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What Zillow's Latest Earnings Say About the Future of iBuying

[Updated: May 04, 2020 ] Mar 03, 2020 by Deidre Woollard
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Zillow (NASDAQ: Z) (NASDAQ: ZG) has made a major bet on iBuying, the process of buying homes, fixing them, and then reselling them. But while Zillow Offers brought in $1.4 billion in 2019, that wasn't the only contributor to Zillow's impressive results in the fourth quarter of 2019. Zillow's fourth-quarter revenue rose 158% year over year to $943.9 million, and it remains one of the top real estate stocks to watch.

Part of this was due to the company's Premier Agent lead-generating program. Zillow reconfigured the program, focusing on delivering leads to top agents and increasing conversion rates. Revenue from the program grew by 3% during 2019 to $924 million. Zillow is also expanding its Flex program into more markets from its start in Phoenix and Atlanta.

Flex is a shift from the traditional model where agents pay for leads. With Flex, agents don't pay for the leads but instead pay a "success fee" when the transaction closes. On the earnings call, ZIllow Chief Financial Officer Allen Parker said the company expects revenue from the program to be between $238 million and $243 million for the first quarter.

Zillow Offers grows, but so does inventory

Zillow reported that it earned more than $603 million from Zillow Offers in the fourth quarter of 2019, up from just $41 million one year before. At the end of the fourth quarter, Zillow had 2,707 homes in inventory. It has bought 7,200 homes since the beginning of Zillow Offers and sold 4,500 homes. For Zillow, like Redfin (NASDAQ: RDFN), the challenge of making a profit on these homes still looms large.

While the last year was one of expansion for Zillow Offers as it moved into 17 markets, the next year will be one of deepening in the markets it has now entered. By the middle of 2020, the company expects to be in 26 markets. Zillow anticipates that the Homes segment, of which Zillow Offers is a part, will bring in revenue of between $675 million and $700 million in the first quarter of 2020. However, this program is still running at a loss and is expected to lose between $85 and $95 million in the first quarter of 2020. Zillow is still losing money on each home it sells and is at significant risk if the market shifts and it finds itself unable to sell the homes it has on the books.

Zillow Offers faces two core challenges:

  • To get the acquisition price of each home right relative to what it can make on the resale.
  • To lower the renovation costs for each home it sells.

A move to own the transaction

In tandem with Zillow Offers, Zillow has grown its mortgage program and also now has both title and escrow services. Zillow has evolved from being a home search website to being a company that now participates in transactions. While Redfin was a brokerage from the beginning, Zillow was slower to enter the brokerage market. It just got its brokerage license in New York in February of 2020 and is only a brokerage in Florida, California, and Texas.

The Millionacres bottom line

Zillow is the most popular real estate search platform and had 1.8 billion visits last quarter. That alone gives it a powerful advantage when it comes to attracting more homeowners to sell their homes through Zillow Offers. The company, in turn, is starting to use Zillow Offers to help it become a one-stop shop for all of real estate. As CEO Rich Barton said on the earnings call, real estate is not a one-click transaction yet, but real estate transactions are getting more streamlined and integrated.

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Deidre Woollard has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Redfin, Zillow Group (A shares), and Zillow Group (C shares). The Motley Fool has a disclosure policy.