More revenue isn’t necessarily good if you’re ultimately
Publicly traded companies across the country are holding their
second quarter earnings calls over the last two weeks, and Zillow
and Redfin reported some eye popping results related to their home
Zillow raked in $248 million in revenue from home flipping,
which accounted for 41.5 percent of the company’s total revenue
for the quarter. A year ago, Zillow didn’t report any home
flipping revenue. Redfin reported $39.9 million in home flipping
revenue compared to $8.9 million last year, contributing to a 39
percent jump in total revenue from a year ago.
These reports produced a number of
rosy headlines about their respective “iBuyer” programs.
iBuying, a concept pioneered by tech startup Opendoor, is when the
company buys your house for a “fair market price”
determined by an algorithm in an all-cash offer that closes in a
matter of days. This allows the seller to take the money and move
more quickly and with less hassle.
But does this jump in revenue mean that iBuying is working for
Zillow and Redfin? Not necessarily. The revenue the companies
report from this segment of their business is the proceeds from
selling the house, plus the transaction fee, which is a small
percentage of the value of the house—on average 7.5 percent for
Zillow. The median sale price of existing homes in June was
$288,900, according to the National Association of Realtors.
Zillow’s legacy business is selling ad space to real estate
agents, transactions that bring in far less than $288,900.
Redfin’s legacy business is as a discount brokerage that brings
in a commission of 1 to 1.5 percent of the value of the house, not
1 to 1.5 percent in addition to the full value of the house like
with its iBuyer program.
Point being: because transactions in their legacy businesses are
proportionally smaller than transactions in their home flipping
businesses, any company like this that starts expanding into
iBuying is going to see their revenue rise dramatically just
because the nature of the iBuying business.
And a rise in revenue in iBuying doesn’t necessarily mean
it’s “paying off.” Redfin doesn’t give much detail on the
per unit economics of its iBuyer program, but Zillow provides a
breakdown in its shareholder letter. The company made 0.5 percent
profit on the 786 homes it sold in the second quarter of 2019; when
taking interest expense related to financing the transactions into
account, its iBuyer program lost 1.01 percent on those 786 home
Zillow says it believes that after it scales the business, it
can get its profit margin up to 4 or 5 percent, before interest
expense, which for the 786 homes sold in the last quarter was $3.5
million. It also believes Zillow Offers can fuel its other
businesses, like mortgage and title insurance; if a customers sells
their house to Zillow, Zillow can refer them to its mortgage
division when they buy their next house.
Zillow and Redfin have taken divergent approaches to expanding
of their iBuyer programs. Zillow has been highly aggressive and
plans to be in 26 markets by the middle of 2020.
Redfin has more cautious. It’s currently in Dallas, Denver,
and most of southern California. It has actually partnered with
rival Opendoor in Atlanta and Phoenix to feed referrals to
Opendoor, for a fee of course.
But the bottom line is iBuying is still an unproven concept. And
headwinds growing in the housing market and the economic more
broadly, it’s unclear at best if may ultimately prove to have
been not worth the risk, no matter how much it makes revenue
Source: FS – All – Architecture 10
Whysoaring revenue doesn’t mean home flipping success for Zillow, Redfin