Zillow launches its high-stakes home-flipping business in LA
Firm hiring two-dozen field staff; working with two brokers
When Zillow Group pivoted from an advertising-based business model to algorithm-based home-flipping in 2018, its executives knew this day would come.
Zillow and other tech-driven companies were able to refine their technology enough to make tiny profits on cookie-cutter houses in deserts and small metropolitan areas.
But to make $20 billion a year in revenue from Zillow Offers within five years as executives boldly projected, Zillow would need to crack major coastal markets, where homes are at least twice as expensive, and prices can change dramatically from one block to the next. To not do iBuying would represent an “existential threat” to the $8.5 billion company, CEO Rich Barton said in October.
On Monday, Zillow announced that it would make its biggest play yet, launching an iBuying business in Los Angeles with field staff and two veteran brokers.
In L.A., Zillow plans to hire a significantly larger staff to accommodate the growth — more than double the size of any of the other 21 markets where it already operates, including San Diego, Sacramento, Houston, San Antonio, and Atlanta. Traditionally, it has hired a dozen staffers in local markets, but in L.A. it will hire about 24, though much depends on consumer demand, Zillow president Jeremy Wacksman told The Real Deal.
The company also will establish two offices to cover the city, including one in highly urbanized Irvine in Orange County to the south, according to Wacksman.
“L.A. is easily the biggest and most complex market that we are going into,” said Wacksman. “It is not a market, but a whole bunch of markets. Of the ones that we’ve opened in, it’s the biggest geographically, population and the average home price.”
The iBuying model offers sellers a chance to quickly offload their property, giving them fast access to cash to buy other homes. It’s a business with extremely thin margins, and requires Zillow to set aside large pools of money to make the purchases, perform simple updates to the property, and sell it again, with the ultimate goal of financing the buyer’s purchase through its new mortgage arm.
Zillow lost an average of $4,826 on each home sale in the third quarter, after interest expenses — up from $2,916 in the second quarter, the company revealed last month. Still, Zillow does make money on the transaction fee, which runs between 6 and 9 percent. And that’s the focus.
“We’re looking to move it as quickly as possible and earn our money off the transaction fee,” Barton said last month. “And ultimately because this transaction sits at the nexus of all of these adjacent markets that we know so well, that are big businesses in and of itself, they’re dying to be integrated into one thing.”
For Zillow, the L.A. launch will be a defining test on how far its Zestimate technology has come, and whether it can gain an edge in higher-stakes markets.
The median home price in L.A. for October was $640,000, where homes sat on the market for an average 47 days, two days longer than a year ago, according to the nonprofit listing service, California Real Estate Technology Services. That’s more than double what Zillow averaged in terms of gross revenue of $317,610 per home sold. Some observers believe that the metric is expected to grow now that it has entered Southern California in a big way.
The region is so gargantuan, according to Wacksman, that Zillow plans to open one office in Glendale and the other in Irvine, to handle newly hired field staff who will fan out across the region to snap photos of homes, and generally kick the tires to see what’s under the hood before Zillow makes an offer.
Zillow Offers also has brought on two broker partners to help: John Maseredjian, vice president of JohnHart Real Estate, who will run Zillow Offers in Los Angeles; and Suzanne Seini, partner and chief operating officer with Active Realty, who is leading the Orange County expansion.
The plans to scale are daunting.
“To be honest, it’s an unknown, given that this is a considerably larger market than all others, Maseredjian said. “All we have are these submarkets and neighborhoods with different nuances. It’ll be interesting. We are prepared for everything.”
Zillow is initially targeting certain zip codes and neighborhoods in San Gabriel Valley, Pasadena, Monrovia, Glendale, Burbank, parts of Hollywood, Long Beach, Culver City and West Hollywood, according to Wacksman.
Wacksman declined to state how much capital Zillow has set aside for its L.A. operations. However, Zillow secured an additional $500 million undrawn credit line in October, bringing its total credit capacity to $1.5 billion to support its Zillow Offers business, he said. Its total liquidity with cash and other investments is double that amount.
“We are comfortable that we have the equity and debt to handle all of this,” said Wacksman, of its L.A. gambit.
Still, its iBuying business has struggled to become profitable, as it juggles big changes to its business model, using advertising sales from its online marketing business Premier Agent — which has been in L.A. for a decade — to fund its push into buying and selling homes. Last month, the company said it sold 1,211 of the 2,291 homes bought in the third quarter, generating $385 million, up from just $11 million in the same period last year.
The rapid growth of Zillow Offers has come with mounting losses. The company reported a net loss of $65 million, with the results weighed down by the new business, which has bought and sold more than $800 million in total home sales since its inception.
Wacksman declined to say when Zillow Offers might hit break-even.
Zillow is still casting an eye over its shoulder on its iBuying rivals. That includes the likes of virtual brokerage eXp Realty, Redfin, Realogy and Keller Williams and Softbank-backed Opendoor, which just last month opened its first L.A. office in Silver Lake. The Wall Street Journal reported that OpenDoor would spend up to $800,000 for a home in L.A., and Redfin would pay up to $900,000.
Zillow Offers also plans to open in Cincinnati; Jacksonville, Florida; Oklahoma City and Tucson, Arizona, by mid-2020.