A new era for home-buying: How Zillow, Redfin and their rivals plan to revolutionize real estate, again

Zillow CEO Rich Barton, left, and Redfin CEO Glenn Kelman, right, are leading the transformation of the residential real estate market with technology. (GeekWire, Zillow and Redfin Photos)

The peak home-buying season is upon us, but buyers and sellers taking a fresh look at the market will see a much different landscape for real estate technology than they did just a year or two ago — and it’s only the beginning of the changes to come.

  • Homeowners in some markets now have the option of selling their homes directly to major real estate tech companies, taking much of the time and risk out of listing a property for sale.
  • New technologies and apps are streamlining more of the process of buying and selling a home, aiming to bring to real estate the same efficiencies that Amazon brought to shopping.
  • Major players in the space are dramatically expanding their reach and capabilities, aiming to offer end-to-end solutions, including home search, mortgage, transaction and title services.

“There’s a feeling now among Wall Street investors, and perhaps the general public, that everything’s up for grabs, that real estate’s really going to change,” said Redfin CEO Glenn Kelman in an interview with GeekWire. “And when you have 20 percent of the U.S. economy at stake, you’re going to see companies take larger losses and bigger risks to try to win the prize.”

Seattle is an epicenter of this national transformation, as the home of two real estate tech heavyweights. Redfin is more than two years into its own direct home-sales operation, and it is adding more services all the time to make it easier for people to buy and sell homes. Zillow, one of the biggest names in the industry, has completely upended its business under returning CEO Rich Barton, reorienting itself around a goal of directly buying and selling thousands of homes every month.

On a recent earnings conference call, Barton likened the situation to the moment on the 1980s TV show “The A-Team,” recalling how the character Colonel John “Hannibal” Smith, played by George Peppard, would stop at a pivotal moment in the show and say, “I love it when a plan comes together.”

RELATED: QA: Redfin CEO Glenn Kelman on competing with Zillow, and the potential of real estate tech

Barton explained, “Our daring plan to transform the real estate transaction for the super-empowered, smartphone-wielding, Uber-ized consumer is, in fact, coming together, or at least it’s beginning to come together.”

Compass, the SoftBank-backed high tech brokerage, has invaded Zillow and Redfin’s turf with a major engineering office in the city. And elsewhere, “iBuyers” like Opendoor and Offerpad, which make instant offers on homes, are raising gobs of cash to expand their footprints.

It’s an exciting time in the real estate tech business, and anything can happen. On this special episode of the GeekWire Podcast, we assess the changes so far and debate what could happen next: Could Zillow end up buying Redfin or another brokerage to bolster its new model? Will the notion of one-click homebuying ever truly take hold? How will traditional brokerages play a role in the future? And will any of these changes address the fundamental problem of housing affordability?

Listen to the episode above or subscribe in your favorite podcast app, and continue reading for an FAQ on the new landscape for residential real estate.

Zillow sees a big market for directly buying and selling homes. (Zillow Photo)

Zillow, Redfin and others are getting into more and more areas of the real estate market. What’s happening with each of the major players?

In many ways, Zillow and Redfin are heading toward the same destination, from different directions. Zillow has made a dramatic change in its business, while Redfin is adding new services and businesses in a more incremental way.

Zillow shocked the industry back in February, when it declared it would focus the majority of its energy on buying and selling homes directly. Traditionally, Zillow’s bread and butter has been offering media and advertising for brokers and agents. Now it wants to take control of the entire real estate process. That includes becoming a major mortgage lender and down the road offering services like title and escrow and moving.

Redfin has been in a number of these businesses for years, and it is gradually adding new services without dramatically switching up what it does. Redfin too got in to direct home sales through RedfinNow, a program it started experimenting with more than two years ago. It’s increasingly becoming a bigger part of the business, but it’s not THE BUSINESS, like it has become for Zillow.

What is prompting this? Is it about solving problems, or growing revenue?

Leaders of both companies say they want to transform how people buy and sell homes. And that’s a noble goal, considering how tough it can be to buy a home. But they are also betting on these programs as huge moneymakers.

Zillow obviously sees huge dollar signs in its shift, forecasting it would bring in $20 billion from home sales alone within 3 to 5 years. In 2018, the company as a whole brought in $1.3 billion in revenue. That’s a huge bet, and a huge payoff if Zillow is right.

Redfin is getting a huge revenue boost from RedfinNow, even though it is taking a more measured approach. That division brought in $21 million in revenue in the most recent quarter, a 7X increase over the prior year, and it made up nearly 20 percent of total revenue in the last quarter.

For both Redfin and Zillow, these programs bring in a brand new revenue stream, but it’s a risky one that might lead to steep losses if they can’t price homes right and make money on the transactions.

What is the fundamental problem in home sales, and how do these companies think they can fix it?

As Redfin CEO Glenn Kelman said at the 2018 GeekWire Summit: It’s not affordable. This is especially true in tech hubs on the coasts, but prices are rising rapidly in more affordable markets as well. Low supply of available homes and restrictions that make it difficult to build new ones are major contributors to the problem, as are the challenge of coming up with huge sums of money for down payments in an era where wages aren’t rising quickly enough to keep pace with costs.

(Opendoor Photo)

Who are the other players out there in real estate tech, and what are they up to?

Zillow and Redfin aren’t the only players in the iBuyer market of companies that buy and sell homes. Opendoor in March it raised a whopping $300 million at a valuation of $3.8 billion, bringing its total lifetime funding to $1.3 billion in equity and $3 billion in debt over its lifetime. Offerpad also recently raised some new cash to bring its total combined debt and equity funding to $975 million.

Zillow Offers aims to be in 20 markets by early 2020. RedfinNow is in six markets, with plans to expand later. Opendoor is live in 20 markets, and Offerpad is available in 14.

Outside of the iBuyer market, there’s also Compass, the SoftBank-backed high tech real estate brokerage that has been raising serious cash and making some major moves in the Seattle area recently. It brought in a former AI executive at Microsoft to lead its technology teams and planted its flag in the area with a new West Coast hub. It’s already found itself in a legal tussle with Zillow based accusations of stealing intellectual property and poaching the Seattle company’s employees who violated non-compete agreements.

What do Rich Barton’s history and his latest comments tell us about how far he might take Zillow beyond its original mission?

Barton, a co-founder at Zillow, took the CEO seat in a story that was overshadowed by news of the company’s dramatic shift. He has a self-admitted affinity for big swings, and this is one of the bigger swings we’ve seen in tech in recent years, and certainly in the real estate scene: A well-established public company dramatically shifting its business into a more competitive and risky area, albeit one with a super high ceiling.

It’s clear from the way Zillow is talking about this that the company is all in on home sales as the future of its business. And Barton, who also founded Expedia and Glassdoor, isn’t stopping there. Doubling down on mortgages and  the Microsoft Office of real estate.

Redfin CEO Glenn Kelman rings the Nasdaq opening bell with members of the team in 2017 (Nasdaq Photo)

Is this the beginning of a new era for homebuying, with all the companies building platforms for you to buy a home entirely through their website?

That certainly appears to be Zillow’s aim with all these moves. Redfin has offered other real estate services for several years, such as brokerage, mortgage and titles and now it is into buying selling homes as well.

Don’t be surprised if companies took several different approaches to simplifying housing. Some, like Offerpad and Opendoor appear to be focused primarily on home sales, aka iBuying. Others will attempt to be all things to all buyers and sellers. There’s certainly some appeal to a one-stop shop where someone could in theory, search for a home, get a mortgage, make an offer and complete the sale.

How do the approaches of Zillow and Redfin differ?

Both companies are real estate-focused, but they started off in very different areas and have been steadily coming together. Redfin was a brokerage first, and Zillow was a media and information company.

Traditionally, Zillow received the bulk of its revenue from broker advertising spending. Redfin brings in money through its variety of real estate services, primarily on commissions on home sales, which are less than other brokerages.

In recent years, the companies’ ambitions have moved them closer together, with both of them looking to carve out market share in home sales. Zillow is the much larger company with a market cap of $8.6 billion versus $1.6 billion, per Marketwatch, and annual revenue of $1.3 billion versus $487 million for Redfin.

As a result, Zillow is positioned to make a bigger bet on home sales, while Redfin is taking things a little slower.

Will Zillow make a major acquisition, possibly of a brokerage. Maybe even Redfin?

GeekWire spoke with several analysts that cover both companies who argued that by buying Redfin, or any other brokerage, Zillow would effectively gut the Premier Agent business that made up roughly two-thirds percent of the company’s total revenue in the most recent quarter.

Premier Agent lets real estate brokers buy ads on Zillow’s network of websites, putting them front and center for customers who are searching for homes. If Zillow were to acquire Redfin, the combined company would become a powerful tech-infused real estate brokerage. And that would mean competing with the very same brokers that advertise on Zillow’s websites. That could lead to an exodus from the Premier Agent business, the same way retailers competing with Amazon are fleeing its cloud computing business.

A year ago, Premier Agent made up roughly 71 percent of Zillow’s total revenue. Today, Premier Agent is 65 percent of the overall business. However, Premier Agent rose at only a 2 percent clip in the most recent quarter, while revenue from the home sales business, which is admittedly new and seeing faster growth as a result, nearly tripled.

As Zillow Offers becomes a bigger part of the company’s overall business, and if it turns out to be profitable, the importance of the advertising business lessens. Those things happen, and this conversation gets a whole lot more interesting.

Zillow has been known to make a surprising acquisition or two, namely the deal to scoop up its top rival Trulia for $2.5 billion in 2015. If Zillow is going to pull off its ambitious of goal of buying up 5,000 homes a month, it is going to need some boots in the ground in local markets. Acquiring a brokerage to make sure it prices homes correctly makes sense.

Redfin would get a boost in traffic, and the combined companies would be a much more formidable force against rivals like Offerpad and Opendoor. Together, with services Redfin already offers and those Zillow is getting into, they could come close to offering every aspect of a home sale under one umbrella.

Does any of this actually fix the fundamental problems in the housing market right now (people can’t afford homes, there aren’t enough of them for sale)?

Zillow and Redfin aren’t going to raise wages, ease lending standards or change zoning laws. However, there is one area the companies could make an impact.

One of the biggest challenges in real estate today is buying one house while selling another. The timing can be tough if the owner’s home doesn’t sell, potentially sticking them with two payments at once in some circumstances or forcing them to hold off on buying.

The presence of instant offer programs means that a homeowner looking to move up can quickly sell their current place, giving them the funds they need to purchase their next home. As instant offer programs like Zillow, Redfin and others spread, it’s possible they could facilitate more sales by helping people move up to their next home, thereby making more starter homes available for first-time buyers. That could help increase supply and possibly blunt price hikes in some areas.

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