The lack of property reviews is a perennial complaint of renters and property buyers, which cuts to the heart of the real estate industry. But, why aren't they readily available?
The short answer? Reviews decelerate the buying process. The industry's largest companies like Zillow earn the vast majority of their revenue helping real estate agents close transactions as quickly as possible. Serving real estate agents, not buyers, Zillow has little incentive to prioritize property reviews. Below is a deeper explanation of why the real estate industry has failed to meet this demand.
PART 1: As tenants have gained pricing power, they have somehow failed to attract a national property review system.
Due to U.S. eviction moratoriums and rental forbearance, renters and homeowners have unprecedented power ⏤ enforced by federal mandate. Rents continue to decline in many of the most expensive cities in the U.S., suggesting that tenants are leveraging at least some of their newfound powers.
A late 2020 study found that the average incentive offered in Manhattan was two months of free rent in an attempt to fill empty apartments. As people continue to work from home, many renters have moved to more affordable cities to lower costs or improve their quality of life. In December 2020, monthly rents in Manhattan were 21% lower than in December 2019, on average. San Francisco led the nation in rent decline, with average monthly rent for December 2020 versus December 2019 down 33.8% for studio, 25.5% for 1-bedroom, and 22.8% for 2-bedroom apartments.
Change in average rent (October 2020 vs. October 2019):
- San Francisco, Calif. declined 31%.
- New York, N.Y. declined 15.4%.
- Honolulu, Hawaii declined 14.9%.
- Hillsborough County, Fla. declined 28.4%.
PART 2: The demand for a Yelp-like property review website
- In various cities, entrepreneurs have built review websites for real estate. In New York City alone, companies like RentCity, bitResi, GoHomeNY, Apartment Ratings, Localize, OpenIgloo, and Rentlogic offer property review websites.
- However, thousands of disparate websites across the country have few users and confusing incentives for property listings.
- Renters and homebuyers certainly want to find reviews, with millions of Google queries relating to apartment and home reviews.
- Short-term renters have reviewed millions of rental properties on AirBnB, VRBO, Booking.com, and Expedia.
- However, when the long-term tenant looks for a centralized destination for nationwide property reviews, they encounter small review websites with scattered value propositions.
PART 3: The elephant in the room: Zillow (NYSE:Z)
- Zillow's CEO Rich Barton was named the "most powerful person in real estate" in 2020. He employs more than 5,200 workers.
- Zillow is a $46B company. Its industry peers are the $9B "low cost" real estate broker, RedFin (NASDAQ:RDFN) with 3,300 employees; and the $20B "for sale by owner" real estate brokerage OpenDoor (NASDAQ:OPEN).
- Contrast these valuations with the country's largest review service, TripAdvisor (NASDAQ:TRIP), with a market capitalization of just $5B.
- Yelp (NYSE:YELP) is worth even less: $3B.
- Neither compares to the enormity of their real estate agent-focused competitors.
Zillow's business model: Selling leads to real estate agents.
- Like Realtor.com, Zillow generates substantially all of its revenue from real estate agents.
- Zillow sells marketing packages to real estate agents, including inbound phone calls from buyers and renters who are browsing properties on Zillow's website.
- The company reports its revenue in three categories: "IMT" (Internet, Media & Technology), Homes, and Mortgages.
- Zillow's large "IMT" segment (annualized revenue: $1.6B) includes various products and services for real estate professionals. Zillow describes IMT as "Premier Agent, rentals and new construction marketplaces, dotloop and display, as well as revenue from the sale of various other marketing and business products and services to real estate professionals."
- Zillow's Homes segment (annualized revenue: $748M) derives revenue from Zillow's own purchase and sale of homes.
- Finally, Zillow's small Mortgages segment (annualized revenue: $216M) includes "financial results for mortgage originations and the sale of mortgages on the secondary market through Zillow Home Loans, advertising sold to mortgage lenders, and other mortgage professionals as well as mortgage technology software."
As the reader can see from Zillow's three revenue streams above, Zillow has no incentive to prioritize reviews.
- Its $46B market capitalization is almost entirely based on revenue derived from real estate agents, not renters or buyers.
- Zillow's goal is to sell qualified leads to agents, closing real estate transactions as quickly as possible.
- Reviews would seem to only slow that process down, and are, unsurprisingly, not a priority for the industry's largest company.
- Any company attempting to build a nationwide property review system would also need to invest considerable time and resources to address unique problems, such as the low number of eligible reviewers of long-term properties. (i.e. how do you accurately portray a magnificent property when it has been occupied for 60 years by one cantankerous homeowner?)
When moving, the average buyer encounters an infuriating lack of information. The dilemma of home-buying is that time-consuming research is required precisely during one's busiest time. No central repositories for property reviews exasperate buyers, leading them to settle for a small handful of in-person viewings – ultimately speeding up the transaction for the real estate agent.
Services like Yelp instantly provide reviews of any restaurant nationwide. In contrast, most renters and homebuyers can only find statutory minimum data on properties; plus a single, invariably glowing review written by the seller's real estate agent.
Until there is an economic incentive to prioritize a standardized, nationwide property review system, the marketplace will naturally struggle to address this demand.