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
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. .
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.
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.”
“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.
“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.
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. .
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.”
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 “.
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.
“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. “
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. “
“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.
“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.”