The housing market timeline is notoriously tough – just ask
The Seattle-based real estate technology company shut down its Zillow bidding platform last week after paying too much for the homes it intends to sell. The blunder was from Zillow; the so-called iBuying business is not going to go away.
When Zillow (ticker: Z) started buying homes, it followed a similar pattern to other iBuyers. Homeowners are soliciting an offer by providing information about their home online. The property is evaluated by a proprietary algorithm, and a preliminary offer is made. Zillow appraises the house in person and makes a cash offer. If the seller accepts, he sets a closing date. Zillow performs repairs and updates and then lists it with an agent. If the seller rejects the offer, Zillow refers the owner to a partner agent for a traditional sale.
For sellers, the process saved time and provided flexibility. Zillow’s goal was to make a small profit by selling the house and charging vendors fees, and directing homeowners to other services such as mortgages and closings.
Everything had to be fine. iBuying “is a relatively low margin business, even if you navigate successfully,” says Jake Fuller, analyst at BTIG. “No. 1, you want to scale up. No. 2, you want to push the props through the deal because that’s where the margin will come from.
Zillow has out of sync with the market in its growth efforts. The company bought 9,680 homes between July and the end of September, more than double what it bought in the previous quarter. The company has sold 3,032 units and has a contract to purchase 8,172 additional units.
The ramp-up came as the domestic housing market showed signs of slowing. While the median annual increase in home prices remained high in September, it slowed from a record pace earlier in the year, according to existing home sales data from the National Association of Realtors. Competition among buyers had weakened, with the share of homes that received more than one offer in September falling to its lowest level in nine months, real estate brokerage
“They kind of stepped on the gas, probably at exactly the wrong time,” says Ed Yruma, Managing Director of KeyBanc Capital Markets.
Speaking on Zillow’s earnings call, CEO Rich Barton attributed the failure in part to the difficulty of anticipating changes in home prices. The company used historical data and simulations that couldn’t accurately predict home prices three to six months in advance. Grumbling supply chains, meanwhile, hampered Zillow’s ability to renovate and sell homes in its inventory.
Zillow’s home buying business lost $ 381 million in the third quarter, according to the company’s adjusted earnings before interest, taxes, depreciation and amortization, or Ebitda. Zillow took $ 304 million of depreciation on homes he says he bought at higher prices than he expects to sell them for. Zillow sees further write-downs between $ 240 million and $ 265 million in the fourth quarter. Its Class C shares have fallen about 24% since earnings at Friday’s close.
Other iBuyers say they will continue. Their success will depend on how they handle prices. “These are big buys with leverage attached to them, and at the end of the day, if you buy incorrectly, you’re going to end up with results like Zillow’s,” says Yruma of KeyBanc.
Redfin, a $ 5.4 billion brokerage house, claims that the homes it bought through its RedfinNow unit sold above their expected selling price in the third quarter. In his earnings call Thursday, Redfin CEO Glenn Kelman said the company started lowering its offers in March in anticipation of a deceleration in home price gains.
Redfin earnings suggest Zillow flop is not a sign of more serious problems in the housing market, even as supply chain issues affect parts of the business, Wedbush analyst wrote Ygal Arounian in a note Thursday night.
Redfin has a smaller exposure at iBuying. Sales from its Properties segment, which includes RedfinNow, represented 44% of its overall revenue in the third quarter; Zillow’s Homes segment, which includes Zillow offerings, accounted for 68% of its total revenue.
The biggest iBuying player is
Open Door Technologies
(OPEN). The $ 14.5 billion market-capitalization company was founded in 2014 and went public at the end of last year through a merger of purpose-built acquisition companies. The majority of Opendoor’s $ 1.2 billion in second-quarter revenue came from home sales. Opendoor has handled prices in the housing market better than Zillow, said Arounian of Wedbush, citing the companies’ adjusted gross profit margins.
“There are definitely going to be moves in the housing market, but we feel very well equipped to identify those moves and adjust,” said Eric Wu, CEO of Opendoor. Barron. Opendoor was present in 39 markets in July and is expanding its services. The company announced Friday that it has acquired RedDoor, a digital mortgage brokerage firm.
(OPAD), a $ 1.8 billion iBuying-focused real estate platform, is also growing. It operates in 21 markets, seven of which were added this year.
The next test will take place on November 10, when Opendoor and Offerpad report their winnings. Analysts will be watching for indications of gross profit margins per house in the fourth quarter.
Zillow, meanwhile, is focused on developing new services for buyers and sellers and growing its Internet, media and technology segment.
Write to Shaina Mishkin at [email protected]