Sure it has become far more common for home buyers to find their  price first through a site like Zillow and only involve a real estate agent once they are ready to buy. Homeowners are now able to both view and sell houses and rentals online rather than having to go through “MLS listings”, a traditional real estate agent, or Realtor.com. These websites are beginning to completely displace old networks of Realtor and real estate agencies as more and more sellers, buyers, and agents are conducting business through these sites. Both market places create the majority of their revenues by selling marketing and premier services to realtors.

For most of 2014, Zillow has been a solid performer in the stock market, gaining  by more than 80% as compared to Trulia’s 20% gains. It is hard to identify a reason for the disconnect. From an operational standpoint, the two companies are very similar, although Zillow is larger. For example, Zillow ended June with 83 million users, far more than the 53 million that Trulia had at the end of that same month. Examining these metrics from a year-over-year growth perspective, Trulia’s 55% increase outpaced Zillow’s 49% user growth.

With that said, Trulia is outperforming Zillow on many different fundamental metrics, mainly revenue growth. Looking ahead to the next two years, Zillow is expected to grow revenue by 57% and 35%, respectively. Meanwhile, Trulia should grow 76% and 32%, respectively, during the same two-year period.

At first glance, the two sites appear to be twins. However, they have less in common than it seems. As Zillow is favored by property buyers, Trulia is the BFF of  sellers. Interestinly, two-thirds of Zillow’s visitors do not use Trulia. Zillow is widely know for its  “Zestimate” of how much a property is worth, while Trulia offers more analytical tools, such as detailed information on local criminal activity. And Trulia is faster-growing.

But here’s the twist.

In what it seems as real estate’s first wave of technology firms consolidation, the acquisition of Trulia by competitor Zillow, for $3.5 billion in stock has made headlines. The San Francisco and Seattle companies will remain independent brands, with Trulia‘s CEO reporting to his Zillow counterpart. But they will create a giant capturing 71% of unique visitors to real estate websites. Zillow reported 83 million users for June 2014, and Trulia 54.

The logic behind the merger acquisition is simple: while Zillow and Trulia focus on home buying, they are really media companies, not brokerage businesses. As such, they generate revenues through advertising, and need high traffic. It seems cost-cutting, network effects and pricing power are the financial dynamics behind the merger.

Do you use Trulia or Zillow for your investment deals? What do you think of the merger?

To learn more about Part-Time REI visit us at http://part-timerei.com/

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Warnings of Zestimates

In 1993, Zima was thrust upon the country as “Zomething Different.”  Coors introduced the beverage to fill the previously unknown void between beer and wine coolers.  Turns out that drinkers of beer and wine coolers actually preferred their respective products and have no desire to mix the two.   Zima was mercifully discontinued in 2008.  Other than the public shame of those who ordered Zima at a bar or the moral dilemma created for those who bought a 6-pack to try and then had to decide whether to waste money or actually consume the other 5, consumers were generally unharmed.  The real estate website, Zillow also offers Zomething different.  Unfortunately, its Zestimates are far more dangerous.

The Fine Print

“The Zestimate® home valuation is Zillow’s estimated market value, computed using a proprietary formula. It is not an appraisal. It is a starting point in determining a home’s value. The Zestimate is calculated from public and user submitted data; your real estate agent or appraiser physically inspects the home and takes special features, location, and market conditions into account.”

If a company creates a product and then states it should not be used for its intended purpose, there is a really good chance the product is just a gimmick.  Zillow encourage buyers, sellers, and homeowners to supplement their information by:

• Getting a comparative market analysis (CMA) from a real estate agent
• Getting an appraisal from a professional appraiser

In other words, pretend you never saw our Zestimate and ask a professional.  Amazingly insightful!  At least Coors, pretended their product was good.

Problems

How accurate are Zestimates?

Inaccurate Information

One huge issue is that Zillow does not get its information directly from an MLS feed.  Instead it relies on info that agents and homeowners upload directly to the site or to other sites that are then scraped.  Obviously, this can create a tremendous amount of bad or outdated data points that are factored into the equation.

More from The Washington Post

Missing Information

As a rehabber, you are going to be putting a top-notch product on the market.  It will have new flooring, a remodeled kitchen and/or updated bathrooms.  Your masterpiece will look nothing like Ma & Pa Sluggo’s disheveled dump down the street.  Zillow cannot discern the difference the finish and may show your house as having lower value.  Other items, such as finished basements can be particularly troubling for the algorithm.

More from an appraiser

Incorrect Information

To its credit, Zillow attempts to remove foreclosures from their algorithm.  There is no reliable way to do this and other distressed properties (short sales, estate sales, crazy cat lady sales) get factored in.  This means the Zestimated (is that a word?) value of the home may be low.  If you rely, on this value you may pass on a good deal.  In fact,  half of all sales are generally above the Zestimate.

Unlike local agents and appraisers, Zillow cannot differentiate between neighborhoods.  This can lead to a huge problem for rehabbers.  If you are considering a deal in a lower-priced neighborhood that backs up to a higher-price area, the Zestimate may be inflated.  Finding out after you own the home that your entire profit margin was fantasy is a little disheartening.

One Final Point

The ValueRange shows the high and low estimated values of a home (e.g., the Zestimate may be $260,503, while the ValueRange is $226,638 — $307,394).  I don’t know about you market, but in ours +/- $30,000+ will make a difference in the success of our project.

Conclusions

Other than as fodder for blogs, Zestimates have no value to society.  In fact, as we discuss above, they may cause damage.  Zestimates will, hopefully, join Zima on the list of discontinued products that we all look back on and say, “What the heck were they thinking???”  Until then, we do agree with Zillow on the proper way to obtain both as-is and ARV values….  Call your agent and ask for a CMA.  Better yet, discuss the project with him or her over a beer.