Last September, Zillow Group (Z -1.58%)(ZG -2.44%) announced that its iBuying business, Zillow Offers, was partnering with a group of home builders in select Zillow Offers markets to help simplify the new construction home buying experience. Essentially, homeowners who buy a new construction home from one of these home builder partners can sell their current home to Zillow with a flexible closing schedule so that the sale of their current home can occur whenever the new home is ready.
Management seems to agree because last week Zillow announced it is partnering with an additional group of regional home builders for the same purpose.
The problem Zillow is trying to solve
There are a lot of pain points when moving, not the least of which is buying a house while trying to sell another. Most homeowners can't buy the new home before selling their current home, but selling their current home without certainty that a new home that meets their needs can be secured is daunting. Sellers can try to make the sale of their house contingent on them finding a new home within a certain time period, but that doesn't always work. Buyers can also be turned off by the contingency, since it introduces another level of uncertainty for them. Another option for homeowners is to sell their home, rent another, and then look for a new home to buy, but that requires moving twice, which is both a headache and an additional cost.
These problems can be exacerbated when buying a new construction home, because buyers can't easily sell their homes without having certainty around when a new home will be ready. Construction delays, bad weather, or scheduling issues can make timelines unpredictable. And for builders, some would-be buyers are forced to cancel their orders if they are unable to sell their existing homes on time. According to a study conducted by Zillow, 31% of new construction buyers said one of their top challenges is timing the completion of their new home with the sale of their previous home. And given the option, 49% of new construction buyers would have liked to change their closing dates.
The Zillow Offers solution
With the Zillow Offers business, homeowners can request an offer on their homes, Zillow will evaluate their homes and potentially make an offer, and the homeowners can either accept it or reject it. One of the benefits of this service for the home seller is Zillow's flexible closing schedule. A homeowner who has accepted Zillow's offer to buy their home can extend the closing of that sale up to 90 days later. Zillow's flexibility allows him or her to schedule that sale and the purchase of another home around the same time. This can prevent one of several less than ideal situations that people encounter when trying to sell one home to buy another.
Zillow's partnerships with home builders is taking this flexibility to another level. Buyers of new construction homes from builders who've partnered with Zillow can sell their current homes to Zillow in anywhere from seven days to eight months later.
Homeowners can schedule the closing of the sale of their homes to coincide with the timing of the completion of their new homes. And if construction is delayed -- even by a few months -- due to bad weather, scheduling issues, or other reasons, Zillow simply defers the closing date of the sale of the homeowner's current house.
The original group of home builders Zillow partnered with is spread throughout the U.S. and it includes: Ashton Woods, Brookfield Residential Properties, Fischer Homes, H&H Homes, Hartford Homes, Kerley Family Homes, M/I Homes, Mattamy Homes, Oakwood Homes, PulteGroup, and Shea Homes. Added to the list last week were: The Providence Group, NewStyle Communities, Kindred Homes, Saratoga Homes, Avex Homes, Woodbridge Pacific Group, Caviness & Cates, Drees Homes and Stanley Martin Homes, and Minto Communities.
A win-win all around
Zillow's partnership with home builders benefits all the different parties involved. Builders benefit because it makes it easier for them to sell new homes.
Buyers get into their newly built homes while also benefiting from the extreme flexibility and convenience of selling to Zillow, which means not having to host open houses, no cleaning up, no staging, and no uncertainty. While homeowners might net a bit less than they otherwise would by selling on the open market with an agent, the superior experience and convenience make it worth it for some sellers. Plus, Zillow wants to pay more for homes over time, which could make selling to Zillow make more sense for almost every seller.
And Zillow benefits by expanding the Zillow Offers business, which positions it at the transaction where it can offer all sorts of ancillary services, like mortgage origination, homeowners' insurance, title insurance, moving services, renovation services, and other services.
While Zillow has not disclosed the early results of these partnerships, the opportunity looks meaningful. According to the U.S. Census Bureau, the seasonally adjusted annual rate of new home sales was 719,000 in November of last year (the last month the data are available). That is a big addressable opportunity, especially considering Zillow's three- to five-year targets include buying 60,000 homes per year in total. If the company can make any meaningful headway in that 719,000 annual new home market, Zillow's target could end up looking conservative.
This sort of innovation in the residential real estate market is why investors should be paying attention to the company's progress with Zillow Offers.