Serial entrepreneur (Expedia; Zillow; Glassdoor) Rich Barton, one of the five, original Zillow co-founders, returned to assume his former CEO role early this year. Barton came back to Zillow’s Management after a nine-year hiatus from his chief executive spot, taking over from fellow co-founder Spencer Rascoff, who took over the helm from Barton when he left his CEO role in 2010.
By all measures Rascoff is credited with doing a great job of growing the company, including taking Zillow through its initial public offering in 2011 and building what became the Zillow Group through fifteen 15 acquisitions. One of Barton’s keen areas of focus in resuming the top spot at Zillow has been to improve operational outcomes at its new PropTech venture, a nascent direct buying service, Zillow Offers, which the company launched in April 2018.
PropTech—or the advancement of real property technology—continues to be the darling of the commercial real estate (CRE) industry, with eager venture capital investors hoping to cash in on the next Big Idea. Over $1.7B in VC investments have been made in the PropTech industry just in October 2019 alone. But is every aspect of real property development and financing, the operational management of completed projects, and the marketplaces that support them, really susceptible to being made more efficient and, therefore, more profitable, in every instance through technology?
Crudely stated, Zillow Offers is geared to attract Zillow customers who lack the patience and wherewithal to use Zillow’s core service of matching sellers and buyers through its market information platform as the principal vehicle for selling a home. Rather than being active participants in the traditional home-selling process Zillow was founded to facilitate—through which one or more buyers is enticed to place an offer on a home marketed for sale on Zillow’s site and, sometimes, Zillow’s Premier Agent network—Zillow Offers is for those sellers who want to receive the benefit of their home sales proceeds as quickly as possible, and get out of their existing home. In this regard, Zillow Offers may be the PropTech analog to those billboards and direct-mail postcards proclaiming “We Buy Ugly Houses.”
The on-demand homebuying market created through Zillow Offers and other competitors, such as Offerpad and Opendoor—sometimes referred to as iBuying—takes a high-tech approach to home owners who’d like to sell their “ugly houses” as quickly as possible: That is, houses requiring just too much prep work to make it worth the owner’s while. To be fair, the We Buy Ugly Houses analogy only goes so far: Zillow Offers is designed to attract garden-variety homeowners who want to more-quickly monetize their residential asset than the traditional residential market beauty pageant (which Zillow famously digitized) normally fosters. Not only are their homes not required to be “ugly,” the less ugly they are the more-likely the Owner-Applicant and Zillow Offers will agree on a selling price through Zillow Offer’s algorithm-driven process.
After listing a home on Zillow, the platform askes the homeowner if they would prefer to have Zillow Offers purchase their home directly, rather than having the seller wait to receive one or more purchase offers from prospective buyers who frequent Zillow’s platform for the purpose of finding a home to buy (i.e. through Zillow’s core business model). Originally rolled out in only two geographic locations—Phoenix and Las Vegas—Zillow Offers opened eight new markets in Q32019–Atlanta, Dallas, Houston, Miami, Orlando, Portland, OR, San Antonio, and San Diego–and expects to be operating in a total of twenty-six markets by mid-2020, including Los Angeles.
The business model for Zillow Offers can best be likened to how a robot house-flipper might operate. The platform uses algorithms to determine its initial offer to a homeowner requesting a direct purchase offer from the platform (without any obligation to proceed), much as Zillow does with generating market information in its core business (e.g. the ZestimateTM, which was substantially improved by the company after being sued by a group of aggrieved Chicago homeowners dissatisfied with how the platform valued their homes).
As with any house-flipping operation, it is in the best interests of the potential profitability of the direct buyer (aka the “iBuyer”) to underbid the purchase price at least somewhat, leaving plenty of room for profit and to account for risks. Profit is essentially defined as the difference between i) what Zillow Offers pays the seller for the house; plus any improvements needed to remarket the house effectively and efficiently, including staging expenses; plus transaction costs; plus carrying costs, and ii) what Zillow Offers can garner as the sales price through its remarketing efforts (i.e., after all improvements have been completed). This approach is not new to residential markets. It is derisively referred to as “bottom-feeding”: Pay as little as possible for a property on the front end, and sell it for as much as possible on the back end.
Actual human beings representing Zillow Offers intermittently intervene in the otherwise algorithm-driven and largely automated process. This includes one of the most-critical steps in the iBuying process: Conducting a physical property inspection before the direct purchase transaction is consummated. The physical inspection—this humanoid intervention in the automated process—may, and often does, result in Zillow Offers reducing its offer for the property, to which the seller had already agreed through the Zillow Offers online application process. Again, at this stage in the process, the Owner/Applicant is under no obligation to sell their home to Zillow Offers, although they may nonetheless feel emotionally invested in the process.
As of November 7, 2019, Zillow Group reported that 80,000 Zillow customers had applied for a direct purchase through Zillow Offers in the third quarter of its current fiscal year. Remarkably, however, a relatively small percentage of Zillow Offers applicants consummate the direct offer sales transaction, with only 2,291 purchases completed during the same three-month period. This low percentage of completed Zillow Offers transactions may help explain at least one complaint about the Zillow Offers process: Zillow automatically refers each rejected applicant to a Zillow Premier agent (in case the applicant would like to try to sell their home the old-fashioned way: Through a brokered transaction). In that regard, some regard Zillow Offers as a fishing expedition benefitting its Premier Agents, rather than a transactional platform. That may change, however, as Zillow Offers continues to enter new markets and, presumably, increases the percentage of applications ending in completed sales.
Perhaps more remarkably still, as of the first quarter of 2019, the consummated direct purchase transactions through which Zillow becomes the owner of the home, a relatively small percentage of those homes had been re-resold by Zillow Offers. However, even those numbers appear to have improved in the intervening six months, although presumably a large percentage of the 1,211 homes sold in Q32019 came out of the backlog of homes purchased prior to the beginning of the most-recently completed quarter, as the company’s financial statements do not age its inventory of Zillow Offers’ purchased homes.
“During the quarter, we sold 1,211 homes and purchased 2,291 homes, ending the quarter with 2,822 homes on our balance sheet.”
Again, it may be reasonable to assume that as Zillow Group improves and refines the Zillow Offers process, it’s “homes purchased” and “homes sold” will be brought into better balance.
Zillow’s co-founders, led by Barton, believed technology could completely transform a process Barton found completely unsatisfactory, based on his and his wife’s personal experience, prior to Zillow’s founding, in trying to buy a home in the Seattle area after returning from a year living in Italy. In essence, the co-founders believed they could do for the nationwide residential home sales and purchases infrastructure, driven largely by the National Association of Realtors relying primarily on a nationwide network of residential brokers and agents, what they had done at Expedia for booking airfares, hotels, rental cars, and, eventually, experiences.
Barton’s lamentation—‘But [Zillow] didn’t change the home buying transaction’—may point to a larger, structural impediment to the claimed ubiquity of PropTech: It just doesn’t, in fact, apply ubiquitously to all real estate situations.
Zillow and Zillow Offers may continue to struggle to reach the transactional fluidity the co-founders, Barton in particular, originally envisioned (or, at least, hoped for), because residential transactions are nothing like streaming movies, finding rides, or having a restaurant’s menu items delivered to a customer’s door when that restaurant doesn’t offer delivery. Homes are unique; the locations of homes are unique; and the sheer scale of a single transaction can be completely overwhelming, particularly for first-time homebuyers. In other words, a home is the least-widget-like product imaginable.
Even something as genuinely personal as a dating app, where the products are, arguably at least, similarly unique, doesn’t have the market resistance of home-selling/buying apps because the consumer can easily bail on that bad Tinder choice after a single date, without adverse consequences. Making the wrong choice in the purchase of a personal residence, on the other hand, can be nothing short of disastrous emotionally and financially.
The jury’s still out on Zillow Offers. In the meantime, its operating losses may be casting a pall over its parent company, Zillow Group (ZG), impacting ZG’s stock price. During the approximately eight and-a-half months since March 1, 2019, after Barton resumed his former CEO position, the ZG common stock started and ended at almost the same price (from $39.93/share on March 1, 2019, to $39.44/share at the close on yesterday), with a high of $58.88 on July 10th and a low of $29.60 on October 2nd. The all-time high closing price for the company’s stock was established on July 28, 2014: $160.32. It’s hard to say to what extent the stock’s volatility is in any way a reflection on Barton’s leadership starting in February.
While it may be affirming to believe there’s a technological answer to every consumer problem, it may be prudent to consider that PropTech may have its limits in solving First-World problems, like selling a home.
The Motley Fool