Shares of Zillow, the online real estate database company, plunged 9 percent on Friday after the company said it would begin buying and selling homes, a capital-intensive business.
Zillow's new program, announced Thursday, will allow home sellers in its test markets of Phoenix and Las Vegas to use Zillow's platform to compare offers from Zillow with those from potential buyers. Once Zillow buys a home, it aims to flip it quickly by making updates and repairs and putting it on the market as quickly as possible. An agent will represent Zillow in each transaction.
“We're entering this market and we think we have a huge advantage because we have access to a huge audience of buyers and sellers,” Zillow CEO Spencer Rascoff said on CNBC's “Squawk Alley.” “After a year of testing the marketplace model, we're ready to invest in our own marketplace.”
But investors aren't as enthusiastic. The home-flipping model used by startup Opendoor is very different from how internet marketplaces operate. It requires big investments to operate, with the added risks of buying and selling a home. And Zillow could compete directly with real estate agents on its platform.
Zillow's shares were down $5, or 9.3%, to $48.77 as of midday Friday, wiping more than $900 million in its stock market value.
“This is a business model that's been all based on advertising revenue, and it has high gross margins,” said Mark Mahaney, an analyst at RBC Capital Markets who has a “buy” rating on Zillow. “And now they're pivoting into this other space where they have balance sheet risk, they have much lower margins and an uncertain housing environment,” Mahaney said on CNBC's “Squawk on the Street.”
In May 2017, Zillow announced the launch of Instant Offers, which allowed home sellers in its test markets of Las Vegas and Orlando to receive cash offers from potential investors on the Zillow platform. The company said homeowners liked the process, and most who requested an Instant Offer ended up selling their home through a real estate agent.
“Home sellers are happy to have the hassle-free option of selling their home without having to clean out the garage or move the kids out of the house,” Raskoff said.
Rascoff said his company will take on secured debt to buy homes and hopes to have 300 to 1,000 homes for sale by the end of the year. He called the move “industry friendly” and would benefit buyers, investors and agents. He said it could also help stimulate the real estate market and provide new inventory for would-be buyers.
“Liberating People”
“People who are basically stuck in their homes want to buy another home but can't sell,” Raskoff said. “This program could empower people to get out of their homes.”
Mahaney said this will help Zillow test how much the real estate market is changing.
“This is an interesting experiment for the company,” Mahaney said. “They've reached a point of scale with both real estate agents and consumers, and there's data in the market that suggests this way of buying and selling homes is really starting to take off.”
The program is launching in Phoenix and Las Vegas this year, and Zillow didn't say when it would expand to other markets.