people to select an agent primarily based on price. True, there are also industry forces which make it difficult to operate as a discount brokerage; but the primary reason why discount brokerages fail is because consumers don’t choose to work with their agents.

  • Anon

    He has to explain why he thinks Redfin will fail. I’ve used them and they’ve got a great value prop.

  • Thomas R.

    It’d be great to get a comment from Glenn Kelman at Redfin.

    I think this is interesting because there’s a clear problem in the market (“one that frustrates so many home buyers and sellers”) but Mr. Rascoff dismisses.

    In truth, Zillow’s paying customers are the agents that advertise on their site, not the homebuyers (except for mortgages) or homesellers that visit the site. So it makes sense that they wouldn’t risk losing their paying customers by trying to disrupt the commission model as it is.

    Also most startups are built on what people said couldn’t be done. So keep shipping!

    • johnhcook

      Thanks. I’ve asked Redfin for comment for this story, and will update as I hear more.

    • http://twitter.com/homingCloud Tina Fine

      Agreed. Disruption doesn’t come from insiders like Zillow who benefit from the status quo.

  • http://twitter.com/jkoteen japhet koteen

    umm, a real estate agent is not like a doctor; a residential real estate agent is more like a massage therapist (who may know something about health) or a perhaps a pedicurist who makes you feel good while charging you 35 bucks to cut your nails.

    • Shelley

      Personally, I wouldn’t trust a massage therapist with the largest purchase of my life. It’s quite a bit different.

    • we’ll see

      as an agent the easiest part of the job is finding the home, always has been. Negotiating is learned by experience and some buyers or sellers think “they got this” and I have to guide them out of messes they negotiate themselves in to. Knowing “the market” doesn’t mean just knowing values, it means we know other agents personalities – how much they’re willing to lie or cover up a major problem, problems in neighborhoods with land movement or water way systems and even changing trends in school systems that may be a major issue for you. Our ears are to the ground every day in this particular conversation of moving your life from one place to another, I would hope you treat your career the same way. Also, the “door openers” are weeding themselves out of the business, but only with your help. If you walk into a house and hear “this is the living room”….. walk back out and call me. ;-)

  • http://teardowns.com/ Brian Hickey

    A little confusing – Zillow themselves addressed commissions (indirectly) in their response to Redfin’s report:

    “For example, Zillow has hundreds of thousands of for-sale-by-owner, new
    construction and foreclosure listings, which often aren’t listed on an
    MLS”.

    These “off-market” (non-MLS) listings are on Z strictly for the purpose of avoiding or limiting a commission.

    So, it’s really contradictory to offer FSBO’s (on Z) and then say the commission disruptors are “doomed to fail”???

  • http://walawrealty.com marc_h

    As one of those “other startups” I’d love to hear these previously explained reasons. The only thing mentioned in the article is his opinion of what the “best” agents do and that hardly seems like sufficient explanation of why traditional brokerages persist. From my experience I can say with a high degree of confidence that the majority of agents practicing today are far from being experts in their chosen field yet Windermere is able to keep its lights on. Seems to me real estate and the 6% commission paradigm is a market ripe for disruption. The only question is who’s going to come up with the innovation good enough to change the game. In any event, Mr. Rascoff’s apparent disdain for my business certainly does not alter my confidence and enthusiasm for it.

    • http://twitter.com/homingCloud Tina Fine

      Agree with you. 6% is ripe for disruption.

  • http://www.marketleader.com Ian Morris

    Over the past 15 years, hundreds of companies have made bets that the role of the Realtor would go away or become severely diminshed. These bets have not panned out because of the nature of the transaction : its large, infrequent, complex, and involves highly differentiated products (homes). That is not to say that there isn’t room for innovation in the model (Redfin employs Realtors and charges commissions as well), but you can bet on the fact that a decade from now, the vast majority of consumers will still choose to have a real estate professional at the center of the process.

    • http://teardowns.com/ Brian Hickey

      Ian,

      IMO, the more information you guys supply to the consumer the less value in a two-sided commission model.

      I will take that bet (gentleman’s) and offer up that within 10 years the average commission rate will be down 20%-50% (net, includes rebates) of where it is now.

      The only caveat is that RE.com, Z, T and the rest continue to deliver the listing and housing information that has become so important to the consumer-side of the transaction.

      Thanks,

    • http://teardowns.com/ Brian Hickey

      Ian,

      It looks like I may not have read your comment as you intended? I agree, “the vast majority of consumers will still choose to have a real estate professional at the center of the process” – the key here in my opinion and speculation is “a” real estate pro.

      One agent, not two :)

      There’s the commission disruption.

      Thanks,

      • http://blog.findwell.com Kevin Lisota

        Hmm… One agent is the territory we came from decades ago when you bought from the seller’s agent. After the emergence of the buyer’s agent, some states and most reputable brokers will not engage in dual agency and represent both sides of the deal due to the conflict of interest. I don’t see trends, either legal or consumer-based that would suddenly find dual representation acceptable.

        True competition on commissions on the buy side of a transaction will not happen unless buyers become the party that pays it. Today it gets preset by the seller/listing agent at the time of listing.

        • http://teardowns.com/ Brian Hickey

          The more information the greater the empowerment for everyone involved…..the buyers will (are) take (ing) advantage of this, feeling more and more confident they can execute their side on their own…….like buying a car (I know a house is more expensive, infrequent, more complex etc.).

          How do I know? I just did one last week. While we do not do a lot of traditional sales, a buyer approached us to buy one of our listings – he understood that if he came to us directly there would not be a coop commission (no buyer’s agent). He negotiated the deal, called an inspector, his lawyer and is buying the home (half of the commission/cost is out of the transaction).

          Buyers are getting smarter everyday because of the information they are able to obtain i.e. sales history, comps, video tours etc. – not that tough really.

          IMO, this is the trend that the Big Portals are creating by supplying the information that’s necessary to slim down cost – probably not what they intended – but the by-product of what they provide.

          I’m just one with an opinion – but am experiencing the behavior change first-hand.

          Thanks,

  • johnhcook

    Thanks everyone for the comments. There were some questions about the context of Rascoff’s remarks, so I followed up and asked him to explain in more detail. Here are those comments (also posted in the update above).

    “In my opinion, most home shoppers select a real estate agent based on their expertise and their overall fit with the potential client more so than based on price. For evidence of this, look no further than the many companies that started out as discount brokerages but which have reduced their discount over time, in most cases to the point where their product differentiation has become the quality of their agents rather than their price point. Brokerage after brokerage that have tried to gain market share based on offering discount services have tried and failed, because consumers don’t respond to it. The real estate transaction is too infrequent, too expensive, and too emotional for people to select an agent primarily based on price. True, there are also industry forces which make it difficult to operate as a discount brokerage; but the primary reason why discount brokerages fail is because consumers don’t choose to work with their agents.”–Spencer Rascoff

    • http://twitter.com/homingCloud Tina Fine

      Commission based pricing can be disrupted since the brokerage service “bundle” will be unbundled and price will be for one particular service of that bundle. For example, hire a broker to show but have a lawyer do the rest. Discounting isn’t the only way to disrupt this market

    • Shelley Rossi

      Great story, John, and something all of us in the real estate industry are constantly reviewing, discussing, and re-evaluating on a daily basis in order to do what’s ultimately in the best interest of the people who entrust us to help them make one of the largest financial decisions of their life.

    • http://twitter.com/dana_kunz Dana Kunz

      Consumers want quality advice at a fair price. There are three alternative models to commissions: hourly, retainer, or fixed fee. If we are going to disrupt the current model, which of the following would you prefer?

      > Commission Only. In this model, the brokerage is only paid when the deal closes. It doesn’t matter how much time it’s agent professional and staff have invested in a deal, if it falls through at the last minute, the brokerage doesn’t get paid–and neither does its sales professional.> Fixed fee. Each transaction costs the same amount, regardless of complexity or time used. Exceptional needs or additional services would be charged by the hour or fixed fee. Fees could be paid upfront or contingent on a deal happening.> Hourly. Consumers pay their brokerage for every hour that their agent professional spends on the project, just like an attorney or accountant might charge. Hourly rates would apply regardless of whether a deal closes.> Retainer. Consumers pay their brokerage a daily, weekly or monthly retainer for the use of a sales professional until a deal closes. A retainer would be paid regardless of whether a transaction comes to fruition.
      Maybe there is room for a hybrid model? One where you pay a retainer/fixed fee upfront, and then pay an additional commission/hourly/fee at close? Not sure. Would love feedback.

  • http://twitter.com/fijiaaron Aaron Evans

    Real estate agents are brain surgeons now? I don’t think so, but it doesn’t take a genius to figure out that they’re advertising on Trulia over Zillow.

  • http://twitter.com/homingCloud Tina Fine

    I wrote this back in August, and I still think that commission based pricing will disappear. Fee for service pricing will come into existence because technology allows the brokerage service bundle to become “unbundled” and that means people don’t need all the services. You can’t price by commission if you are using brokers for some and not all of their expertise and for part of the sale transaction. Check out my blog on this on http://www.homingcloud.com/blog/bid/59047/What-is-a-homingAgent-could-they-be-a-Realtor-too

  • Pradeep Chauhan

    I’m sure they started Zillow with the intention to disrupt the real estate space not as a tool for real estate agents. However, when it was time to monetize it, instead of taking on the difficult task of disrupting the commission model, they chickened out (unlike RedFin) and made a compromise that is going to cost them long term. Consumers that have tasted a better way- rarely go back.

  • jeffrey mindham

    The statement that consumers don’t respond to price when selling their homes is simply dead wrong. I should know, I helped launch YHD/Foxtons.com (2% commissions) once the largest discount broker in the U.S. I was the VP or Marketing. In fact, consumer response was overwhelming. During our first week, our website and call center crashed because of the massive consumer response. In two and a half years, we sold over 5,000 homes just in the New Jersey and later in the parts of the New York Metro area. The reason the company failed had nothing to do with a lack of consumer interest, quite the contrary. One of the main reasons we failed was because of our poor transaction management systems brought on, in part, by an unanticipated high volume of business. There were other reasons too for our failure but a lack of consumer interest in price was not one of the them.

  • duyen tran

    Rascoff did not refer directly to Redfin, but the Seattle company is one of the leading online brokerage companies that’s experimenting with new ways to provide cash back to consumers during the real estate purchase process.

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