Housing Wire: Hit list: Inside CoStar’s all-out war against Zillow

By  from Housing Wire, featuring ACME’s Courtney Poulos

Through acquisitions and a strategic New York City partnership, CoStar’s Andy Florance takes on a wounded Zillow

Zillow is no longer a relevant player,” said Andy Florance, the CEO and founder of CoStar. “We have done a million dollars of market research in the last couple of months. And we have found that Zillow is not the leader in the space. Zillow is actually not used by many homebuyers.”

Zillow’s 226 million unique monthly visitors? Peeping Toms.

“We’re about the attracting the homebuyers not the voyeur checking out the inside of their Tinder date’s house,” Florance said.

Florance speaks confidently about Zillow losing its grip on homebuyers. After all, he called that the Zillow Offers iBuying program would flop.

“Zillow Offers imploded and that was a joke all along. That was a horrifically ill-conceived business model. I probably got about 100 emails saying, ‘Man, you’re right.’”

Florance is speaking on the phone, driving away from a doctor’s appointment. A “major car crash two months ago,” he said, compels doctor’s visits.

In his 34 years at CoStar’s helm, Florance has through shoe leather data gathering and aggressive acquisitions built an essential source for commercial real estate professionals. Also, CoStar owns the most trafficked U.S. websites for office space — LoopNet, and residential rentals — Apartments.com, generating revenue from subscriptions by landlords and commercial brokers.

CoStar has not significantly grabbed market share of for-sale residential, perhaps the largest total addressable market in U.S. real estate, with over 6 million single-family homes bought and sold each year. But CoStar is starting to try. The Washington, D.C.-based company acquired Homesnap and Homes.com. And they are taking on Zillow’s dominance in New York City via Zillow-owned StreetEasy with CoStar’s own direct-to-consumer product.

Real estate agents in New York City — and across the country — are cheering for Florance.

“StreetEasy has been biting the hand that feeds it for too long,” said Frederick Peters, CEO of New York City brokerage Warburg Realty. “Nothing would give me greater pleasure than to see a little reverse biting.”

“Zillow has been making money off of consumer confusion,” said Courtney Poulos, CEO of ACME Real Estate in Los Angeles. “CoStar is a great, agent-centric alternative.”

“I find CoStar to be infinitely more user friendly than the evil Zillow monster,” said David Schepner of Howard Hanna Bainbridge Kaufman Real Estate in Pennsylvania.

So, Zillow’s days are numbered. Right?

Party time in San Diego

Andy Florance graduated from Princeton college in 1986, and a year later started CoStar.

“My first interest was residential, but because of capital restraints I felt that commercial was something I could first do,” he said. “It is easier to collect, manage and distribute data with thousands of buildings compared to hundreds of thousands of buildings.”

CoStar tracked office space, first in D.C. and then across the country. The information they gathered from taking pictures of buildings and developing relationships with commercial real estate agents led to a role in facilitating transactions, Florance said.

CoStar also grew through acquisitions, and, at times, intellectual property litigation. In a 2018 article, The Real Deal chronicled CoStar’s legal war waged against Xceligent, once CoStar’s biggest rival for commercial property listings. CoStar’s actions included collaborating with law enforcement in the Philippines to raid an Xceligent office, and Xceligent eventually fell into bankruptcy. CoStar took exception to how it was characterized in the article, calling it a “toxic stew of half-truths.”

Today, CoStar is positioning itself as a friendly alternative in the American home ownership market, especially with agents. But The Real Deal article also reported that in 2011 three of the biggest U.S. commercial brokerages, JLL, CBRE, and Cushman Wakefield plotted designing an alternative database to CoStar. The idea went nowhere, but the brokerages were lodging the same complaint against CoStar thatresidential brokerages have with Zillow: CoStar hoarded data provided by these brokerages, and then charged brokerages to use the data they provided.

Florance downplayed lingering resentment between CoStar and commercial brokerages. He drew an extended analogy between himself and Brent Witte, chief financial engineer at JLL. Witte is like a “longtime neighbor, who I invite over to watch football with, but occasionally have disagreements with about picking up the trash” from the curb.

In contrast, Zillow’s relationship with brokerages is like a neighbor “setting fire to 10 propane tanks in the garage.”

JLL and Witte did not comment on their relationship with CoStar and Florance. Zillow responded to specific questions, and Florance’s jabs, with a written statement by spokesperson Viet Shelton.

“Our sites and apps are a valuable marketing tool for seller’s agents, which is why the vast majority of brokerages and MLSs across the country want their listings on our sites,” the statement partly reads.

CoStar began pivoting toward the residential market in 2014, when it paid $585 million to buy Apartments.com, which lists apartments for rent.

Apartments.com was one of several acquisitions that has grown CoStar’s revenue, and stature on Wall Street. CoStar reported $1.44 billion in revenue through the first three quarters of 2021, an 18% increase from the first nine months of 2020. CoStar’s net income in the first nine months of 2021 was $199 million, up 4% from the year prior.

CoStar has a market capital value of over $31 billion, as of Dec. 20. That’s twice Zillow’s value of $15.8 billion.

But CoStar’s growth as a company has, so far, little to do with for-sale residential. CoStar’s residential revenue totaled $54 million in the first nine months, less than 4% of the companies’ overall revenue.

CoStar expects this residential revenue figure to grow in the coming years.

Last November, CoStar purchased Homesnap, a residential real estate listing platform that partners with MLSs, for $250 million. Agents use Homesnap for information about consumer leads and the performance of rival agents. And in April, CoStar bought for $156 million Homes.com, which Florance envisions as CoStar’s eventual national, consumer-facing competitor to Zillow.

A month ago, CoStar declared it was partnering with the Real Estate Board of New York, a trade group representing New York City agents and brokerages, to create Citysnap, a direct-to-consumer portal of New York for sale and rental listings to rival StreetEasy.

A month after the Citysnap announcement — the product is not set to roll out until the spring — and a week after Zillow’s announced wind down of iBuying, CoStar threw a party.

Homesnap and Homes.com personnel flooded the San Diego Convention Center, which hosted the National Association of Realtors annual convention. They took centerstage in a massive expo hall and even were stationed to provide directions to attendees (“Oh, you noticed us there!” Florance said with a laugh about the company’s NAR presence).

On the convention’s Saturday night, CoStar cordoned off an entire block of the Gaslamp District, an oasis of al fresco restaurants, non-dive bars and chatty tourists, and sponsored a party plus concert by the country music singer Keith Urban.

“We’ve hosted a number of concerts at a number of different venues,” Florance said. “Since we’re paying for this party, here’s my one-minute commercial. Usually everyone in the audience is like, ‘Alright, alright, let’s have the band start.’ But up on the stage at NAR, they were yelling and screaming ‘CoStar! CoStar!’”

New York City street fight

Across the U.S., a spider’s web of Multiple Listings Services gatekeep residential real estate listings. These 500 or so MLSs collect information from agents and brokers, who are required under NAR rules to provide their listings. MLSs then sell the listings to Zillow, Realtor.com, Redfin, and other websites including CoStar-owned Homesnap and Homes.com.

The one glaring exception is New York City, which does not have a centralized MLS. In Gotham, Zillow is not just a popular website. It’s a company that can dictate the flow of real estate information through StreetEasy, a website Zillow snagged in 2014 for $50 million.

“The strengths of StreetEasy come from the sheer amount of data that real estate firms have let them have unfettered access to over the years,” said Bess Freedman, CEO of Brown Harris Stevens in New York City. “They have listings from many brokerages in every borough, and a strong direct-to-consumer approach.”

StreetEasy, though, is loathed by many real estate agents.

For one, Freedman and other brokers claim, StreetEasy escalates listing fees. The platform presently charges $6 a day for listing rental properties.

Brokers’ larger objection is StreetEasy’s application of Zillow Premier Agent, Zillow’s main source of revenueother than iBuying. Under Premier Agent, agents pay Zillow to have their name pop up and be the point of contact for listings in a designated geographic area.

“It’s not always immediately clear that the Premier Agent is not the listing agent, and the consumer gets confused,” Freedman said. “I have had agents report that Premier Agents will show up to their open houses and hand out business cards outside, or in the lobby, which is sneaky and underhanded.”

Zillow’s response is that they serve the consumer, not the listing agent.

“Our platform arms consumers with information and services that put them in control,” Shelton of Zillow stated. “That includes convenient and transparent tools to connect with real estate professionals, whether that’s a seller’s agent or a buyer’s agent.”

But to some, StreetEasy is an affront to the craft of snaring listings. “There has long been real rage in the brokerage community against StreetEasy,” said Jonathan Miller, an appraiser at Miller Samuel who has valued New York City homes for decades.

Citysnap answers agents’ StreetEasy grousing with the mantra, “Your listing, your lead.”

Instead of a Premier Agent type of service for a would-be buyer’s agent, consumer inquiries on Citysnap go to the listing agent.

Citysnap’s revenue stream, Florance announced on a November earnings call, would come from agents paying to get their listing more prominently featured.

“The typical New York agent is excited by CoStar’s move,” Miller said. “The timing is good as 2022 looks like another strong market and Zillow is on the defensive with their significant failure in the iBuying space.”

But agents are also cynical, Miller said, about whether CoStar, which will use listings provided by the Real Estate Board of New York, can change consumer, and even, agent habits.

“Brokers go where the consumers go,” Miller said. “That’s what CoStar needs to resolve.”

Additionally, while CoStar may enhance their reputation by taking on Zillow in New York City, it’s unclear how much the company will enhance their revenue.

Zillow hardly mentions StreetEasy in its earnings report and does not break out StreetEasy revenue or profitability. (Zillow declined to provide StreetEasy financials for this story.)

StreetEasy chipped in an unknown amount to the $1.4 billion in Zillow Premier Agent revenue for the first nine months of 2021. The website also contributed a cut of the $379 million of additional “internet, marketing, and technology segment” revenue through StreetEasy’s listing fees.

On the November earnings call, analysts peppered Florance with questions about how CoStar would monetize Citysnap.

One analyst on that call, Ryan Tomasello, director of equity research at Keefe, Bruyette & Woods, described Citysnap as more of a “taste” of what CoStar could eventually provide agents and consumers.

The predominant driver of CoStar’s residential revenue, Tomasello noted, is Homesnap — which faces its own questions.

Search for homes like a pro 

Bruce Ailion praises Homesnap Pro, an app agents download through their designated Multiple Listings Service.

“It is essentially a search and communication platform,” explained Ailion, an agent at RE/MAX Town & Country in Alpharetta, Georgia. “The agent sends a link to the buyer or seller, and that client can search for or view properties on the app, save them, message the agent about the property and communicate back and forth in real time.”

“The nice thing,” added Ailion, “is to look up the property, you only have to snap a picture of the home, and the listing information would come up, thus the name Homesnap.”

Poulos, of ACME Real Estate, said that her brokerage of 50 agents in Los Angeles and Orlando, also uses the search function. Homesnap partners with the Combined Los Angeles/Westside MLS, better known as “CLAW.”

Another feature of Homesnap Pro, Poulos noted, is that it shows you the sales performance over the past 24 months of other agents and brokerages in CLAW.

Ailion and Poulos are, according to CoStar, two of the “roughly 300,000-400,000 real estate agents who use HomeSnap Pro monthly.”

That’s out of a group of 770,000 agents who receive Homesnap Pro because they are registered with an MLS that partners with Homesnap. In other words, about half of the NAR’s 1.5 million membership has access to Homesnap Pro, and a quarter actually use it.

Homesnap Pro has cut through the crowded landscape of real estate agent apps and carved out a “very strong adoption by agents and MLSs,” Tomasello said.

But admiration and even adoption of Homesnap does not quite equal agents giving CoStar money.

Of the $54 million in residential revenue CoStar reported in quarter three, $42 million came from Homesnap, with the other $12 million from Homes.com.

One part of that $42 million is Homesnap Pro contracts with MLSs. Another is Homesnap Pro Plus, a subscription service that charges agents $599 a year. Homesnap also has concierge and marketing services for agents.

“A large piece of the so-called total addressable market is in advertising and marketing services,” said Tomasello. The analyst noted that agents could pay up to $500 a month for Homesnap to market themselves or clean up a home before showing it.

But most agents interviewed only use Homesnap Pro provided through their MLS. They do not also use Homesnap Pro Plus, or additional Homesnap services, which are often provided by their own brokerage. Said Poulous, “The Homesnap advertising component is very spammy.”

About that evil Zillow monster

After Citysnap and Homesnap, the other terrain of CoStar’s residential play is Homes.com. But the platform’s status as a nationwide, consumer-facing challenger to Zillow is not imminent. In fact, CoStar anticipates shrinking its revenue in the near term.

“We expect residential revenue for the fourth quarter of 2021 to decrease compared to the third quarter of 2021 due to seasonal reductions in Homesnap advertising sales and the discontinuance of certain services previously offered on Homes.com that are inconsistent with our long-term strategy,” reads the company’s third-quarter earnings report.

Part of CoStar’s long-term strategy for Homes.com really does seem to rest on the shoulders of agents’ professed hatred of Zillow, especially Premier Agent.

“Obviously, as you know, agents hate this whole thing,” Florance said. “One person has the listing. But another person has hijacked this listing, and so the buyer thinks they are meeting the listing agent.”

But agents’ Zillow animus compares to coffee enthusiasts’ distaste for Starbucks: It doesn’t seem to affect the business in question.

Through the first nine months of 2021, Zillow Premier Agent revenue was just over $1 billion, a 42% increasefrom the first nine months of 2020. In fact, as Zillow Offers was slamming its head against one wall after the next, Premier Agent propelled Zillow toward an overall profitable first and second quarter.

“Too many agents have been afraid to pull out of Zillow and other online lead sources because they were never taught the skills of how to generate their own business,” said Ryan Cook, broker/owner of HomeSmart First Class Realty in North Easton, Massachusetts. “The shiny object has just been too appealing. I still battle with my agents about that.”

Another plank of Homes.com play seems to be betting that consumers also hate Zillow.

“We have conducted dozens of focus groups in the U.S.,” Florance said. “There is dissatisfaction out there across the board. We hear loud and clear from the buyers: They click on the button and hit robocall hell.”

Florance and a CoStar spokesperson did not elaborate on the methodologies and specific responses of these focus groups. Assuming what Florance says is correct, Homes.com is still also competing with Redfin and Realtor.com for those Zillow-hating eyeballs.

And if Homes.com wins, so what? There’s no trophy for having the most trafficked U.S. residential real estate listings website. There’s not even a plaque for being the listings portal most liked by real estate agents.

The very crux of Zillow’s existence – which CEO Rich Barton intimated at the company’s earnings call winding down iBuying – is that they have spent years struggling to capitalize on their awesome page views and brand recognition. Zillow Offers was a failure in capitalizing on the Zillow brand, but the maligned Zillow Premier Agent is a qualified success.

How Homes.com and CoStar’s residential division may succeed depends on whether they can create a product different from the sea of other MLS aggregators. Florance promised that the strategy goes beyond prominently noting the email and cell of the listing agent. But he declined to go into details.

“Labor doesn’t scare us,” Florance said. “One of the reasons we’ve been successful is that we work hard, and we produce a lot of valuable data. We have some good ideas.”

Los Angeles CA Real Estate & Homes for Sale