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Buying homes for subsequent resale is a capital-intensive, old-economy, bricks-and-mortar business. Zillow will borrow money to buy the homes, which means that
by cs702 9y ago
Buying homes for subsequent resale is a capital-intensive, old-economy, bricks-and-mortar business.
Zillow will borrow money to buy the homes, which means that (a) the clock will start ticking the instant each new home is purchased, and (b) this endeavor can be profitable only if proceeds from resales/rentals are sufficiently high to cover cumulative debt service costs -- in addition to all property taxes and ongoing maintenance expenditures associated with home ownership.
Why would a heretofore capital-light SaaS business like Zillow want to do this?
The only sensible explanation I can think of is that Zillow's current business is no longer growing quickly, i.e., Zillow is now a boring, mature company.
The stock dropped 7% on the news last Friday.
- nol13 9y agoBecause they think they have some competitive advantage in the space?
- vincentmarle 9y agoImproving liquidity in the market, aka being a market maker, can provide an interesting advantage.
- ethbro 9y agoAgreed. The surprisingly bespoke nature of home translations definitely provides an opportunity for this to be a win/win. Zillow wins by buying an asset it has more information on the true market value of, then providing an easier, economies of scale on the associated services (inspection, legal, repair, etc), then being able to offer a standardized product to home buyers. Buyers win from taking a lot of the uncertainty out of a transaction. And from possibly lower fees if Zillow decides to rebate a portion. Let's not forget there's a standard 6% commission in US real estate transactions... most retail would kill to start with a 3% margin. If Zillow has high confidence a home is underpriced, it makes sense to time arb that into profit when it can match with a buyer.
- tonyedgecombe 9y agoLet's not forget there's a standard 6% commission in US real estate transactions I never really understood this, the last time I sold a house in the UK the fee was 1.5% and only on my side, the buyer pays nothing.
- aidaman 9y agoWelcome to the US.
- oh_sigh 9y agoYou don't need to pay it, but people feel that it is worth it/ You can definitely get a broker who works by the hour for you.
- zirpderp 9y agoor flat fee - which will crush every realtor going fwd.
- gm-conspiracy 9y agoDid you know that "realtor" is a registered trademark?
- Declanomous 9y agoWhat is the generic mark? Real estate agent?
- mbesto 9y ago1) The 6% commission is negotiable. 2) In the UK, the buyer pays stamp duty (tax) on the purchase.[0] 3) You can put a bid on a property in the UK and it's non-binding (until exchange)[1] In other words - very different markets with very different dynamics. [0] - I forget the percent, but it's material. This effectively disincentives people from buying, making the market less liquid. [1] - This is frankly ridiculous. (I've bought and sold in both US&UK markets)
- raintrees 9y agoReal Estate is one of the older investment games in town - It is what I am basing my retirement on. I wonder how this will impact disclosure rules versus sales advertising? Existing model to use, or adopt another industry's? Will this cause fears of LIBOR-style manipulation? This will be interesting to watch... edit: p.s. Maybe another chance to make a Carfax-like system for homes? In the US market, I find there is not a lot of opacity, especially when one gets into larger/commercial deals.
- subpixel 9y agoI think you mean not a lot of transparency.
- gm-conspiracy 9y agoWhat do you envision for this Carfax-like system for real estate? What info would be available that you could not see via Zillow or the MLS listing?
- dawhizkid 9y agoI suspect part of the reason is that SV "unicorn" Opendoor (https://www.opendoor.com/ https://www.opendoor.com/) is doing this and it wants a piece of the pie. Question I have is if whatever "pie" Opendoor is grabbing is actually sustainable in a recession/down market...seems like the worse case scenario is that they are left holding a bunch of illiquid inventory of declining value they can't get rid of.
- rejschaap 9y agoIt is interesting they even choose the same cities to start in.
- dawhizkid 9y agoVegas makes sense...the best markets for something like this are ones where there's a good amount of inventory, median prices are not very high, avg time on market is on higher side (giving a reason for sellers to use Opendoor to trade value for liquidity) and there's a good balance between buyers/sellers.
- subpixel 9y agoThe risk is in sitting on a lot of properties and getting overextended during a downturn. I think that can be mitigated because Zillow/Opendoor's model is not to buy and hold, but to: 1. buy at a discount (essentially a fee for the service of selling your house with a click) 2. sell at a markup (we're talking a small one in most cases, but the fact is in a good market you can reliably print small amounts of money with some paint, some minimal landscaping, and new kitchen appliances. Zillow will not be using a high-interest loan for the purchase or repair, so they will not be sweating like your typical flipper on TV.) Assume for the sake of argument that Zillow has data to decide where these bets are safest based on comparables and key economic indicators. And they will say no to sellers as often as the data suggests they should. I don't think this has much to do with finding super-profitable deals with data, but with reliably shaving points off a large pipeline of deals. If it doesn't work in a healthy economy, they stand to lose the difference between the discounted price they paid for a house and the market value they can sell it for. In a recession, they can probably stay afloat by renting properties they can't sell at a decent price.
- mjfern 9y agoOr Zillow has access or insight to data that general property investors do not, thus driving abnormal returns.
- caseysoftware 9y agoThat's my guess also. If they have details on the specific aspects in the specific markets that drives prices, being able to "jump on a deal" could work out well. The question becomes if there are enough opportunities like that to move the needle for them. If I had to guess, I would have guessed moving into Lending Tree's matchmaking area would be easier and have a better ROI.
- ssharp 9y agoWhat specific details would they have that other's don't. I don't know how prevalent FSBO is on Zillow in some markets, but in mine it's extremely limited. I'd be shocked if it made up 5% of the residential market, probably closer to 1%. The rest of the listings are from MLS systems and they pull housing data from county systems. For that, I'd assume there is a data broker and Zillow isn't integrating with thousands of counties. If that's the case, then both the MLS and county data can be had by anyone. With that information, you'd get lot details, house details, listing history, county tax valuations and sales history. What other data do you need? A lot of house flippers are agents because they get the MLS listings ahead of the public and can move faster on them. I don't know when Zillow gets their MLS data, but listings almost always hit Realtor.com a day before they hit Zillow, so I don't see that as an advantage either.
- justonepost 9y agoWhat's peculiar is that they don't use OPM for this. There are literally a million of these flippers out there. Why not just work with them to buy it and sell it, and Zillow gets a percentage for providing the lead? It's like zero risk for Zillow, all upside. They must be making a lot of money from this if they're going it alone. The 7% drop is probably not because of riks here but because it signals lack of growth.
- chrischen 9y agoAll businesses can be framed as “old economy” but cheaper. Lyft is just “taxis” done better. An algorithmic hedge fund is just old-style investing automated.