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Home International Zillow is losing millions on home sales. But its CEO Rich Barton...

Zillow is losing millions on home sales. But its CEO Rich Barton isn’t worried

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But Zillow has decided to shake things up.

The model, known as instant purchase or “iBuying”, marked an important revision for Zillow’s core business. Until then, the company had operated in a purely digital realm, removed from the headache of ownership or the renovation of real brick and mortar properties.

In the company, the dramatic change is known as “Zillow 2.0” and CEO Rich Barton presented a bold vision, portraying this moment as a “new frontier in the real estate sector”. He wants Zillow’s service to eventually transform the industry so that selling a house is as easy as swapping a car. But first, he warns, the company and its shareholders must be patient.

There is a steep learning curve and so far the company is losing millions every month with the new initiative. But Barton believes the big bet will pay off.

Because Zillow is changing course

Today, more agents use Facebook and LinkedIn to market homes than garden signs and open houses, and the online real estate market is valued at $ 19.9 billion, according to Associate Borrell, a research team that draws up an annual vision of the sector.
Zillow already captures a good chunk of that market; brought in $ 1.3 billion in revenue from online advertising in 2019. Co-founded by Barton in 2005, the company has collected competing real estate sites such as Trulia and StreetEasy over the years. With nearly 200 million monthly users on its sites, according to the company, Zillow now operates one of the country’s busiest online real estate platforms.

So why put this at risk?

In a sense, the company was boxed into the decision by smaller and more recent competitors: OpenDoor was launched in 2014 with iBuying as its main offering, followed by OfferPad in 2015. RedFin, meanwhile, had started experimenting with iBuying in 2017. .

Related: see the 20 Risk Takers that drive global business forward
“iBuying was an existential threat to the company,” he said Mike DelPrete, a real estate technology strategist and resident scholar at the University of Colorado Boulder. “Zillow’s whole position is based on being the first place where consumers go when they buy or sell a home. They have to bring oxygen out of the room for anyone else and own the space as quickly as possible.”

With iBuying gaining ground on other sites, DelPrete said Zillow risked losing its competitive edge. But although many experts believe it was a natural expansion for the company, it still involved a fair amount of risk, especially because the margins are very thin.

A home owned by Zillow, for sale in Atlanta, Georgia. The company has expanded its home shopping program to 23 US markets. (Edward M. Pio Roda / CNN)

Selling digital ads alongside real estate listings is one thing. But selling houses is a completely different ball game.

“It’s quite unusual to have this type of business model change for a public company – it’s such a risky move,” said Mark Mahaney, chief Internet analyst at RBC Capital Markets. “It probably helped that Rich was the one who came to help him. He has enormous credibility.”

For Barton, that credibility comes from a series of entrepreneurial successes. Not only did he quickly expand Zillow during his first stint as CEO, he also founded Expedia and co-founded Glassdoor. He is not afraid of making big swings.

“I am very comfortable with temperate risk,” he said in an interview with Rachel Crane of CNN Business. “In a way, I think it’s a courage.”

Barton had left Zillow’s principal position in 2010 and had taken on the role of executive president. But in February 2019, Zillow reported him as CEO when the company decided to double its iBuying strategy. Zillow’s stock jumped into the news after trading down much of the year before.

“Rich has solid experience in” disruptive “space,” said DelPrete. “Before returning as CEO, Zillow was a little agitated with investors. It makes sense to change the guard if the company is about to turn.”

Magic with one click

Before launching Zillow Offers, the company generated most of its revenue through its Premier Agent business, which sold advertising and led real estate agents across the country. That segment of the business had started to slow down, giving the company another incentive to find new revenue streams, according to experts.

Barton compared the process of buying a house to a large grocery store. Before the launch of Zillow, the lights were off and people were shopping in the dark. The arrival of Zillow in 2006 it was the equivalent of turning on the lights and providing more information and transparency while customers were shopping.

“But it gets to the checkout and it’s still the technology of the 50s,” he said. “There is a long line, there is chaos in the line, there is a person who is scanning things one at a time.”

For Barton, Zillow Offers is an attempt to create an “express lane … to make it with a single click and make the magic happen”.

In the year since Barton returned as CEO, Zillow Offers has worked hard to make this magic possible. It has been expanded from seven markets to 23 in the past year.

Zillow reported Barton as CEO when the company decided to double its iBuying strategy. (Jovelle Tamayo for CNN)

How it works: homeowners come to Zillow to check their Zestimate; if they are in a price range and in a location where Zillow sees an opportunity to buy, they can click on a button and fill in some basic facts about the house (photos are optional but not required). Within 48 hours, Zillow makes an initial offer, which is a “man-machine combination”, according to Emily Heffter, director of corporate communications for Zillow. He said Zillow makes an initial calculation with the data he has at hand and uses broker brokers in town to make sure it’s an appropriate offer.

If the homeowner likes this offer, Zillow sends an employee (not an authorized inspector) to look at the house in person. So, Zillow makes an appropriate offer, which takes into account all necessary repairs to the house. If homeowners accept the offer, they can choose a closing date between five and 60 days in the future. Heffter said the whole bidding process takes no longer than a week.

Barton stressed that Zillow’s goal is to provide a fair price that offers sellers a “card without getting out of jail”, which allows them to move on to their next adventure without being “stuck” in their current home, waiting for her to sell. .

In November, Zillow has published a study who examined 3,200 homes where the seller had turned down a Zillow offer and continued to sell their home in the traditional way. The final sale price was on average 0.22% higher than Zillow’s initial offer, something the company uses to underline Barton’s point: their offers are market rates.

This is also why Barton questions the word “throw” when referring to Zillow’s offers.

“We are providing a service to sellers,” he said. “The term” reversal “has incorporated into it some negative connotations that relate to taking advantage of people in distressed situations and making oversized profits. That’s not what we’re doing.”

In 2019, Zillow said that over 250,000 homeowners have applied for an offer. Yet throughout the year, Zillow only bought 6,511 houses and sold 4,313. Although the numbers are low, they mark a big increase in a year: in 2018, Zillow purchased 686 homes and sold 177. (Opendoor, by comparison, bought around 11,000 in 2018.)

Heffter said Zillow tries to “buy houses in the median”, which means whatever a typical single-family home is for that city (in Miami, for example, it could be an apartment building). They avoid “truly rich or truly unique neighborhoods because they are more difficult to resell and more difficult to evaluate”. Likewise, he said there is no market as large for low-end properties and neighborhoods. He noted that’s why Zillow’s offerings started in markets like Phoenix and Atlanta: real estate was similar in age and quality, so it was much easier to evaluate with confidence and know what they were getting.

“[We avoid] homes in need of major structural repairs, “said Heffter.” We only do a renovation: landscaping, painting, flooring. Occasionally we may make a roof; we have many swimming pools and air conditioners “.

A home undergoing repairs and renovations in Smyrna, Georgia. (Edward M. Pio Roda / CNN)

He said there are many houses with which Zillow decides not to go on for one reason or another. Likewise, some homeowners use Zillow’s initial offering as a starting point before opting for the more traditional route.

Zillow charges the seller a commission of around 7.5% on average, which is significantly higher than the traditional 6% commission that a seller pays to real estate agents. Heffter said that the rate is adjustable depending on things like the house itself and the market, and added that the higher rate represents the risk Zillow takes.

“It might cost a little more to go through us,” he said. “But it is worth considering other costs that you will have to face: if you are in a [homeowners association] and sit at your house to sell, you’re paying dues and utilities. Many people go out while their home is on the market, so they are paying a double mortgage or rent. We think it will probably work for many people. “

In addition to commissions, Zillow also earns from any profits made from the sale of the house. So far, those margins have not been great. In the fourth quarter, Zillow reported operating costs each house averaged $ 318,667, while the average house sold for $ 317,155 – a loss of $ 1,512 with each sale. And that was before we accounted for interest and operating costs, which amounted to an additional $ 4,895 in house losses.
Overall, the Zillow Homes division has lost $ 312 million in 2019, before taxes.

A stomach for losses

DelPrete said that one of Zillow’s advantages in the iBuying space is the company’s stomach for “sustained unprofitable” since most iBuyers are currently losing money on the strategy.

“[Zillow’s] the entire Homes division is losing tens of millions of dollars every month, “he said.” It is a bloodbath. They have a lot of money to burn to resist huge losses. It is quite stunning. At the moment it also appears to be a chicken game between Opendoor and Zillow. “

Experts believe that tight margins will continue to be problematic. Best case: Zillow downsizes its instant offers and the unit economy increases enough to make the segment profitable. But the real potential may lie in lead generation: around 250,000 people every year tell Zillow that they are interested in selling their home. This is where DelPrete thinks that the real opportunity is: to use iBuying “as a portal for other ways of making money” in the transaction, such as referral fees, title insurance and mortgages.

“If Zillow is able to count each of these people as customers, they will win,” he said. “And for those people, some of them want an instant sale, some are kicking the tires, some want to sell the traditional way. It’s like going to the kitchen table and saying, ‘What do you want? To list your house, do an instant offer, get a broker? It’s empowering consumers. “

Barton acknowledges that this is part of the strategy, noting that, for example, many homeowners who don’t use Zillow offers are still interested in selling their home. If so, Zillow may refer them to one of its agent partners and request a referral fee. However, he is adamant about seeing Zillow Offers as a profitable segment on its own. He said that in 3-5 years, he sees Zillow buy and sell around 5,000 homes per month and earn $ 20 billion in revenue from that segment alone. (This is more than seven times the company total revenue for 2019.)
Although Zillow Offers is losing millions of dollars every month, Barton says he is confident that it will eventually become a profitable part of the business. (Jovelle Tamayo for CNN)

“We are not planning on Zillow Offers business to be a loss-making leader for a group of other companies,” he said. “We are planning that in the long run it will be a profitable business in and of itself that it will also be a gateway to a world of other services.”

Of course, those plans could strike us a key if the housing market takes a hit. But even that doesn’t stage Barton, who said Zillow’s offers can withstand any recession.

The Internet has not reduced real estate commissions by 6%. But this cause could

“People still need to move,” he said. “If we were to suffer a short-term loss in the process, that’s fine because we will buy houses at much cheaper prices during that period. [And] people may be more motivated to sell, honestly, so our service will be highly appreciated. “

However, it will be an uphill climb to reach the ladder that will make Zillow Offers successful, and it won’t happen overnight. RBC’s Mahaney thinks it will take at least until 2021 or 2022 before investors see if “material profits could be generated consistently in this sector.” But Zillow definitely doesn’t start from scratch.

“The cost of acquiring Zillow’s customers is zero,” said DelPrete. “It is the most popular real estate portal in the country with hundreds of millions of consumers visiting it. It is easy to publish an advertisement asking for information on iBuying, while other competitors must spend tens of millions of dollars to generate such contacts. It is a competitive advantage. sustainable.”

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