Zillow – Zillow is losing millions on selling homes. But its CEO Rich Barton isn’t worried
But Zillow decided to shake things up.
The model, known as instant buying, or “iBuying,” marked a major overhaul for Zillow’s core business. Up until then, the company had operated in a purely digital realm, removed from the headaches of owning or renovating actual brick-and-mortar properties.
At the company, the dramatic shift is known as “Zillow 2.0,” and CEO Rich Barton has laid out a bold vision, painting this moment as a “new frontier in real estate.” He wants Zillow’s service to eventually transform the industry so that selling a home is as easy as trading in a car. But first, he warns, the company and its shareholders have to be patient.
There’s a steep learning curve, and so far, the company is losing millions every month on the new initiative. But Barton believes the big bet will pay off.
Why Zillow is shifting course
So why put all that at risk?
In a way, the company was boxed into the decision by smaller, newer competitors: OpenDoor launched in 2014 with iBuying as its core offering, followed by OfferPad in 2015. RedFin, meanwhile, had started experimenting with iBuying in 2017.
As iBuying gained traction on other sites, DelPrete said Zillow ran the risk of losing its competitive edge. But even though many experts feel it was a natural expansion for the company, it still came with a fair amount of risk, particularly because the margins are razor thin.
Selling digital ads next to real estate listings is one thing. But selling homes is a whole different ball game.
“It’s pretty unusual to have this kind of business model change for a public company — it’s such a risky move,” said Mark Mahaney, lead internet analyst at RBC Capital Markets. “It probably helped that Rich was the one coming in to help do it. He has an enormous amount of credibility.”
For Barton, that credibility comes from an entrepreneurial success streak. Not only did he rapidly scale up Zillow during his first stint as CEO, but he also founded Expedia and co-founded Glassdoor. He’s not afraid of taking big swings.
“I’m very comfortable with risk that is tempered,” he said in an interview with Fintech Zoom Business’ Rachel Crane. “I kind of think of it as courage.”
“Rich has a strong track record in the ‘disruptive’ space,” said DelPrete. “Before he came back as CEO, Zillow was in a bit of a rut with investors. It makes sense to have a changing of the guard if the business is going to pivot.”
Before launching Zillow Offers, the company generated most of its revenue through its Premier Agent business, which sold ads and leads to real estate agents around the country. That segment of the business had started to slow, giving the company another incentive to find new revenue streams, according to experts.
“But you get to the checkout line and it’s still 1950’s technology,” he said. “There’s a long line, there is chaos in the line, there’s a person who’s scanning things one at a time.”
To Barton, Zillow Offers is an attempt to create an “express lane … to make it just one click and have magic happen.”
In the year since Barton returned as CEO, Zillow Offers has been working hard to make that magic possible. It’s expanded from seven markets to 23 in the last year.
How it works: Homeowners come to Zillow to check their Zestimate; if they’re in a price range and location where Zillow sees an opportunity to buy, they can click a button and fill out a few basic facts about the home (photos are optional but not required). Within 48 hours, Zillow gives an initial offer, which is a “combination of human and machine,” according to Emily Heffter, Zillow’s director of corporate communications. She said Zillow makes an initial calculation with the data it has on hand and uses broker partners in the city to make sure it’s an appropriate offer.
If the homeowner likes this offer, Zillow sends an employee (not a licensed inspector) to look at the house in person. Then, Zillow makes an adjusted offer, which takes into account any repairs the house needs. If homeowners accept the offer, they can choose a closing date between 7 and 90 days in the future. Heffter said the entire offer process doesn’t take more than a week.
Barton stressed that Zillow’s goal is to provide a fair price that gives sellers a “get-out-of-jail-free card,” allowing them to move on to their next venture without being “stuck” in their current home, waiting for it to sell.
This is also why Barton takes issue with the word “flipping” when referring to Zillow Offers.
“We’re providing a service to sellers,” he said. “The ‘flip’ term has embedded in it some negative connotations around taking advantage of people in distressed situations and making outsized profits. That’s not what we’re doing.”
Heffter said Zillow tries to “buy homes at the median,” which means whatever a typical single family home is for that city (in Miami, for instance, it might be a condo). They avoid “really wealthy or really unique neighborhoods because they’re harder to resell and harder to price.” Similarly, she said there’s not as much of a market for properties and neighborhoods on the lower end. She noted that’s why Zillow Offers started out in markets like Phoenix and Atlanta: The housing stock was similar in age and quality so it was much easier to price confidently and know what they were getting.
“[We avoid] homes that need major structural repairs,” Heffter said. “We just do freshening up: Landscaping, paint, flooring. Very occasionally we might do a roof; we fix a lot of pools and air conditioners.”
She said there are a lot of homes that Zillow decides not to move forward with for one reason or another. Likewise, some homeowners use the initial Zillow offer as a starting point before opting to go the more traditional route.
“It might cost a little bit more to go through us,” she said. “But other costs you’d take on are worth considering: If you’re in a [homeowners association] and sit on your house to sell, you’re paying dues and utilities. A lot of people move out while their house is on the market, so they’re paying double mortgage or rent. We think for a lot of people it probably works out.”
A stomach for losses
DelPrete said one of Zillow’s advantages in the iBuying space is the company’s stomach for “sustained unprofitability” as most iBuyers are currently losing money on the strategy.
“[Zillow’s] entire Homes division is losing tens of millions of dollars each month,” he said. “It’s a bloodbath. They have plenty of cash to burn to withstand the massive losses. It’s pretty staggering. It also appears to be a game of chicken between Opendoor and Zillow at the moment.”
Experts think the tight margins will continue to be problematic. The best case: Zillow scales its instant offers and the unit economics increase enough to make the segment profitable. But the true potential could lie in the lead generation: Roughly 250,000 people each year telling Zillow that they’re interested in selling their home. That’s where DelPrete thinks the real opportunity is: using iBuying “as a portal to other ways of making money” in the transaction, like referral fees, title insurance and mortgages.
“If Zillow is able to count each of those people as a customer, they’ll 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 their 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 designing the Zillow Offers business to be a loss leader for a bunch of other businesses,” he said. “We are designing it to be, long-term, a profitable business in and of itself that also is a gateway to a world of other services.”
Of course, those plans could get a wrench thrown in them if the housing market takes a hit. But even that doesn’t phase Barton, who said Zillow Offers can weather any downturn.
“People still need to move,” he said. “If we have to take some short-term loss in the process, that’s OK because we’re going to be buying homes at much cheaper prices during that period. [And] people may be more motivated to sell, honestly, so our service will be more highly valued.”
Still, it’ll be an uphill climb to achieve the scale that will make Zillow Offers successful, and it’s not going to happen overnight. RBC’s Mahaney thinks it will take until at least 2021 or 2022 before investors see if “one could consistently generate material profits in this sector.” But Zillow definitely isn’t starting from scratch.
“Zillow’s customer acquisition cost is zero,” DelPrete said. “It’s the most popular real estate portal in the country with hundreds of millions of consumers going there. It’s easy to put up an advertisement to ask about iBuying, while other competitors need to spend tens of millions of dollars to generate those leads. It’s a sustainable competitive advantage.”
Editor’s note: This story has been changed to update outdated information provided by Zillow about how long transactions may take to close.