Zillow Bets on Automation

Zillow Group is making a sizable bet that it can automate the labor-intensive process of buying and selling homes. But unlike most other areas of technology, many customers may prefer doing things the old-fashioned way when it comes to the roof over their heads.
 Tech-enabled “iBuying” offers speed and convenience for a customer, eliminating the need for repairs, stagings, showings and, in some cases, even real-estate agents. For Zillow, which works with agents, it means physically taking on home inventory, quickly fixing it up and selling it — essentially home flipping.
 Commissions associated with iBuying are generally higher than what traditional real-estate agents charge, as customers pay for the added convenience. (Zillow dislikes the term “home flipping,” describing its business as a “service for a fee,” in which the fee depends on such factors as market conditions and the work to be done on a home.) The potential market is vast: Zillow expects it to generate $20 billion annually within three to five years.
 Investors seem to understand both the potential and the risk. Zillow's shares soared 25% on Feb. 22, the day after it announced on its fourth-quarter earnings call that it was doubling down on iBuying. But the stock has since shed most of that gain. Margins on iBuying are thin: Zillow said it expects to earn just 2% to 3% on transactions at maturity. And for customers, an increase of even a few percentage points in commission dollars on a home adds up in a big way.
 Redfin, which in 2018 did 9% of its business in iBuying, said earlier this year it expects the process to be “fundamentally limiting” for some customers because of its inherent financial risk. Even Zillow's management has characterized the company's move into a low-margin, inventory heavy business as one of Chief Executive Rich Barton's trademark “big hairy audacious goals.”
 Barclays downgraded Zillow to “underweight” last month, expecting aging and mispriced inventory to weigh on margins. Still, some analysts are forecasting a quick ramp-up. Cowen analyst Thomas Champion estimates that iBuying will represent 41% of Zillow's revenue by the end of this year, compared with just 4% in 2018. Bullish analysts see cross-selling opportunities for Zillow's iBuying business with mortgage origination, which carries higher margins.
 Zillow isn't alone; several pure-play startups are going all in on iBuying. In March, Opendoor raised $300 million at a reported valuation of $3.8 billion. Others include Knock, led by the founding team members of Trulia, as well as Offer pad and Perch, among others. Well-funded private competitors may further pressure Zillow's margins as they race for market share, though Zillow has a sizable advantage as the established market leader.
 Mr. Barton reckons that Zillow can streamline the real-estate process with iBuying, much as Netflix did streaming videos. But real estate is a vastly different business from movies and even other online markets. For one thing, it is low-volume — just 5.5% of homeowners moved in 2017, according to the U.S. Census Bureau. And when people do move, most want their hands held — 87% of home buyers and 91% of home sellers still use an agent, according to a 2018 survey by the National Association of Realtors.
 Taking a chance with Netflix sets you back $12.99; gambling with your home requires putting all your chips on the table.  

— Laura Forman


Zillow's daily share price

Zillow's estimated annual iBuying revenue for its 'Homes' segment

Sources: SIX (shares); the company (actual revenue), Cowen (estimate revenue)

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