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`EXHIBIT 2001
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`What's your house really worth?
`
`How Zillow is turning online voyeurism into a real estate
`revolution. Fortune's Jeffrey M. O'Brien reports.
`
`By Jeffrey M. O'Brien, Fortune
`senior editor
`February 15 2007: 11:55 AM EST
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`(Fortune Magazine) -- This is what usually happens the first time you visit
`Zillow.com: You type in your address to check out the Zestimate, an
`approximation of your home's market value. It appears in a little pop-up
`superimposed on a photographic map of your neighborhood. The number might
`make you smile; it could make you angry.
`
`Pow ered by
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`Next, you realize that the information on your property is incomplete. What about the kitchen upgrade? Your new deck? The landscaping?
`All that work's gotta count for something. You've spared no effort to convince the assessor that your house is worth less than the official
`report, but now it's time to primp. So you tap in some modifications and watch your home's value rise.
`
`Next, you check your neighbors' Zestimates. Then your childhood home, a best friend's place, your boss's house. Just as you open your
`address book in search of more targets, your spouse calls out from the bedroom, wanting to know what the hell you've been doing for the
`past two hours. "Nothing, honey," you say, shutting the laptop and trudging off to bed, caught red-handed in a loop of real estate yuppie
`porn.
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`If you haven't heard of Zillow by now, it's probably because you don't own a home. Or maybe you're just not as prurient and narcissistic
`as the rest of us. The national real estate market is in flux: Prices fell last autumn; new-home sales have risen for the past two months.
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`But what does that have to do with you? Zillow knows. With 52 million house valuations across the U.S., the site attracts as many as four
`million visitors a month. In less than a year since launch, the Seattle company has become one of the Internet's biggest real estate
`destinations. There are many listing sites on the Web, but Zillow is more of a media play. It makes money by selling ads to brokers, banks,
`contractors, appliance retailers and anyone else interested in reaching data-obsessed homeowners and -buyers.
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`And now the company is trying to create something even more ambitious: a perfect market for real estate. Mix E*Trade, Craigslist and the
`Multiple Listing Service together, and you begin to get the idea.
`
`A pair of disruptors
`
`The two men behind Zillow, a pair of former Microsoft executives named Richard Barton and Lloyd Frink, don't exactly cut the image of
`moguls intent on upsetting a $2.27 trillion industry. On the day of my visit to Zillow's headquarters, Frink, who's 42 and president of the
`operation, is wearing a Seahawks jersey and seems most interested in talking about football. And Barton, the company's 39-year-old
`chairman and CEO, couldn't look less threatening - put a pool cue in his hand and he'd be perfect in a Dockers ad.
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`But the two entrepreneurs know an industry in transition when they see it. They've placed $5 million of their own money, $1 million from
`early employees, and another $51 million in venture capital on a bet that real estate is ripe for some good old-fashioned Internet
`repositioning.
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`Barton and Frink (not to be confused with "Barton Fink," the most excellent 1991 Coen brothers film) have had this feeling before.
`Thirteen years ago Barton convinced Bill Gates that consumers would benefit from a more transparent process of booking flights and
`hotel rooms. With his boss's backing, Barton launched Expedia, hired Frink, took the company public, and proceeded to massively disrupt
`the travel industry.
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`When Barry Diller bought the site for $1.5 billion in 2003, the duo cashed out. They won't say how much they made, but let's just say it
`was enough to take some time off and figure out what to do next. (Nor will they say much about Zillow's finances, except that the
`company still has half of its VC money and that an IPO is probable, but not this year.)
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`Now they're taking on the wobbling, punch-drunk world of real estate. "When we were doing focus groups on Expedia, consumers would
`tell us they could hear the tap-tap-tap of the keyboard when talking to a travel agent, and they wanted to jump through the phone and
`look at the screen," says Barton, sitting in his office in the company's Seattle headquarters. "Expedia was about satisfying that impulse,
`and that's also what we're doing at Zillow. The hunger for information about real estate is infinite, at least among adults."
`
`"There are a lot of parallels with Expedia and Zillow," adds Frink, who plays the technical guru to Barton's visionary. (Frink was hired by
`Bill Gates at 14 - not a typo - and his first big project was coding the DOS-based program Doodle.) "In the real estate industry you have
`tools and systems built for the professionals. We're trying to build something for consumers."
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`Until recently Zillow was read-only. But now Barton, Frink and their 133 employees are introducing new features to keep people coming
`back and, in the process, protect the site from downcycles in the real estate market. In September, Zillow opened the site to enable visitors
`to edit home records for everyone to see.
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`In December the site began accepting listings from homeowners and agents, and unveiled an intriguing feature called Make Me Move.
`Everyone has heard the heartwarming tale of the newlyweds who luck into a dream home while driving through an idyllic neighborhood.
`They get out of the car and slide a note under the door: "If you're ever interested in selling, we can offer you x. We promise to love your
`house. Please call." Two days later an elderly woman phones to tell the couple their timing was impeccable and the price is right. The
`couple buys the home, raises a family and lives happily ever after. Make Me Move - which, as it sounds, lets Zillow users post the figure
`that would cause them to pack up and go - is intended to make that fairy tale a lot more common.
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`We all have our price. Judging by some of the Make Me Move listings that have cropped up in a few months, that price is often
`ridiculous. But Zillow officials say the average Make Me Move figure is just 17 percent over the Zestimate. That's a relatively modest
`premium, so users are clearly taking the feature seriously. Which got me thinking. My wife and I have entertained thoughts of moving.
`We're not restless enough to go through the stress of interviewing agents, listing our home and opening it to visitors. But if someone
`made the right offer, sure.
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`I've paid attention to the market since we moved into our 101-year-old two-bedroom, two-bath Victorian in San Francisco, so I had an idea
`of what our house could sell for. I looked at the Zestimate, sized up my place against comparable homes, factored in the hassle of finding a
`new place to live and came up with my own Make Me Move figure. Sure enough, it was pretty close to 17 percent above the Zestimate.
`Not wanting to sell myself short, I nudged it up and put my house on the market in the most passive-aggressive way possible. All in the
`name of research. My price? A cool $1 million.
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`A transparent market
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`The real estate industry is based on what economists call information asymmetry, which simply means that one party (typically the seller)
`knows more about a product than the other (the buyer). It's an opaque market that encourages obfuscation and leads to flawed pricing.
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`The big idea behind Zillow is to make real estate more like a stock exchange, a transparent market where all information about every
`property is readily available, and as a result pricing is perfect. The problem with building such a system, Barton explains, is that "the best
`information about the real estate market is locked up in people's heads. It's happening in conversations in backyard barbecues."
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`For a buyer, the best way to root out the true value of a property is to tap into that communal knowledge, interviewing neighbors about
`how well the home has been cared for, barking dogs, loud buses, crime, buzzing power lines. For a seller looking to price a home properly,
`the key is knowing how many people showed up at every nearby open house for the past six months, analyzing overbids and price
`reductions, knowing the average time on the market and walking through every comparable home that has sold recently.
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`Doing all that legwork is unrealistic, of course, which is why we use agents. If Zillow does what Barton and Frink say it will, however, all
`that information will be as readily available as the number on the mailbox.
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`Needless to say, Zillow has a tendency to put real estate people on edge. "There is something really quite scary," reads a post from last
`summer on 0DotZero, a real estate blog, "about the fact that Joe and Jill Consumer [are] perfectly willing to give their frikkin' cell phone
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`numbers to Zillow.com, when they wouldn't even be willing to accept a cookie from my Web site."
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`The blogger, who claims to oversee interactive technology and marketing for a large unnamed commercial real estate agency, sees trouble
`ahead for his business. "He who holds the primary customer relationship controls the customer," he says. "From that perspective, Zillow
`is well poised to control the customer."
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`Both founders have heard this type of angst endlessly, and they swear they're not trying to obliterate the middleman. (They're much more
`intent on stealing one of the last great cash cows of newspaper advertising - like Craigslist with a profit motive.)
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`"At Expedia we were the agent," says Barton, whose mother was a real estate broker. "With Zillow we're not. There's speculation that
`we're going to charge commissions and sell houses. That is not what we're doing." He goes on to say that a broker is less like a travel
`agent than an attorney. You have access to every bit of legal information that a lawyer does, but none of the training - would you really
`choose to represent yourself?
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`It's clearly in the company's short-term interest to maintain the current power structure. Brokers, agents and developers spend upwards of
`$8 billion in advertising a year. By 2010 a greater percentage of that money will go to the Internet than to newspapers, according to the
`media consultancy Borrell Associates.
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`So Frink spends his time convincing the professionals that their ads on Zillow will attract new clients. "If you have a good agent, they'll
`say, 'I know about the barking dogs,'" says Frink. "If we can get the agents to share that kind of information with the public and they get a
`benefit from it, they'll get more clients and gain more trust."
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`Agent outreach
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`For the most part, Frink's outreach seems to be working. The site is getting more ads from agents every day, and the National Association
`of Realtors is sold on the concept. "Zillow is lighting up the imagination of consumers, getting them engaged in the real estate process. If
`you're marketing anything, it's good to have an interested user base," says Mark Lesswing, a senior vice president at NAR. "Many
`realtors don't fear Zillow anymore. They use it as a way to show how their services are more valuable than something you can get for free
`on the Web."
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`If Christopher Guest ever films a mockumentary about real estate agents, he could do worse than to make the trip to Phoenix and get a
`load of Brett Barry. With a George Michael beard, bleach-white teeth, perma-tan and a smattering of gold jewelry, Barry darts around his
`office in a strip mall, his face lighting up whenever another human comes within shouting distance.
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`Specializing in a planned community near Scottsdale, Barry lords over his territory in a canary-yellow Porsche Boxster whose vanity plate
`reads SAYSOLD. "It's a realtor thing," he says, half apologizing for, half drawing attention to his chariot. Locals tell me today is the
`coldest day of the year in Phoenix, but that doesn't dampen Barry's enthusiasm. "Let's put the top down!" he calls out as we get in the
`sports car for a tour of his domain.
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`Barry is skeptical of Zillow's valuations, especially in a market like Phoenix, where so many properties are languishing. If the Zestimates
`are based on sales, then Zillow is missing a whole lot of data. He points at a stack of pages from the MLS (for Multiple Listing Service, the
`nationwide database of properties for sale). "Look, 213 days, 353 days, 529 days," he says, referring to how long each house has been
`available. "There's a lot of fat in the market. Prices are still too high."
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`For any homeowner looking to sell, it's a gloomy message: These are the worst of times. Not long ago, Phoenix was the nation's fastest-
`growing market. The median price rose 55 percent in 2005. Agents were closing deals on the hoods of cars; investors flipped homes
`without ever moving in.
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`Fast-forward to early 2007: Throw a rock in any direction, and it'll bounce off a FOR SALE sign. "There are 45,000 listings in the Phoenix
`MLS, and that number hasn't changed in six months," Barry says as we cruise among lookalike stucco homes. With every passing week,
`the number of houses on the market rises, increasing the downward pricing pressure. "It's like a freeway pileup."
`
`But Barry's not glum. The way he sees it, his services are even more valuable in a down market. (He says he made $100,000 more last year
`than in 2005, the height of the boom.) And he's taking me along on his rounds to show me why that's true. At each place he quickly
`identifies shortcomings, punching numbers into his cell phone calculator and revealing that a house is overpriced by $25,000, $40,000,
`$90,000.
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`Scouting trips like this one give Barry valuable knowledge. Same for the kibitzing he does with fellow agents, telling stories, listening to
`what types of properties are moving. Add such anecdotal data to his access to professional valuation services, his intuition on how much
`to discount a house that backs up to a road instead of a golf course, and his presence in the community, and you get an agent who has
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`repeatedly ranked in the top 1 percent nationwide.
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`And yet even Barry has problems persuading clients to follow his advice. Homeowners too often become emotionally attached to the
`price they could have fetched at the top of the market - especially if they've taken home-equity loans.
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`"You look out on the street and see five to ten houses for sale, but many people still don't believe things have changed," he says, shaking
`his head at a dirty carpet. "The average seller says, 'I need to get this much out of our house to move up.' But the market doesn't care."
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`By giving consumers real-time updates on the value of their homes, Zillow intends to improve the dynamic between homeowners and
`agents like Barry. "We're going to change the nature of the communication," says Frink. "When real estate agents are talking to clients,
`it's going to be more of a two-way conversation."
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`Improving accuracy
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`The first step on that road is improving the accuracy of the Zestimates. Overall, Zillow has Zestimated the value of 57 percent of U.S.
`housing stock, but only 65 percent of that could be considered "accurate" - by its definition, within 10 percent of the actual selling price.
`And even that accuracy isn't equally distributed.
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`For example, 85 percent of homes in Los Angeles have Zestimates, and two-thirds have been accurate. But only 53 percent of homes in
`metropolitan New York have Zestimates, and only half of those are accurate. In Louisiana, where one in 50 homes is listed on Zillow, the
`site is just about worthless. (In at least one case, questions about Zillow's accuracy have taken on a political charge: A community activist
`group, the National Community Reinvestment Coalition, accused the site of discriminatory valuations in minority neighborhoods. "A lot
`of people have thrown rocks at us," Barton says. "Have we been sued yet? No, but I'm sure we will be.")
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`Squirreled away five floors below Barton's office, the company's VP of data and advanced analytics, Stan Humphries, is trying to improve
`those percentages. Each night his formulas churn through two terabytes of data, comparing every home with similar nearby properties
`and factoring in newly reported sales.
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`"When you want to see comparable homes - when you ask, 'What homes are like this house?'' - realtors do that with intuition," Humphries
`says. "We do it with machine learning. You can infer information. If one house always sells for more than everything around it, we might
`be able to infer that it has a view. This is a really hard problem to solve, but at some point in the next year we are going to produce
`valuations that people are going to be completely stunned by."
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`Barry remains dubious. Zillow has Zestimates for 99 percent of all Phoenix homes and claims that 72 percent are accurate to within 10
`percent. But Barry tells of a family who recently came to him believing their home was worth a lot more than it was. Zillow told them it
`would sell for $505,000; Barry and another agent each independently put the figure at $440,000. He doesn't discourage clients from looking
`at Zillow, but he definitely suggests they take the numbers with a grain of salt. "It's a tool," he says dismissively. "These folks said they
`looked at Zillow, but after seeing the Zestimate, they knew they wanted someone with knowledge of the area to see their house."
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`Finding the fairy tale
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`Back to my million-dollar pricetag. By now, it's early January, almost a month since I first visited Barton and Frink in Seattle. I haven't
`heard a peep about my Make Me Move price, and suddenly, just as I'm wrapping up this article, an e-mail hits my in-box. It reads, "Hello,
`we are neighbors of yours, looking to buy a home in Potrero Hill. In an effort to not waste your time, we are wondering if your million-
`dollar price quote is at all flexible. We are able to buy in a range close to there, but not quite there. Thank you very much in advance for
`your time."
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`Whoa. Now what? My wife and I discuss whether we have any wiggle room and decide that the first order of business is to call the
`woman and see if she's serious. The following morning, that's what I do. She is. As it turns out, the potential buyer and her husband are
`perfectly suited to play the role of the house-seeking couple in the fairy tale. They love the neighborhood and have been frustrated by
`their inability to buy. With the help of an agent, they've made three offers in three years, only to be outbid each time. Oh, yeah, and she's
`pregnant. They want a place to raise their family and are sick of going through the usual routine. "I've seriously considered putting a note
`up at Farley's," she says, referring to the local coffee shop, "or writing a form letter and putting it in mailboxes."
`
`She's been a fan of Zillow since she found the site several months ago and immediately identified Make Me Move as a great way to draw
`a bead on houses before they go up for sale. Scouring the site, she found six pricetags in my neighborhood and inquired about mine and
`one other. As soon as she talked to the other guy, he decided it would actually take more to make him move after all, and he chickened
`out. I remain convinced that my number is fair. But she can't get there.
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`So I propose an idea that'll take $60,000 right off the top: Let's cut out the middlemen. She's torn. She feels loyalty to her agent but is not
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`sure how much he's really worth. "We're doing 95 percent of the looking and all the legwork. He really just comes in when we're ready to
`make an offer," she says, adding that she'd be nervous about not having a pro to see the process through to the end.
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`Ultimately, the buyer and I decide to chill, think about how we could make the transaction happen, and pledge to strike up the
`conversation anew in the spring. Which is fine by me. With a buyer on hold, I'm able to begin scouting a dream property for my family.
`Just five years ago such a search would have started in a newspaper and ended in the office of an agent, where we would have probably
`competed with dozens of other bidders. Today I might be able to hop on Zillow and buy a house that's not even on the market - without
`dealing with open houses, bidding wars or buyer's remorse. Or even an agent.
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`In an opaque market, where the closest approximation of the value of a home lies in the head of a knowledgeable broker - say, Phoenix
`circa early 2007 - an agent can easily be worth the standard 6 percent commission. But in a perfect market, where the true value of a home
`is crystal clear to all parties and the fairy-tale note on a napkin comes in the form of an anonymized e-mail, 6 percent begins to look an
`awful lot like a luxury. Kind of like a canary-yellow Porsche.
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`Doris Burke contributed to this article.
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`_________________
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`Real estate: Who's buying now
`From the February 19, 2007 issue
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`Find this article at:
`http://money.cnn.com/magazines/fortune/fortune_archive/2007/02/19/8400262/index.htm
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