Zillow reported Q2 2019 earnings results this week, giving us the latest installment of the biggest story in real estate.
Below we run down how the company makes money, and whether their money tree is growing as their massive vision to reinvent home buying and selling plays out.
HOW ZILLOW MAKES MONEY & SERVES CUSTOMERS
When Zillow reported Q4 2018 earnings two quarters ago, they said you can now use Zillow as a one-stop shop for selling, buying, and financing your home.
Before that, you’d mainly use them to spy on home values, shop for homes, and connect with local realtors and lenders.
It was what Wall Street types call a media play.
Zillow made their money charging realtors and lenders to help us to sell, buy, and finance homes.
And a good media play it’s been. Zillow’s 2018 revenue was $1.3 billion, and they’ve had 2.2 billion site and app visits in the last year.
You can still use Zillow to connect with realtors and lenders, and they want to double this business to $2 billion in 3-5 years.
But now you can also:
– Ask Zillow to make you an offer to buy your home
– Sell your home to them (or use an agent they refer you)
– Buy a new home from them (or use an agent they refer you)
– Finance your new home purchase (or use a lender they refer you)
Wall Street calls companies who buy your home outright instant buyers or iBuyers, and Zillow calls this Zillow Offers.
They want Offers, combined with their new Home Loans division, to add about $20 billion to annual revenues in 3-5 years.
How are they doing on these giant revenue targets as they add this one-stop shop vision to their media play?
CAN ZILLOW HIT ITS $22 BILLION REVENUE TARGET?
– 2Q revenue jumped 84% to $599.6 million, 46% of which was Zillow Offers & Home Loans.
– First half 2019 revenue jumped 69% to $1.05 billion, 41% of which was Zillow Offers & Home Loans.
– These large percentages of revenue from Offers and Loans are impressive since these businesses just started in April and August 2018, respectively.
– Offers and Loans revenues were $431.7 million in first half 2018, which annualizes to $863.4 million.
– Way below $20 billion target, but huge 2153% jump from $38.3 million in inception year 2018.
– Their $20 billion target is based on getting to 60,000 home sales and 36,000 mortgages per year.
– This is doable: 60,000 transactions is just 1.06% of U.S. new and existing home sales today, and 36,000 mortgages is just 0.4% of U.S. loan volume today.
– As for the leads business (“media play” as noted above), it did $622 million in revenue first half 2018, which annualizes to $1.2 billion.
– This tracks similar to last year’s $1.3 billion, but it’s too early to project how they hit 3-5 year target of $2 billion with $600 million in net income.
FOR NERDS: DETAILS ON THE JOURNEY TO $22 BILLION
– Zillow’s Q2 net loss was $71.9 million, not surprising when ramping 2 new massive businesses.
– To win, it’s all about growing those home sale and loan transactions.
– Their 60,000 yearly home sales target translates to 5,000 per month, so where are they now on this?
– 69,000 people in 11 markets asked Zillow to buy their home in Q2.
– They bought 1,535 homes and sold 786 homes Q2, and lost $2,916 on each home it sold.
– But that’s an improvement over Q1 loss of $3,268 per home.
– Also home sales are ramping nicely: 141 sales in 4Q, 414 sales in Q1, and now 786 sales in Q2.
– Plus Zillow owned 1,743 homes at end of Q2, which ostensibly get sold in Q3.
– They don’t break out mortgage units to measure against their stated goal of 3000 units per month in 3-5 years.
– But they’re investing heavily in mortgage, which you can read about here if you want to get into the weeds.
– The reason mortgage is so important to their strategy is best summed up by CEO Rich Barton’s quote here:
“Mortgage is fundamental. Can you imagine Uber without payments? That’d be a taxi. That’s bad. We think the house transaction should be the same way. An integrated mortgage into the transaction. And it’s magic.”
– When we say Zillow’s vision is a one-stop shop for you, this is what we mean.
– And this mortgage revenue will improve unit economics as the one-stop home selling, buying, financing shop comes together.
KEY ZILLOW BUSINESS MODEL DETAILS TO WATCH
– Most of Zillow’s media revenue is from selling leads/ads to real estate agents, and until now those are up front lead/ad purchases.
– Now Zillow is testing their Flex model which takes a 35% cut of closed agent deals.
– This aligns everyone’s interests. Agent and Zillow get paid only when customer achieves endgame of closing a deal.
– The 35% commission share to Zillow equates roughly to a lead buying spend for an agent truly committed to marketing.
– Something we’re watching closely: Zillow’s mortgage lead revenue isn’t in media segment of earnings anymore. It’s now bulked into a newly created Mortgages segment (which I called “Loans” above).
– This is important because mortgage industry lead buyers worry Zillow will keep all the good mortgage leads for their own Zillow Home Loans business.
– In response to this concern, Zillow told The Basis Point the main priority for Zillow Home Loans is to support Zillow Offers and the mortgage lead operation, saying:
“We are committed to finding excellent partners for consumers that ask through us. We take our commitment to our ad partners very seriously.”
Stay tuned and follow us using buttons below. Next up, we’ll dive into what all this means for consumers, realtors, and lenders.
– Zillow just became the mortgage and real estate industry’s biggest frenemy (HousingWire)
– Q2 Shareholder Letter (Zillow)