Why Zillow's Latest Move is Brilliant: Limited Downside and Unlimited Upside
On Thursday April 12th, Zillow officially announced & expanded their Instant Offers program and were immediately slammed in the stock market. Wall Street analysts downgraded the company and share prices fell ~9% to $48.77. This reaction, which in my opinion is an overreaction, suggests investors did not see this coming and the natural human impulse is to flinch at change. However when taking a deeper look, Instant Offers may be a brilliant move by Zillow .
The Instant Offers program is one in which Zillow will offer homeowners a streamlined process for selling their home by collecting inbound offers from corporate buyers (including Zillow themselves). Zillow will also begin buying up properties on MLS and other listing sites, fixing them up and selling them within a 90 day window. This is a big pivot for a company that has traditionally defined itself as a media brand.
Personally I think of this as a transition from being solely an information marketplace to an assets marketplace. While this undoubtably comes with risk, in my mind this is a shrewd endeavor by Zillow that caps their downside and gives them exponential upside
Why Zillow Downside is Capped:
1. Real Estate is a permanent asset.
Most media and technology companies derive value from some combination of advertising inventory, intellectual property, and user engagement but each of these are volatile in their own right. Look at Myspace, Yahoo!, AOL, Snapchat, and most traditional editorial brands. Each of these has seen massive monetization challenges, user attrition, or downright replication. These issues do not plague the real estate market. Regardless of other societal factors real estate retains value over the longer term horizon because land and property will always be needed.
The best example of this in the business world is McDonalds. To the surprise of many McDonalds does not view itself as a burger company or a fast-food company or even a global brand. They see themselves as a real estate company because they know that the land they own will always be valuable even if burgers go out of ‘fashion’. This mindset plays a critical role in how the company selects their locations optimizing for prime real estate. This ‘real estate’ strategy is the primary reason why McDonalds has delivered outsized returns for their investors over time. Even if Zillow’s maneuver does not pan out, the reality is that they can easily cash-out of their real estate holdings and likely even see appreciation gains.
2. Zillow faces minimum user attrition risk.
This move may irritate real estate agents and brokers but it the reality is Zillow is still an invaluable tool for anyone in the market. Successful real estate investors are both hustlers and incredibly systematized. To handicap yourself and recreate your entire process on a matter of principal is an unlikely for the majority of the market particularly given the important of expedience, information, and timing in the property market. People will certainly complain but similarly to the recent Facebook backlash this will not result in abandonment of the platform.
The other reality is that Zillow will not eliminate the real estate marketplace it will only reduce friction and outliers. It will reduce outsized returns for investors and losses for sellers but will create more consistent deals as pricing will be based off of their market data which is superior to any other platform out there (at scale). From a property availability standpoint, I anticipate Zillow to compete more with big banks and investment firms that purchase real estate assets (e.g. Blackrock, Vanguard) than I would for them to eat into individual or SMB real estate shops.
Why Zillow’s Upside is Massive:
1.The Brokerage & Real Estate Agent Market is Enormous
Entering this market redefines Zillow’s size of prize in a very significant way. According to the Federal Reserve Economic Data (FRED) Real Estate Agents & Brokers made over $100B in earnings subject to federal income tax in 2016 alone. This figure doesn’t even illustrate the entire pie but regardless of the exact figures Zillow now has the opportunity to take a large slice of it.
Even better for investors is that with real estate investments Zillow will be able to take advantage of tax synergies and even their ‘capital investments’ will be tied up in assets that retain their value or appreciate. While Zillow investors are unlikely to see profits immediately due to their reinvestment rate the company is poised to have a very healthy balance sheet and can quickly cutover to becoming a profit generating cash-cow once they slow down expansion to new markets.
2. Diversification of Revenue Streams
Entering the property market gives Zillow an entirely new set of potential revenue streams. Beyond the obvious opportunity of tapping into brokerage fees this gives Zillow a foot in the door to a variety of opportunities in the commercial and residental property space. As Zillow grows they can expand their remit into deep fix & flips, mixed properties, and even a marketplace for contractors, property managers, and other ancillary industries. While going into every aspect of the market or ‘The Amazon Strategy’ is not what I’d recommend, this move gives Zillow a chance to see where their existing user base, wealth of market data, and sizable capital access can create natural synergies and scale opportunities.
From a business standpoint the limited downside and potentially unlimited upside really makes this smart move on Zillow’s part. However, aside from the potential business value for Zillow this shift has the potential to transform how the average homeowner sells their property. Currently this is an incredibly tedious process with lots of moving parts that coincides with a general high-stress period in someone’s life. Zillow’s service could streamline this process making it easy for sellers to get a fair value for their property with a fraction of the headache. If done right, this product offering could solve a major pain-point for homeowners looking to sell.
In my mind Zillow’s foray into property makes a lot of sense. What do you think? Agree, disagree, somewhere in the middle? Comment below to let me know your thoughts.
Disclaimer: I am not a financial or investment expert. All views expressed are my own and do not represent the view of any companies or any other affiliations.
Co-Founder at Yoreevo
6yGood article Samir. A couple of comments on each of your sections and then my overall view on Zillow's positioning. 1.) "Downside is capped." a) "Real Estate Is a Permanent Asset"- Yes the downside is capped but no one knows at what number. All we know is that its lower than you think. Just think back to the last crisis where US home values fell ~30%+ on average. If you are flipping for low single digit percentage and the cash flow negative asset you bought falls significantly, it can be a big problem, especially with leverage (if they use it). b) "Zillow faces minimum user attrition risk." - Sure for the short term but new business will eventually be cannibalistic. If this works it would be more of a pivot than a new business line. 2)"Why Zillow’s Upside is Massive" a.) "The Brokerage & Real Estate Agent Market is Enormous" - It is. And this is the only reason Zillow exists. If broker's margins weren't so large they wouldn't be able to afford to be Zillow's customers. The winner in this game will save the customer money by making margins smaller. Not squeezing broker's with no benefit to end-buyers/sellers (If the profit margin of the brokerage industry remains the same this strategy will become incredibly profitable). b.) "Diversification of Revenue Streams" - Brokers and Zillow Home Flipping business has the same end client. Home-owners don't need another middle mean so they will eventually pick one (most economical one). You can not grow the market by creating another product that results in same out come. It's 0-sum. Overall this massive/enormous brokerage/house flipping industry needs to shrink in size relative to the aggregate value of all real estate. Home-flipping may be the solution but you can't do it without displacing broker profits/broker advertising spend. *One more downside to home flipping which didn't fit into the response are non-broker transaction cost. Most notably transfer taxes and especially in NY/NYC where its normally ~1.8%. That's a big hurdle rate to flip a low risk asset in few months in addition to operational risk, SG&A, attorney's etc. Not impossible but difficult and if they succeed they will be rewarded greatly for it.
Sr. Associate - Marketing and Creative Development at Digital Illusion Studio
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Realtor at Edina Realty
6yIt seems that the pride we, as a country, have had in our rate of homeownership could fall victim to the rate of return required by corporate owners. Since our home is, most often, our largest asset it could result in lowering individual net worths further. Rentals will then have to increase. Commoditization of our housing market could lead to greater volatility in the name of progress.
Digital & Social Media Consultant
6yIs this the end of Realtors? Time will tell if their profession falls victim to our ever changing world. Sounds like you will be able to search for a home, push a button and purchase a home all on your phone soon! Like getting an uber ride or buying on Amazon. Oh know, don't tell Bezos about this!