The real estate market has been on fire in many places across the country, and Zillow (NASDAQ: Z) has been reaping the benefits. Its stock has been climbing, with a 20% increase in share price this quarter. Despite the fact revenues for Zillow Homes, an iBuying program, were only half of its anticipated forecast for the fourth quarter of 2020, Zillow is moving forward with a new program that turns a Zestimate into a cash offer for interested sellers. Find out how this online real estate behemoth could end up competing with not just licensed agents but also real estate investors.
How does Zillow Offers work?
Homeowners interested in better understanding their home values often turn to Zestimates, Zillow's free tool that estimates the property’s value. But now, homeowners interested in selling at the Zestimate price can simply click on a banner on the webpage that advertises the purchase of the property with cash through its Zillow Offers program.
With just a few clicks, homeowners can start the free online process to get a cash offer based on the property’s Zestimate within a few days' time. If the offer is accepted, Zillow will conduct a quick home inspection, then close within the timeframe that works for you. If the property is not located in one of its active Zillow Offers markets, it will put you in contact with a Realtor who is.
Right now, Zillow Offers is only operating in 25 markets:
- Austin, Texas
- Charlotte, North Carolina
- Colorado Springs, Colorado
- Fort Collins, Colorado
- Jacksonville, Florida
- Las Vegas
- Los Angeles
- Minneapolis-St. Paul, Minnesota
- Nashville, Tennessee
- Orlando, Florida
- Portland, Oregon
- Raleigh, North Carolina
- Riverside, California
- Sacramento, California
- San Antonio, Texas
- San Diego
- Tampa, Florida
- Tucson, Arizona
What does it mean for investors?
When Zillow originally started its iBuying program, it told Realtors it would be another lead generation source for them, but recently Zillow announced it would be licensing some of its employees. That's not exactly supporting its Premier Agent program, which up to this point has been a major income stream for Zillow. This is obviously not an ideal scenario for Realtors and brokerages, because it's directly competing with their lead sources, but it also impacts unlicensed real estate investors too.
This program can offer a seller much of what a typical real estate investor can offer: quick closings based around sellers' needs as well as cash offers, both major negotiation points for investors. With Zillow now offering essentially the same closing process and associated perks, but to a much broader online audience, this could severely impact potential deals investors would normally find. Right now, the limited markets it's working in will prevent massive changes for investors, but Zillow intends to scale up its market areas as it restarts the program post-lockdowns.
Zillow, at least for right now, is actually losing money on the houses it's purchased and tried to flip. It says it's a scale issue and that as things ramp up, margins will improve, but these remain a prediction. That might lead you to think this program may not be here for long, but Zillow is a big company on a big mission. The ultimate goal appears to be a one-stop-shop for all aspects of real estate investing, from Zestimates to agent referrals to title insurance and more. Low or even negative profit margins on one portion of the business model may be worth it to the company in the grand scheme of things.
The Millionacres bottom line
Real estate investors working in Zillow's target markets will likely have to step up their game, getting creative with marketing efforts and offers, while those outside their current markets should keep a careful eye on where it's heading next.