Zillow 1st Home under their new initiative. What do you think?

7 Replies

Hi BP,

So Zillow have finally entered the buying and selling property business. Here is an article briefly describing how the experience was for Zillow and the home seller: https://www.geekwire.com/2018/inside-look-zillows-...

The article stated that the seller accepted an offer of $410,000 for the house and the Zestimate for it is $414,233. It also have the coming "Coming Soon" note at $425,000 and that Zillow plan to only do some light touch up to the house before putting it back on the market. Also, below is an image I just took from zillow own website. I have circled the house in red.

Personally, from the numbers so far I don't think there is much profit to be made from this house since most of the comps are much lower. With the purchase price of $410,000 I think Zillow have put out a generous offer to make a good impression on future potential seller. This must have been a marketing attempt to get good publicity. Even if they only pay 3% for both the seller and buyer agent to have the property for sale that would have equate to $12,750 ($425,000*3%). This is not counting the cost to acquire the property (excluding the price) and the cost to fix up the property before selling it. I am pretty sure they will need a better margin down the line if they wanted to stay in this game. 

What do you all think?


KH

Hey Khoa,

Zillow makes most of its money through ad sales. These ad sales are purchased mainly by real estate agents, mortgage professionals, and others who hold an interest in the home buying, selling, and improvement process. It's quite often today that I see advertisements on TV, billboards, or signs on the side of the road stating "I buy ugly houses" or "I buy homes with cash fast." So now they are looking for other ways to bring in revenue, hence the flipping industry, a highly profitable but risky venture. Zillow states the following on their annual report, "If Real Estate, Rental and Mortgage Professionals, Home Builders or Other Advertisers Reduce or End Their Advertising Spending With Us or if We Are Unable to Effectively Manage Advertising Inventory or Pricing, Our Business Would Be Harmed."

It is known that the house flipping industry is growing and that to be successful in the business of flipping, you will want to buy homes at a discount in order to have nice margins when you go to sell. 

With the information provided it does not seem that strong margins will be obtained but this does not take into consideration the knowledge Zillow has about the markets that the pubic does not. That is where they can really manipulate the margins. Zillow is operating with data and a strong market influence that the public simply does not have. Zillow will have to operate these transactions with low cost of capital and it is unclear how they will do this. The article says "contractors working for Zillow." That can mean several things. Is Zillow outsourcing contractors or are they increasing their workforce for these new ventures. Things like that will effect margins short and long term in varying ways.

So while we can speculate on the margins Zillow might make, we won't actually know until they release more information of how they are going to fund these projects, the path they will take for hiring work, and their overall flipping goal and holding periods. 

Hi @Ryan Goggins ,

Thank for the input. From what I fee of the article I think that this first house that they purchase might have been for show only and not intended to make any profit out of it. The sellers said they accepted an offer at $410,000 and Zillow show that it will coming on the market for $425,000. If they have to pay an agent to sell this property and the buyer agent as well then the $15,000 margin might not even be enough to cover that (4% commission is $17,000). So no matter how little work they put into this the numbers still don't add up for any typical investor.

KH

They are most likely not paying any commission. Zillow is the buying and selling agent in this case. They are the direct point of contact in these transactions from what I understand.

@Ryan Goggins ,

Actually they hired George Laughton to list and sell their property (stated in the article). And if they want other agent to market this property to their buyer then they will probably need to pay a buyer agent commission as well. 

Also, here is the statement from Zillow CEO in another article “There are several startups and real estate brokerage websites experimenting in this space, but Zillow is the only one that has designed a product to keep the agent involved in every part of the transaction, most notably by giving them the opportunity to secure new listing agreements,” Rascoff said. “Ultimately, Zillow Instant Offers has the potential to deliver the highest intent, highest quality listing leads at scale to our Premier Agents.” - https://www.geekwire.com/2018/zillow-group-will-st...

KH

Yea its interesting. None the less, pretty minimal information on this to forecast the future transactions. They are obviously in the business to make money, not lose money to help out sellers with quick transactions. 

It will be interesting to see how this will effect the traditional market. 

What do you think?

@Ryan Goggins ,

You are right we dont have enough information to know if this will have a negative or positive effect in the traditional market or not. Maybe if we look at if someone that have bid against any of the other service like Redfin or Opendoor can give us some insight on how aggressive they are when buying value-add property. 

KH