As far as I know, DotLoop customers were happy enough with the product and service until the announcement that the company was being purchased by Zillow. That news, along with the $108M price tag of the acquisition was the fundamental buzz at Inman Connect conference last week.
About the price of $108 Million.
Typically companies’ sell for a multiple of profit – 6x to 10x profit is not bad. The last acquisition of this type was the Real Estate Digital deal, which sold for a much lower multiple than DotLoop. In the case of DotLoop, it looks like Zillow paid a multiple of revenue.
As best we can tell, DotLoop would be running at a rate of $15 million in annual revenue. Its privately held, so that number is a guess. They hold a distant third position in the market share behind ZipLogix and Instanet. With the calculus on this valuation, Instanet would be worth about $300 to $500 Million. ZipLogix would be worth about $750 Million or more. The multiple that Zillow paid on this deal is irrational unless they see an opportunity to modify the business to reap profits in entirely new ways. Rather than spend hours on the phone with the investor community discussing the deal, here is a summary outlook on why the $108 could be justified from Zillow’s point of view.
I get the strategy.
Today, consumers shop for property on Zillow. They then bump into a real estate agent who handles everything from there, and Z is long gone from the picture. With transaction management, they can stick their brand inside the transaction. This strategy not only allows them to measure ROI on Zillow lead conversions to measure “share of wallet,” but it also provides them with a lead to close solution that supports the consumer to think that they purchased a home on Zillow. Zillow connects with consumer mindshare first. If they continue to expand the consumer’s understanding of services from Zillow, the consumer will stick with them through more of the transaction steps. The long-term goal object seems to be to develop a Zillow customer for life. DotLoop fits with this. The homeowner will be able to log into Zillow and grab their transaction documents forever. The implications for the relationship with the broker and the agent in the loop would also seemingly be solidified.
Far out strategy.
Sometimes you need to simply think about crazy stuff when assessing an acquisition that leaps so far beyond a reasonable price. Again, if they paid a multiple of revenue, they must have really wanted the company badly. Otherwise, you could just say that to Zillow, $100 Million is immaterial. Facebook purchased Instagram for $1B and that company does not have any revenue.
Zillow may be looking at these three strategic things: get into the forms business, expand their FSBO offering, and tie home services advertising into transactions. These are all business strategies that have the potential to yield significant dividends. It would only take the successful execution of one of these to justify the purchase.
Forms: One of the barriers to DotLoop adoption is the forms copyright. They got into a tussle about this with the California Association of REALTORS®. Perhaps Zillow is seeking to double edge a forms strategy by undercutting the revenues that Associations earn from forms and provide an alternative solution to REATORS®, real estate agents. Remember, real estate law is real estate law. Just because there are standard forms used by real estate agents does not preclude lawyers from developing alternative forms. I see a Zillow forms library in the future. Those forms are likely to be a lot less expensive than today’s Association forms. Free to the real estate agent, $150 per transaction to the consumer.
FSBO: Remember, Zillow is a FSBO site. Listing your home for sale there and not having contracts is an opportunity limiter. Clearly, sellers will pay Zillow a much higher amount of money if they provide the forms. In today’s seller’s market, finding buyers for your property is not difficult – they are all on Zillow. Add a “make an offer” button to a FSBO listing and you are on your way. Pick mortgages, appraisers, inspectors, title and you are good to go.
Home Services: Zillow provides advertising solutions beyond agents and brokers. Developing revenue in mortgage, title, insurance, home inspection and the other major home services business is a bounty hunter’s take. As far as I know, the vendor marketplace within DotLoop is open space. If you tell Bank of America that they can be a fixture in DotLoop for a few hundred thousand real estate agents and their many consumers, I would expect that they would be very comfortable paying $500k per month or more for that position. Better yet, they can sell a ticket to the show to Bank of America, Citi, and others.
Risk
The quote of the week at Inman Connect came from big brokers: “I do not trust Zillow.” Zillow dances in a grey area between stellar business partner and foe. I observed that Zillow had reached a tipping point of distrust with brokers long ago. But that does not seem to matter much. Brokers continue to advertise on Zillow regardless of how much or little they trust them.
Impact Discussions
- Associations should be discussing the impact that Zillow forms could have on their business.
- Brokers should be discussing the impact that a more empowered FSBO seller would have on their business.
WAV Group works with enterprise firms like MLSs, Franchises, and large brokers to integrate Zillow’s marketing and technology solutions. Putting trust issues and fears aside, Zillow is tending to its row. WAV Group does not have an opinion one way or the other about Zillow. We wear the hat of our client and put our shoulder behind their success whichever way they want to go. If you need help or want to discuss it, give WAV Group a call.
This is a great post Victor. Thanks for making all of us think about the future. It looks very exciting when we get beyond the “what is” and think about “what could be”.
Kevin
Both the DRE and CAR (with government over site & control) have slowly been leading the Realtors down the rose colored path. The end run by these entities is to make every Realtor whether or not they are an Agent or a Broker, an Employee and get rid of the small business Realtors all together. They are quite successfully teaching the public that Realtors are no longer needed.
I just wanted to confirm what I read. Zillow is about to become the next real estate conglomerate?
In the future there may be the possibility that C.A.R./N.A.R. will supply Zillow forms for REALTORS to use for a transaction? So, in the next 5 years it will be C.A.R./N.A.R VS ZILLOW? Realtors vs Zillow agents will be the next step to how home buyers purchase their home?
Your FSBO argument is the most compelling. Paperwork is the second biggest worry people have about selling FSBO. The first, finding a buyer, Zillow already helps with.
Another argument you didn’t mention is to leverage their current sales organization, that is, product line extension.
Thank you Victor for sharing with the Realtor community the reasoning behind this acquisition.