Zillow announced on April 12 that it plans to do more than just showing potential buyers houses that are on the market. Soon it will participate in buying and selling homes in Las Vegas and Phoenix beginning this spring. The company plans to work with Berkshire Hathaway HomeServices and Coldwell Banker Realty in order to make offers on homes listed for sale before finding a buyer.
Zillow has long been recognized as a giant in the online real estate listing industry. Buying and selling homes directly constitute a huge change in business model for the company.
Calling its initiative ‘Instant Offers’, the program resembles home flipping on a massive scale. Essentially, Zillow aims to purchase homes for sale, make necessary repairs or updates, renovate them if required, and re-list them back on the market.
Zillow Public Relations Senior Manager, Emily Heffter, said in an exclusive interview with The Scope Weekly “The Instant Offers price from Zillow will likely be slightly below market value, so that Zillow can afford to make minor repairs to the home and list it on the open market.”
Essentially, Zillow plans to buy the property, handle the home maintenance, get it list-ready and find the next buyer. The objective is to re-sell any purchased Instant Offer homes within 90 days of quick-flip transactions.
Local agents will represent Zillow in the purchase and sale of each home, allowing agents to generate commissions on the transaction.
Zillow began testing its Instant Offers program in May 2017, working with motivated sellers who opted to take direct action in selling their homes. Sellers receive offers on their home listing from investors, along with an analysis of their property value if the home was to be listed on the open real estate market.
When asked when the company hopes to expand to other areas across the country, Heffter said “Zillow plans to buy and sell homes only in Phoenix and Las Vegas. Since this is a test in a few markets, we don’t currently have a timeline to expand to other housing markets.”
Zillow Chief Marketing Officer Jeremy Wacksman said in a release,
Even in today’s hot market, many sellers are stressed and searching for a more seamless way to sell their homes. They want help, and while most prefer to sell their home on the open market with an agent, some value convenience and time over price.
For homeowners ready to purchase a new home, but remain unable to sell their existing property, the Instant Offers program offers a way to sell quickly and move on.
ZG Investors Uneasy about Changes
Investors are less than enthusiastic about Zillow’s radical change in business model. On the Friday following Zillow’s announcement share prices fell by 7.3% to close trading at $49.84.
In an interview with CNBC, Zillow CEO Spencer Rascoff acknowledged that the company would be taking on collateralized debt in order to execute the Instant Offers program. The company plans to buy between 300 and 1,000 homes by the end of 2018, which amounts to an estimated investment of anywhere between $75 million and $250 million.
To date, the company’s business model has relied heavily on advertising revenue across its massive listings site, which provides it with a high gross margin. Such a dramatic move into a different area of the real estate industry yields much lower margins and could add balance sheet risk.
Zillow Group provided investors with selected preliminary financial results for Q1 2018 and offers an updated outlook for the rest of 2018 as part of its Instant Offers presentation.
Investors analyzing the value of Zillow Group (ZG) stocks may view additional company debt as a negative in terms of value. However, analysts at The Benchmark Company raised Zillow’s stock price target from $55 to $64 on Friday, April 13, 2018
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