Buying homes for subsequent resale is a capital-intensive, old-economy, bricks-and-mortar business.
Zillow will borrow money to buy the homes, which means that (a) the clock will start ticking the instant each new home is purchased, and (b) this endeavor can be profitable only if proceeds from resales/rentals are sufficiently high to cover cumulative debt service costs -- in addition to all property taxes and ongoing maintenance expenditures associated with home ownership.
Why would a heretofore capital-light SaaS business like Zillow want to do this?
The only sensible explanation I can think of is that Zillow's current business is no longer growing quickly, i.e., Zillow is now a boring, mature company.
The stock dropped 7% on the news last Friday.
How can zestimate be trusted if zillow is in the business of buying and selling homes? There's a reason why banks separate advisory business from the trading business.
I get the feeling a company like this would only make this kind of leap because they have the data to show it will pay off. I.e. they can formulate algorithms to make the best purchases and the most profit. I foresee big gains from this
Zillow has such reach that they can low-ball every offer so that 99% of people won't take it - but as long as 1% of people do, and Zillow can avoid terrible houses, then Zillow will be buying properties at a huge discount from the market, plus collecting a substantial fee. Thus, they can sell at market rates and make a big profit per house.
The key advantage here is that they can make these low offers to a much bigger audience than anyone else can do. This should allow them to be either be more profitable per house than anyone else, do more volume than anyone else, or hit any mix of these two better than anyone else.
Of course, they can shoot themselves in the foot pretty well if they:
- Try to go for volume over profitability, and then catch a downturn. - Do a bad job of running repairs. - Don't do a good job of catching houses that are much worse than they appear.
However, there's no physical reason this can't be extremely profitable. They have the data to see their current home investors making money. If they feel they can identify the most profitable attributes of these flips, then they can route all the extra profitable ones to themselves. The only losers here are the existing people in Zillows home flipping program. They are almost guaranteed to now be getting the second best homes, once Zillow has skimmed off the profitable ones.
So what does it mean for me if I buy a home straight from Zillow? Better price?
If you read the Redfin 10k, they were doing this already as a service called "Redfin Now." I think it is interesting that two large data-driven pricing services are both pursuing this strategy. If you have better data, it might be possible to make money just on your pricing edge.
Discussed a few days ago: item?id=16825539.
Isn’t this announcement to mess with Opendoor’s current fundraise? Similar to Microsoft announcing vaporware back in the day or Uber trying to interfere with Lyft’s fundraises?
Nobody wants to tackle the elephant in the room in real estate: we need to build a lot more. that's really hard.
Competition with its own customers too. Isn’t this a conflict of interest?
This move is very interesting.
I have been studying this part of the business quite a lot lately. A few considerations:
1) It seems to me that Opendoor, Unison, etc, and now Zillow, are trying to capture "pre-foreclosure" opportunities before they hit the market. Think about this: why would you want to sell your house quickly, and leaving money on the table, if not because you're short on cash and you know you will soon lose your house?
2) Secondarily, especially in the case of Opendoor, some homeowners might want to simply avoid the complex and time-consuming task of "changing homes" (fixing small details, picking the agent and listing it, staging it, handling the delicate balance between selling the current one and securing the next one, etc). Opendoor promises to vastly simplify this part, which I think is good.
3) I believe that some of these assumptions are specific of the current market situation, where in most "hot" real estate areas (SF, LA, Seattle, NY, Honolulu) prices are wild, the appetite for real estate has never been stronger, and at the same time there's still many opportunities to make a quick buck by flipping, accessing certain information earlier, etc.
I am not completely sure what will happen when/if the market corrects (might also depend on the size of the correction).
4) In the US the whole process of buying homes, financing them, and potentially use LLCs/Trusts/etc to handle various real estate properties as investment is still very fragmented, and still very dependent on which State you live in and in which State the property resides. There are essentially thousands of different combinations and configurations, and the optimal answer to each can also vary over the years, following updates to the legal code or to tax rules.
All in all, I think that Zillow is trying to carve out another piece of the market, and not necessarily because their current market is showing signs of slowing down (even if that has discussed just recently ). Heck, it might even be that Opendoor's outstanding fundraising results might have triggered the decision to go against them.
5) Long term, I think most real estate assets will become fully digital, and handled exactly like a small piece of software - that is, for everything that pertains property and ownership, taxation, transactions, etc. Of course, fixing a leaking pipe will still require a physical intervention :)
For background: I'm co-founder/CEO of a startup which will provide a software platform to digitize real estate assets, and legally transact on properties using APIs. We leverage the Ethereum Blockchain as a global land registry where these transactions are recorded. (I don't intend to use this comment to publicize it, hence no link).
Zillow is not to be trusted they have power to manipulate the market prices with their zestimate. Not only that but they're ridiculous leads pricing they charge the agents ($250 for every time you fill out the contact me).
Next week: Yelp to open chain of restaurant, citing vast knowledge of what makes for a satisfying dining experience. Spokespeople ensure their users that the impartiality of their algorithms will continue. This story brought to you from Google News Reporting.
Definitely not another housing bubble. No way.
Let's start buying when the bubble is at it's biggest?