Zillow (Z 3.11%) (ZG 3.18%) is not alone in its quest to expand into iBuying. As Zillow scales up its Zillow Offers business, it will need to compete against the likes of Redfin (RDFN 1.28%), Opendoor, and more.
In this clip from Industry Focus: Energy, Motley Fool contributor Luis Sanchez and Industry Focus host Nick Sciple discuss the competitive dynamics of the iBuyer market and how companies are differentiating their services.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
This video was recorded on Sept. 5, 2019.
Nick Sciple: This story sounds very similar -- I'm a shareholder of Redfin. Redfin has done a lot of similar moves when it comes to adding on mortgage services, and title services, and all those sorts of things adjacent to their business to layer on to their core brokerage product. It sounds like what Zillow is attempting to do is a very similar model. Driving the cost down with this home iBuying model and then using that to feed into these other businesses that are clear higher gross margin businesses. When you look at what Zillow is doing here with iBuying, how does that compare to maybe what Redfin is doing in its business, and maybe what other iBuyers are trying to do?
Luis Sanchez: Zillow is certainly not alone in getting into this instant cash offer business and flipping homes. There's a whole industry emerging now. They're referred to as iBuyers. Redfin's a great example. Redfin has this product called Redfin Now. It's a lot more limited in scope. They're in fewer markets, but they're essentially doing a similar thing in terms of providing instant cash offers and then turning around and trying to sell homes for a slight profit. Redfin is actually already in some of these ancillary businesses like mortgages and title. They seem to have a similar game plan. Although, Redfin's definitely a little bit of a different animal because they also have an online brokerage platform where they charge a reduced brokerage commission to do that agency process through their online platform. They have some interesting things going on, too. Interestingly, you could pay an additional 1% on top of your brokerage commission to Redfin, and they will offer something called concierge listing, where Redfin will actually come and stage your home, host an open house, and basically run the whole process of selling the home for you. Or, if you're a Redfin customer and you want to go ahead and sell your home to Redfin, similar to Zillow, they'll offer you, if you qualify, a cash offer, and they'll charge you a 7% transaction fee for that.
In addition to Redfin, there's quite a few other iBuyers out there. Some of them have their own idiosyncrasies, or their own different spins on the process. There's this one service I saw called Knock which allows homeowners to trade in their homes, kind of how you might trade in your car if you're buying a new car at a dealership. There's this other company called Offerpad, which is backed by Blackstone, and they've raised quite a bit of money, something like $400 million or $500 million. And then there's this other company called Open Door, which has gotten a lot more publicity. They're venture-backed. They're reported to be spending something like $4 billion a year at this point purchasing homes. They're pretty big player. I believe they've actually partnered with Redfin in a few markets.
So, the next logical question is, with all these iBuyers, what is the competitive dynamic going to look like? There's a few cities where there's already a few different iBuyers competing with each other. You have to think that some iBuyers are probably going to be a little bit more aggressive in bidding for homes, and that could put downward pressure on their ability to flip the homes for a profit. But there's still a lot of markets where there's only one or two or even no iBuyers. I think this comes back to why Zillow is so aggressively expanding its iBuying business. It wants to get there first. It wants to get there before other iBuyers can dominate the market.