I see you Zillow

At their core, they believe the world has changed. That the world has become “uberized.” A world where consumers expect magic to happen at the push of a button (this is true).

I see you Zillow
I see you Zillow

Capital Thinking  •  Issue #722  •  View online

I spent a lot of time this week thinking about Zillow and the future of real estate. I will update this post as time goes on and as more information comes in.

And no, I don’t think all real-estate agents will go away. I just think there will be less of them. And the way they are compensated will change or be less than current state (6%).

-Caleb Dismuke

Long Zillow. Short Real Estate Agents

Caleb Dismuke| Pure Alpha:

MUST READ: CNN penned a good article about why a current class-action lawsuit could do away with the 6% real estate commission. It’s really long, but lays out why major changes in the real estate industry could be forthcoming. And what the affect on agents, brokers, and consumers could be.

In the article, they asked Rob Hahn what would happen to the industry if the lawsuit is successful.

7DS Associates

Some context: There are an estimated 1.36 million real estate agents. A drop to 200,000 would be jarring.

Resources used in this article:

Important: Just because I’m bullish on the long-term potential of a business, doesn’t mean I’m bullish on their stock. Good companies can make bad investments if the price paid is too high:)

I see you Zillow

Fan of sports?

Imagine going from a Red Sox fan to Yankees’ fan.

Or from a Celtics fan to a Lakers fan.

Or, if your from my neck of the woods, going from a Bulldog to a Rebel😒

It’s almost unthinkable.

And that’s what Zillow is trying to do.

They’re attempting to go from a capital-light, high-margin business, that makes money through advertising and marketing. To a capital-heavy, low-margin business, that makes money by buying and reselling homes. Sounds great!

In fact, their new CEO said as much in his 2018 letter to shareholders.

high-margin advertising business with lower-margin, capital intensive transaction-based businesses

In addition, he pulled a sentence from Jeff Bezos’ first letter to Amazon shareholders.

From the letter:

We will make bold rather than timid investment decisions where we see a sufficient probability of gaining market leadership advantages.

The truth is. I love it! I love the fact they are going big. We’re always looking for companies with big ambitions and a realistic path to get there.


What’s their NEW, BIG ambition?

At their core, they believe the world has changed. That the world has become “uberized.” A world where consumers expect magic to happen at the push of a button (this is true).

They led the real estate 1.0 boom (Zestimate) that empowered consumers to easily find their dream home just by browsing an app.

Now, they want to lead the real estate 2.0 era by taking the historical friction out of the home buying process. To help usher in this new era, they started two major initiatives in 2018.

(1) Zillow Offers

How it works:

  • Homeowners complete a questionnaire on the Zillow site and receive an initial offer within 48 hours and a final one after an inspection.
  • Zillow charges a service fee that amounts to 7% of the purchase price on average but ranges depending on what repairs it needs to make and other factors.
  • If the seller accepts, Zillow closes the transaction within 90 days at a date of the seller’s choosing, then tries to resell the house soon after.

(2) Zillow Home Loans

They acquired Mortgage Lenders of America in 2018 and rebranded it as Zillow Home Loans.

They plan to integrate this into Zillow Offers. So you can sell your home to them and finance your next one, in one fell swoop.

Important: Their LONG-TERM goal is to create an end-to-end digital real estate transaction experience. In order to do this, they are integrating parts of the value chain that used to be modular (separate).

In other words, to complete a real estate transaction today, you needed an agent, bank or mortgage company, insurance, and closing attorney.

Usually, these services come from different companies. Zillow wants to integrate the whole thing into one simple, digital experience. Saving us time, and making it easier and cheaper for us to buy a house.

A few numbers to frame their ambition

  • ~180 million people visit their apps and website each month.
  • In 2018, 32 million Americans indicated they intended to buy a home in the next twelve months.
  • Yet only 6 million homes were bought and another 10 million entered into lease agreements.
  • That gap of 16 million people is what they’re going after. They believe they can take the the friction and frustration out of the home buying process for millions of Americans.

At the end of his letter, he laid out their three to five year targets (goals).

  • Purchase 5,000 homes per month through Zillow Offers. Generating revenue of approximately $20 billion. In 2018, they purchased 686 homes through Zillow Offers, generating $52 million in revenue.
  • Originate 3,000 loans per month. Up from 4,000 originations in all of 2018.

Since they have released Q1 2019 earnings, we can check in and see how their initiatives are progressing. We’ll start with Zillow Offers and finish with Mortgage origination.

Zillow Offers

  • Segment revenue: $128.5 million. This exceeded their high-end guidance by $13 million.

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