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

(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.

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.

Zillow founders Lloyd Frink (inside house) and Richard Barton swear they have no desire ot make the real estate agent extinct.
Phoenix agent Barry says Zillow's valuations are wildly optimistic. He predicts an ugly '07 in his region.
Make them move: The author's Victorian, yours for $1 million.
Bird's-Eye View
You've found your neighborhood. (We're using Seattle.) Or maybe you're selling. Either way, Zillow's tools come in handy.
For Sale:
Users list homes for free.
Make Me Move:
We all have our price. What would it take for you to pack your bags and get out? Careful - put that number up on the site and you just might get it.
Recently Sold:
Good for figuring out neighborhood trends.

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.

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.

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.

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.

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.

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.

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.)

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."

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.

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.

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.

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.

A transparent market

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.

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."

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.

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.