[Note from editor: We publish a Weekly Transmission for GEM members, a series of long-form articles covering the spectrum from shipping container co-living spaces to the battle for listing acquisition in the first iBuyer world war. Below is this month’s sample Transmission.]
NOVEMBER MONTHLY TRANSMISSION
BY DREW MEYERS
Originally Published: November 3rd, 2021
What started as an innocuous enough announcement from Zillow in mid-October has unleashed a storm. First, Zillow’s paused its Offers business—mildly notable in and of itself. But that telltale sign has presaged a much larger change for the real estate behemoth.
Hot on the heels of that announcement came news that it was seeking to unload 7,000 homes for $2.8 billion to institutionals. Then news of a full shutdown of the entire “Homes” (aka Zillow Offers / iBuying) business.
Combined, these changes hit more like a hurricane, or even a thousand-year flood than a mere storm. In other words, it’s been an absolute bombshell for the industry.
Three years ago, I wondered what if Zillow loses its shorts when it’s caught with a bunch of homes on the books when the market turns?
Well, with two-thirds of the homes priced under the original buy price, it happened. It’s now close enough on the horizon that Zillow wants to stop bleeding out.
Via its letter to shareholders, Zillow shares the core reason for its strategic change in direction:
We have been unable to accurately forecast future home prices at different times in both directions by much more than we modeled as possible, with Zillow Offers unit economics swinging approximately 1,200 basis points from Q2 to an expected -500 to -700 basis points in Q4 2021. Because of this price forecasting volatility, we have had to reconsider what the business might look like at a larger size. … We have determined this large scale would require too much equity capital, create too much volatility in our earnings and balance sheet, and ultimately result in far lower return on equity than we imagined.
According to Rich Barton: “Fundamentally we have been unable to predict future pricing of homes to a level of accuracy that makes this a safe business to be in.”
What if the strategic truth is that Zillow’s data shows a crash (or significant slowing) on the horizon? If that’s the case, its pullout could be the market indicator that accelerates the crash in a never-before-seen way. Let’s just hope that doesn’t happen and leave that discussion for another day. Rather, let’s focus on what this market event means for consumers and industry players.
BACK TO THE MARKET WE GO
I’ve been clear on the fact I believed Zillow’s initial iBuyer model, first launched as “Instant Offers” in 2017, was the right one. “Third party investors were the ones providing offers to home sellers, and Zillow just facilitated the conversation and helped coordinate the transaction using dotloop.”
What if being a direct cash buyer isn’t actually the best strategic way to capitalize on the opportunity to become the de facto home buying and selling marketplace? Or the inevitable home services marketplace that will be created on top of that once it exists?
As I noted at the time, “a transparent iBuyer marketplace will win out long term, and Zillow was not the best positioned company to take on the complexity at a hyper local level in every city across the country.”
There are alternatives to Zillow’s take on this problem: “Taxing the marketplace still seems to be the better model than buying and selling homes directly.”
In fact, Realtor.com’s sellers marketplace already enables multiple offers (including from Opendoor), as does Zavvie’s platform, which empowers agents to offer all selling solutions to their clients through one streamlined interface.
Expect Zillow to return to the same offers marketplace trough it frequented several years ago. That seems an inevitable next step as it winds down its cash offers operations.
With Zillow shaking up the landscape, several other companies are well positioned and just waiting in the wings:
Despite the fact Zillow competing with them directly just got a lot more likely or perhaps even imminent, Zavvie has the chance to become the biggest winner in this shift to fill the iBuyer vacuum. I’m honestly amazed that no one else has made a legitimate threat to Zavvie to date. If I’m Zillow, I’m acquiring the product and big brokerage integrations. Make it the de facto “marketplace” and integrate it directly into its Premiere Agent offering.
Conversely, CoStar is in for a long, hard ride. Zillow just removed one of its “battlefields” from its mental bandwidth. Meaning its executive team will have more time to keep their sights centered on their core portal business. CoStar’s Citysnap battle in New York City and, eventually, its desire to compete nationwide, just got a lot more difficult.
Now clearly the uncontested category leader, can you imagine Opendoor offers being populated on Zillow home detail pages? Given their fierce rivalry, it’s hard to grok. But, Zillow found a way to bring Trulia under its umbrella despite being the competition. If the consumer really is the north star, this is a partnership to bring to fruition. And quickly.
Remember that Offerpad partnered with Zillow back in May of 2017. Of course, they pulled out of that partnership several months later—once they picked up on the signs of Zillow’s ambitions to make cash offers. Will Offerpad fold itself back into the Zillow marketplace, re-uniting the company Spencer Rascoff took public via a SPAC and his former employer?
Glenn Kelman’s been consistent and transparent that “[Redfin’s] opinion [is] that most consumers would be best served selling their home while living in it, not to an iBuyer, but directly to the ultimate owner.” Redfin is really just doing the iBuying thing because it has to due to competitive pressures. Zillow’s exit could well end up being the fuel Redfin needs to escape to the hills.
With a sellers marketplace already well established, I would urge the company double-down on product improvements focused on giving potential sellers instant gratification…without giving up contact information. You can bet that’s what Zillow will do. Beyond that, taking a strategic equity stake in RealSure wouldn’t surprise me.
Will Rich Barton walk away? The pivot to iBuying was the reason he came back to Zillow in the first place—it was reading Ben Thompson’s analysis of Opendoor and his “strategic tear-down of Zillow” that “got to his core.” I don’t see him running the same media/subscription business that has existed for a decade. The likely near term move would be doubling down on power buying with an acquisition of Flyhomes (which happens to be headquartered a mere blocks from Zillow HQ), Ribbon, or Homeward.
I’ve also long thought Airbnb will enter the long-term rentals picture—and, sooner rather than later. A Zumper acquisition or joint venture seemed plausible. But, perhaps going straight to the runaway category leader in audience can materialize now that Zillow’s eyes are no longer occupied with iBuying. Imagine if every Airbnb host could rent their property by the day, week, month, or … year. Airbnb is literally one database field away from being the largest long-term rentals platform in the world. But they don’t have a rentals brand to go with it. Imagine if hosts who chose the long-term route were able to syndicate properties directly to Zillow. Imagine if Airbnb data was integrated directly into a Zillow-owned Zavvie as well, and a property manager to revenue-share it was an integrated part of the marketplace. Sounds like a significant win for landlords to me.
The vacuum opened by Zillow’s announcement makes a fundamental rejiggering of the marketplace imminent. With so many players jockeying for attention, the status quo is being altered in front of us. Despite massive amounts of VC investment being thrown into the proptech fray, I think we’re actually at an innovation lull. Increasing capital efficiency and deployment is cool, but nothing “new” has emerged for consumers in quite some time. Barton is one of the most brilliant innovators of our time. Perhaps this bump will give him an even bigger chip on his shoulder to dream up a transformational real estate offering we haven’t seen yet. Maybe, just maybe, the “iPhone of real estate” hasn’t been created yet.
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