I was asked multiple times over the last few days about Zillow pausing its iBuying business, over email from some of you and in person at Inman that concluded last week. I haven’t written on it because I didn’t think it was a big deal, and others have already written on it.
But since I’ve been asked for my thoughts, such as they are, I thought I should share them. Maybe there’s some spark of originality here; maybe not.
Disclosure: I am long OPEN (Opendoor). I think Opendoor is the pure iBuyer play so that’s why, but I might elaborate on this below.
Tempest in a Teapot
My take from the start is that this is a tempest in a teapot, driven primarily by anti-Zillow sentiment on the one hand, and anti-iBuying sentiment on the other.
The whole “ZOMG! Zillow is losing millions!!!” thing that has brokers, agents, and their influencers dancing for joy is… well… misplaced.
The Business Insider headline that screams, “Zillow has listed a staggering 93% of the hundreds of Phoenix homes it owns at a loss” is an example. The article says breathlessly:
Insider reviewed all the homes for sale by Zillow in the Phoenix metropolitan area as of October 27. Out of 224 homes, 208 — or 92.9% — were priced below what Zillow paid. The potential losses highlight the risks of the iBuyer business, which aims to buy and resell properties for a profit in a roller-coaster market.
Zillow is DOOMED! Bloomberg’s story that Zillow stock fell 6.8% after announcing the pause is in the same vein.
You have to scroll down the Business Insider story to find this:
If the company were to sell all of its Phoenix homes right now at their list prices, it would lose $6.3 million dollars. Phoenix is currently Zillow Offers’ second-largest market, after Atlanta.
Oh noes! Zillow would lose $6.3 million! Whatever will they do??? How will they survive with only $4.6 billion in cash (at the end of Q2) in the bank? Would they have to switch from free Starbucks coffee for their employees to a cheaper coffee? Maybe have fresh flowers only once a week instead of three times a week?
Mike Delprete, who kinda began the storm with this post, had to remind Inman readers that this is no big deal:
This is a company that is willing and able to lose hundreds of millions of dollars to invest in and build a new business. A $7 million loss in one market during one month will be a distant memory by this time next year.
The iBuyer investment case for Zillow, Opendoor and others is clear: This is an opportunity measured in trillions, not billions, of dollars. Within the context of long-term industry disruption, this may simply be an embarrassing detour on Zillow’s inexorable march to transform real estate.
I guess I didn’t even think to point this out because it seemed so obvious to me. Zillow and Opendoor are not flippers; they are market makers. Market makers routinely lose money on trades because they bet wrong, or the price of the commodity/stock/whatever spikes up or down. So? That’s the nature of providing liquidity, and over time and over the portfolio, market makers do just fine shaving a bit of profit here and a bit of profit there. It’s not a high margin business, but it’s a solid one.
So yes, this pause is embarrassing for Zillow. I’m sure it will come up in their Q3 call. But I have no reason to think that Zillow is lying when they say that they paused because of backlog, because they bought too many, they don’t have the manpower or the materials to make their houses ready to sell, and so on and so forth. Yes, Delprete and others are probably correct that there was some kind of a flaw in Zillow’s algorithms and Opendoor and others did not have. Maybe Zillow was more aggressive in purchasing than the other guys.
So what? All of those “embarrassments” and algorithm flaws led to $7 million loss in Phoenix. Say that happened across the country and Zillow will lose $70 million. So they have to learn to live with $4.53 billion in cash in 2022.
Whoop de doo.
Apparently, the smart money on Wall Street thought the same since ZG stock (as of this writing) is up to $106 per share from the post-announcement low of $85 a share. Buy the dip, as they say.
My Concern: The Locker Room
However, I didn’t buy the ZG dip. And it isn’t just because I already own OPEN. It’s because I think the embarrassment points to something a bit more fundamental.
As just about everyone has pointed out, Opendoor didn’t pause its purchasing. Opendoor isn’t pricing its homes at a loss. Zillow did, and is.
The question is, Why?
Is it because Opendoor people are smarter and better than Zillow people? That’s a possibility, but I’ve met Arik Prawer and the team at Zillow Offers. If Opendoor people are smarter and better, I’d find that pretty shocking. It’s like saying the Packers have stronger, faster and better players than the Cardinals do because they beat the Cardinals in one game. Maybe that’s true; it most likely isn’t.
I’m not in the least bit concerned about the talent at Zillow. They’re really smart and capable people over there, and they’ll sort things out.
Rather, my concern is directly related to why I’m long on OPEN and have no position on ZG. I’m concerned about the locker room, if you will.
I’m long OPEN because I’m a humongous bull on iBuying as a transformative application of technology. Zillow has all of the advantages, however, and back when I made the bet, it had even more advantages because Opendoor had not yet been taken public via SPAC. So why not Zillow?
Because Zillow has two main businesses, while Opendoor only has one.
As I’ve written over and over again on these pages and in Red Dot reports, Zillow is in the midst of a transformation from a portal to a market maker. That transformation is complicated by the fact that its portal business is what’s generating all of the profits. There’s just so much legacy stuff in Zillow that is directly tied to its being the dominant aggregator for real estate.
Opendoor never had a portal, so it was always focused on becoming a market maker. They’re laser focused on that one business.
Furthermore, Zillow is now a gigantic public company with thousands of employees. It isn’t a startup anymore; it’s more like Facebook or Google or Amazon — a Big Tech company with Big Tech culture. Opendoor just went public, and I hear from friends there and elsewhere that Opendoor retains its startup culture. And while no company bigger than say three people is free of corporate politics, there is no doubt that the bigger and older companies have bigger and older internal politics.
Hence, the locker room.
My concerns have to do with just how much Arik Prawer and his team can focus on their iBuying business, without having to deal with whatever corporate and boardroom politicking may be going on. You can tell me all you want just how amazingly close everyone at Zillow is, and post videos of every C-level executive going on Outward Bound adventures together. You can tell me that Arik Prawer and Susan Daimler are best friends, and their families vacation together. I’ve worked in Big Corporate before, and I just don’t buy it. People are people, even if they are super smart and successful tech executives, they have got to be jockeying for position, for power, for influence, for budget, for resources, whatever, against one another. The incentives for winning internally are just that much greater in an established Big Tech company.
The 15 minutes that Prawer has to spend thinking about his next board meeting, and how to position himself and his division against Susan Daimler’s profit-spitting portal division are 15 minutes that he can’t spend thinking about how to hire more workers to fix up houses. Now make that an hour. Make it a weekend.
You see my concern?
Eric Wu doesn’t have to worry in the least bit about some MLS policy, or some broker’s reaction, or Inman running hit pieces on Opendoor. He doesn’t have to be concerned about Realtor.com, Homes.com, Redfin.com, or any other dotcom in the portal or lead generation space. He just has to worry about buying houses, fixing them up, and selling them. Rich Barton has to do all that, plus mediate any disputes between his division heads, and worry about the latest “Zillow ate my baby!” hit piece, and worry about Andy Florance and CoStar breathing down his neck, and, and, and.
This is a more substantial concern of mine, and it is one that smart investors should think about.
It isn’t that Opendoor’s people are smarter and better; it is that they are more focused. Zillow has amazing people. But are they as focused as their rivals at Opendoor and Offerpad and elsewhere? Is it even possible for them to be that focused?
Conclusion
So here I am, and there you are, and here we all are.
The kerfuffle over the pause is a tempest in a teapot, driven primarily by media hype that wants “ZOMG!” headlines, and by real estate hostility to anything Zillow. Losing $7 million, or $70 million, or even $700 million on iBuying isn’t the world-ending scenario that some folks hope it is. The pause and the reasons given for the pause is an embarrassment, and I’m sure Zillow management will address those in due time.
The larger, deeper concern that the pause suggests, however, is a serious one. Because that is about internal dynamics within Zillow itself, and about focus. You can put the best and most talented athletes on a team, but if you have a divided locker room… you’re probably underperforming. And you will have a tough time beating another team filled with great athletes who have a united locker room.
This is obviously something that Zillow can fix. Rich Barton is not only the CEO, but a controlling shareholder. He can make whatever changes he needs to make to make sure the locker room is united. He probably should. And with some sense of urgency.
Because I will say this: this sort of thing can’t happen again. To paraphrase Ian Fleming, once is a mistake, twice is a problem, and three times is enemy action. If it happens again, then we no longer have a concern; we have a problem.
-rsh
2 thoughts on “Brief Musings on Zillow Offers”
If Zillow is going to be a brokerage, a lender, a title company, etc., why not be a contractor, too? Wouldn’t the average contractor and/or sub be better off working at a company with consistent work, zero interaction with unhinged property owners and/or their equally unhinged Realtors, and real health insurance? I’m sure there’s all kinds of additional liabilities and HR headaches that go along with those businesses. It’s probably not feasible, but who knows?
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