Not betting on iBuying would be an “existential threat”: Zillow CEO

It’s a thin-margin business but the market is immense, Rich Barton says

Zillow CEO Richard Barton (Credit: iStock and JD Lasica via Flickr)
Zillow CEO Richard Barton (Credit: iStock and JD Lasica via Flickr)

Since returning in February to lead the company he founded 14 years ago, Rich Barton is muscling Zillow into the crowded instant-homebuying market, setting the listings giant on the course for a major overhaul.

The iBuying craze offers sellers a chance to quickly offload their property to Zillow, giving sellers fast access to cash to buy other homes. It’s a business with extremely thin margins, and requires the company to set aside massive amounts of money to make the purchases. The initiative has caused Zillow’s losses to widen, and its stock has also taken a hit.

But Barton feels the move is essential. He was on the board at Netflix when the company made the monumental decision to dive into video streaming even though it had a thriving DVD rental business, and again when it decided to bet the farm on its own original content.

Netflix was relying on the Saudis for the oil,” Barton said in an interview with The Information. “It was pretty compelling. If we don’t learn how to drill our own oil wells, we’re going to get cut off.”

Barton sees iBuying, pioneered by SoftBank-backed startup Opendoor, to be similarly significant for his business.

It was “an existential threat because if it works and we don’t do it, we get displaced as the marketplace, theoretically,” he told the publication.

Since last year, Barton has shaken up Zillow’s management team, and raised $1.1 billion through a debt offering to build up its iBuying game as it has shifted its business strategy.

The iBuying bet, called Zillow Offers, has come at a price, however.

Zillow said its 2019 second-quarter losses widened to roughly $72 million, compared to just $3 million last year. The Homes segment accounted for most of those losses — some $71.1 million, up from $10.1 million a year ago.

Meanwhile, Zillow’s bet boosted its second-quarter revenues 84 percent year-over-year to $599.6 million, putting it on track to hit an annualized run rate of $1 billion in revenue.

Revenue for Zillow Offers — which debuted last year — totaled $248.9 million for the quarter. Meanwhile, revenues from the mortgage division rose 40 percent to $26.9 million.

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“We’re in the early stages of a bold expansion of our company that opens up exciting opportunities for our customers, partners, shareholders and employees,” Barton said in August. Zillow Offers debuted in Sacramento Tuesday, with plans to jump into Los Angeles, Cincinnati, Jacksonville, Oklahoma City, Tampa and Tucson by mid-2020.

Until now, Zillow has made the bulk of its money by selling ads to agents via Premier Agent. Last year, as revenue growth from Premier Agent started to wane, the company bet heavily on iBuying and mortgages — though investors haven’t been completely swayed by the pivot as is evidenced by its stock.

On Tuesday, Zillow’s stock closed at $28.63 a share, down about 44% from its year-high of $50.99 a share on July 10.

The iBuying space includes the likes of Opendoor, virtual brokerage eXp Realty, Redfin, Realogy and Keller Williams.

Competitors offer variations of the i-buying strategy.

Through Express Offers, eXp agents submit properties “to a number of institutional buyers” initially in California, and expanding to 10 more states by the end of 2019, as The Real Deal reported earlier this month.

Under Barton, Zillow has upped activity in iBuying, which began under former CEO Spencer Rascoff, who Barton replaced in February as part of a chain of several shake-ups.

A year ago, Zillow promoted Susan Daimler, who was general manager at Zillow’s New York-based subsidiary StreetEasy, to a newly created national role running Premier Agent. Zillow’s New York operation — which includes StreetEasy, Naked Apartments and Out East — is now being led by Matt Daimler, Susan’s husband.

Barton told the Information that Zillow’s future is built on trading homes where there are razor-thin profit margins. The article says that Zillow charges sellers fees that currently average about 7.5% of the price the company pays for their homes. The upside for Zillow, though, is that the total addressable market, or TAM, for home purchases is much bigger than the advertising market.

Home purchases are “a mindbogglingly larger TAM—$1.8 trillion of secondary market transactions happen a year in the U.S. of homes.” he told the Information. “That’s not rentals. That’s not title, that’s not mortgage. That’s just the homes.”