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Zillow Intends to Buy and Flip Homes
CRETech
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3 minute read
Real-estate listings company Zillow Group Z -6.53% is getting into the business of buying and flipping homes, a risky and untested business model for the online service that could disrupt the traditional brokerage business.
Zillow said Thursday it will purchase homes from consumers in Las Vegas and Phoenix, renovate them and aim to flip them within 90 days. The company initially plans to hold 300 to 1,000 homes by the end of the year, which amounts to an investment in the $75 million to $250 million range.
Zillow executives said they aren’t looking to get rid of real-estate agents, who generate revenue for its listings business by purchasing ads and customer leads. Instead, they say they have handpicked agents to work on the transactions in its “Zillow Instant Offers” business.
Nonetheless, agents are much less essential to these quick-flip transactions, which are powered by technology rather than face-to-face interactions. This is the latest in a string of new technologies and businesses that are threatening to disrupt the multibillion-dollar residential brokerage business and the livelihood of tens of thousands of Realtors.
Zillow is following other competitors, including Open Door Labs Inc. and Redfin Corp. , into the sales business. Zillow executives say consumers are used to smaller transactions that are virtually seamless thanks to technology.
Those same consumers are increasingly impatient with the process of selling a home, which can include investing money and time in repairs, putting up with repeated showings and worrying whether their current home will sell before they close on a new one.
“Consumers now expect an on-demand experience,” Spencer Rascoff, Zillow Group’s chief executive, said on a call with investors Thursday. “The days of pushing a button and that generating an email to a real-estate agent is no longer as magical as it was in 2005.”
The residential real-estate business has been slow to change with technology, in part because consumers historically have found comfort that the slow process of selling a home guaranteed they were getting the best price for what is most Americans’ largest asset. More recently, investors have begun pouring money into businesses that aim to make it faster and easier to sell a house— often by replacing some or all of a real-estate agent’s job with technology.
Opendoor, the biggest competitor in the space, has an in-house brokerage team that is paid a salary but doesn’t use external agents to sell a home the way that Zillow plans to. It does work with and pay commissions to buyers’ agents.
Online real-estate brokerage Redfin began experimenting with buying homes a little more than a year ago, said Glenn Kelman, chief executive of Redfin. “Traditional agents are feeling pressure on all sides,” he said.
Zillow’s move could be a response to Opendoor’s rapid growth. Opendoor Executive Chairman Keith Rabois said at a recent technology conference that Opendoor bought $1 billion of real estate in 2017 and plans to buy $3 billion to $4 billion this year.
Opendoor is in talks with investors to raise at least $200 million at a roughly $2 billion valuation to buy more homes and expand to new cities, The Wall Street Journal reported last month.
Zillow’s market capitalization is roughly $10 billion.
Mr. Rascoff said agents’ reaction has been “overwhelmingly positive” because they will benefit if consumers are more easily able to buy and sell homes, in theory increasing the number of transactions.
Zillow is also taking on new risks by getting into the business of owning large numbers of homes, especially given that most economists believe the real-estate market is nearing its peak. Zillow executives say they plan to take on some debt, but didn’t disclose how much.
Home prices hit a record in late 2016 and have continued to climb at roughly twice the rate of incomes and three times the rate of inflation ever since, raising questions about how long such gains are sustainable. Moreover, rising mortgage rates and a tax code that is less favorable to homeownership are also headwinds to demand in the coming months and years.
Mr. Rascoff said Zillow has an advantage over other investors because it has access to large amounts of data about home prices and consumer behavior. “Nobody understands the housing market better than we,” he said.
Buying real estate is a risky proposition for these companies, because it is unclear how they will fare in a down market. Home builders tend to see their shares pummeled during recessions as they struggle to sell the homes they have built.
A similar dynamic could play out with companies if they are stuck with used homes they can’t sell.Opendoor executives have said they could spot a decline in the market earlier than others and reduce how much they pay for homes while raising fees to manage risk.
