THE BASIS POINT

Zillow smart to end homebuying & refocus on $1.8 billion lead biz (where they grew net income 248% since 2018)

In the 3Q21 earnings release below, Zillow announced they’ll stop buying homes. This is a business called Zillow Offers launched in 2018, where you fill out a form on their site and they buy your home in days.

This came to be known as iBuying — aka instant buying — and there are a few firms doing this capital-intensive, low-margin business. The leader is Opendoor, and they started as a native in iBuying.

Conversely, Zillow already had a $1.2 billion revenue per year lead business before launching their Zillow Offers iBuying platform (lead business is now $1.8 billion — see below). They have 227 million monthly user visits across all their sites and apps, and they make money connecting these consumer users to realtors and lenders.

Now they’ll get back to these roots.

iBuying felt logical for lead generation in the Zillow ecosystem. Why? Because if you chose not to accept their offer to buy your home, they’d just connect you with a local realtor to sell the traditional way. And they’d make money from that realtor for the lead.

But the money required to commit to buy the homes, fix them, then sell them is very real, and the margins are very thin.

My years-long nickname for San Francisco-based Opendoor is Goldman Sachs West because of the firm’s deep capital markets expertise. So if anyone can manage these margins, it may be them.

But Zillow was already a mature and totally dominant real estate brand with consumers, so they don’t really need to “buy” leads buy buying people’s homes with iBuying.

That’s one reality. The other reality is that the home price cycle will turn as it always does.

When this happens, it’s harder to be a dominant consumer real estate information brand if you’re weighed down by carrying cost of having thousands of homes on your balance sheet.

When Zillow entered iBuying, Zillow said they were “going down funnel.” This is MBA marketer speak for making money off actual home sales and mortgages rather than just making money selling home sale and mortgage leads.

But it seems they’ve realized that growing a low-risk, already-giant lead business is much cooler and better for the brand in three ways:

1. It’s better for consumers, who know Zillow’s best interest is realigned with getting them connected with top realtors and lenders.

2. It’s better for realtors and lenders buying leads, who now can rest easier knowing Zillow isn’t a full tilt competitive threat. Note: realtors and lenders will always fear Zillow competition, but this definitely eases it.

3. It’s better for investors, who may see a higher-margin business less harshly impacted by real estate cycles.

A very tough, but good strategy call by Zillow.

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And for the record, here’s Zillow’s lead business results 2018 to present:

52% REVENUE INCREASE 2018 TO PRESENT

-2018 revenue: $1.2 billion
-2019 revenue: $1.28 billion
-2020 revenue: $1.45 billion
-Trailing 12 months as of 9/30/21 revenue: $1.83 billion

248% NET INCOME (EBITDA) INCREASE 2018 TO PRESENT

-2018 revenue: $240 million
-2019 revenue: $304 million
-2020 revenue: $556 million
-Trailing 12 months as of 9/30/21 revenue: $836 million

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Reference:

Zillow 3Q21 earnings release

Zillow 3Q21 shareholder letter with lead biz income breakdowns

 
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