Zillow Group, Inc. (ZG)

Zillow started with a simple idea: put every home in America on the internet with its estimated market value, for free. Before Zillow launched in 2006, buying a home meant either driving around neighborhoods or hiring an agent. The agent had better information — what homes had actually sold for — but that information cost money and was not available to the casual browser. Zillow changed that. It scraped public records to catalog every property, estimated each one’s value using machine learning models, and let anyone look up their own home’s estimated worth. Now Zillow is one of the biggest real-estate websites in the United States, and it does far more than search: it makes money by charging agents for listings, taking a cut of rental commissions, showing ads, and — most controversially — buying and selling homes itself.

A better Rolodex for home buyers

The breakthrough at Zillow was recognizing that property data, once put online and searchable, became a destination. Before Zillow, you looked for a home by driving, by hiring an agent, or by reading the local newspaper’s classified section. Your agent had a book of listings from the multiple listing service, or MLS — a database that real-estate professionals shared with each other but that the public never saw. Zillow realized that if you scraped the MLS data and added public tax records, you could build a comprehensive, searchable catalog of every property in the country. You could also estimate the value of a home using automated valuation models, or AVMs — machine learning algorithms trained on historical sales data that could guess what any house was worth.

The insight was powerful and the outcome was transformative. Suddenly a home buyer could search by neighborhood, price, square footage, and schools without making an appointment with an agent. They could browse thousands of homes in an afternoon instead of looking at ten in a weekend. They could see what the seller was probably paying and what the agent was probably making. Zillow in 2006 did for home shopping what eBay did for collectibles: it decentralized information that had previously been locked behind professional gatekeepers.

That information advantage is still Zillow’s core asset. When you look for a home on Zillow, you are not looking at a live catalog that Zillow maintains; you are looking at a portal powered by real estate data that flows in from thousands of brokers and the public records office. But Zillow’s interface, its search tools, and its estimate of market value are the reasons you go there instead than to ten different brokerage websites.

How Zillow makes money

Zillow makes money three ways, and each is a different business.

Advertising is the largest revenue source. Real-estate agents and brokers need to reach home buyers. Zillow puts them in front of millions of people per month who are actively searching for homes. An agent can pay Zillow to have their listing appear at the top of search results, or to advertise their services to people looking in a particular ZIP code. The agent is taking the position that getting in front of that buyer is worth the fee they pay Zillow. This is a classic high-margin advertising business: Zillow’s cost is the electricity to run the servers; the agent’s willingness to pay comes from the alternative — paying a newspaper or Google, or knocking on doors.

Rental and subscription services are the second stream. Property management companies, landlords, and agents pay Zillow for tools to list rental properties, screen tenants, collect rent, and manage their business. Zillow also collects a small commission on rental transactions. These products are less central to the company’s identity but contribute meaningful revenue and have higher margins than advertising.

The third stream, and the most controversial, is homes transactions. Starting in 2018, Zillow began buying homes directly through a subsidiary called Zillow Homes. The idea was to become not just the marketplace where homes are sold but also a participant in that market. Zillow would buy a home, hold it briefly, and sell it to a buyer they found through their own platform. The spread — buy low, sell high — would be profit. But buying homes at scale requires capital, exposure to real-estate values and mortgage rates, and ability to price correctly. In 2022, Zillow shut down the homes business after suffering losses, acknowledging that buying homes and holding inventory was riskier than the company had anticipated. That exit highlighted how different the homes business is from the advertising business that built Zillow’s reputation and cash flow.

The real-estate ecosystem and Zillow’s role

Zillow operates in the middle of a complex ecosystem. At one end are home sellers and renters who want exposure. At the other end are buyers and tenants. In the middle are agents, brokers, appraisers, inspectors, lenders, and others who make money facilitating the transaction. Zillow’s role is to connect buyers and sellers, and to give agents a channel to reach buyers directly.

This position gives Zillow leverage. If Zillow’s audience is large enough, agents cannot afford to ignore it; they have to pay to be visible there. But it also makes Zillow a target for disruption. If a new technology or platform can offer a better search experience, lower commissions, or a simpler path to buying a home, people will move. Over the past decade, Zillow has faced competition from a changing set of rivals: other listing sites like Redfin and Realtor.com, Google’s property search, and increasingly, agents and brokers who are building their own online presence.

Zillow’s defense is scale. The network effects of a large audience attract more agents and more listings, which draws more buyers, which justifies more agents spending money on advertising. The company has also diversified beyond listings: Zillow now shows mortgage rates, provides closing-cost estimates, helps people find agents, and offers tools for renters. Each of these is intended to increase the value of a Zillow visit and deepen the habit of returning.

The economics of real estate technology

Real-estate technology companies like Zillow operate at the intersection of two difficult businesses: software and real estate. Software scales — a feature you build once can be shown to millions of users. Real estate does not scale — a home is unique, a transaction is complex and involves local regulation, and no amount of software can eliminate the human work involved. Zillow’s model sidesteps this by charging agents and brokers for visibility, rather than being the agent itself. But that puts Zillow in constant tension with its customer base. The higher Zillow’s commissions, the more agents want to avoid the platform. The lower the commissions, the harder it is for Zillow to grow revenue.

The company’s response has been to expand into services and tools that agents need: marketing tools, CRM software, transaction management. By making it easier for agents to do their job within Zillow’s ecosystem, the company increases lock-in and justifies higher fees. But these tools require capital investment and compete with specialized vendors who focus on each function more deeply. The advantage Zillow has is integrating them all: a CRM that already knows about the properties you are selling and the buyers you have talked to is more valuable than a generic CRM you have to configure from scratch.

Challenges and what matters going forward

Zillow’s most serious long-term challenge is that it depends on real-estate transaction volume. When home sales slow — because of high mortgage rates, economic recession, or demographic shifts — Zillow’s advertising revenue slows with it. The company has no control over when people buy homes; all it can do is capture a larger share of the transaction whenever one happens. This makes the business sensitive to cycles and to interest rates.

A second challenge is the changing role of agents. As some companies offer to buy homes directly, and others charge flat commissions instead of a percentage, the traditional agent-based model is under pressure. If that model collapses and real-estate transactions become more of a retail process, Zillow’s business — which depends on agents paying for visibility — would have to shift dramatically. The company is hedging this by investing in tools and experiences that serve buyers directly, but those are not yet core to the revenue model.

A third challenge is data. Zillow’s estimates of home values are one of its most valuable assets, and they depend on having accurate sales data. As more transactions happen outside the traditional MLS — via private equity firms buying homes in bulk, or via agents doing off-market deals — the data Zillow has access to becomes less complete. The company is working to incorporate new data sources, but this is an ongoing and expensive effort.

How to research Zillow

Zillow’s health is best assessed by watching the real-estate market: mortgage rates, home sales volume, and prices in key markets. The 10-K (SEC CIK 0001617640) shows what percentage of revenue comes from each business line and how much competition Zillow faces. Earnings calls reveal how many sellers are using Zillow, how much agents are paying per transaction, and whether Zillow is picking up share or losing it. For a sense of Zillow’s future, watch what new products and services the company is building: expansions into mortgages, home insurance, and moving services are all bets that Zillow can become a one-stop shop for the home transaction, rather than just a search engine.