Author Topic: ZG - Zillow Group  (Read 3393 times)

patientcapital

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ZG - Zillow Group
« on: November 14, 2019, 03:23:13 PM »
Has anyone dug into Zillow and the iBuying opportunity?

I'm pretty well versed on their legacy businesses (premier agent, rentals, mortgage), but it seems iBuying is both a huge risk and opportunity. Question is: does the reward outweigh the risk.

Any thoughts on this business is appreciated.


Broeb22

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Re: ZG - Zillow Group
« Reply #1 on: November 15, 2019, 03:53:02 AM »
I have thought about this some...what massive industries/industry histories are out there that require huge amounts of capital to have scale on the supply side but have low barriers to entry to get in at a small scale?

I think the end game for these companies is a few companies will aggregate supply and make the housing market more turnkey than it was before and could reduce the need for realtors big time in the industry, which leads to more efficiency, which leads to them capturing even more economics, and so on.

On the flip side, anybody at this point can go out and open up a singe family home-buying operation with a quick website, maybe a million bucks (or some VC capital) and a big line of bank capital (hopefully non-recourse), and take a shot at this.

Zillow seems like theyíre in a good position to succeed because they can fund this business with the cash flows of their existing business, though at some risk that realtors will figure out what theyíre doing at some point and rebel against the Zillow lead-gen platform.

Anyways the industries this reminds me of:

Perhaps early railroad industry
Early airlines is probably a better fit since the assets are not fixed in place like railroads or cable
Early cable companies although railroads are better fit since technology change continues to drive cable CapEx and likely will continue to
Potentially co-working, where the contingent liabilities in leases somewhat mirror the contingent liabilities  in the debt financing for the homes and improvements; in a downturn how do you clear that home inventory out in a timely manner?
Perhaps more optimistically, you aggregate demand a la Priceline via a merchant model where you are actually buying inventory from hotels (someone correct me if Iím wrong on early Pricelineís business model being like this) and can scale very rapidly but can be almost killed in a recession if youíre not filling all those purchased rooms; interestingly, Priceline has kind of moved away from owning the actual hotel inventory, and earns a lower % of each transaction but actually has less at stake because they donít own the inventory.

Thinking out loud, I think aggregating supply could be destabilizing for the home market in some kind of downturn because instead of individual people simply taking their homes off the market, these larger iBuying companies companies will be sitting on significant hits to their equity capital and will be aggressively liquidating their home portfolios to save as much equity capital as possible. While the long game tells me they may be able to earn equity- returns from capturing some of the 5-6% that goes to realtors today, they may not be getting that today in an effort to scale the business, making them a VC-equity funded home lender (except for Zillow) which is probably more fickle capital than bank deposits (which typically grow during recessions).

Just some random thoughts...


Spekulatius

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Re: ZG - Zillow Group
« Reply #2 on: November 15, 2019, 04:03:51 AM »
House flipping seems like a risky and low return sort of business. Imagine if they get stuck chuck full with housing inventory in a downturn. They also compete with their main customers (realtors), which I think will quickly become a problem. Redfins model seems like a better one to me, but they are struggling too.
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cameronfen

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Re: ZG - Zillow Group
« Reply #3 on: November 15, 2019, 07:15:47 AM »
While I agree with Spek that this sounds like a kind of bad business, I think what Zillow is thinking is that they have so much data they can make more informed decisions on buying houses than anyone else.  Frankly Iíd rather be the guy that sells this decision making capability to other house flippers and ibuying businesses, but I donít run Zillow. 

johnhuber

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Re: ZG - Zillow Group
« Reply #4 on: November 15, 2019, 09:34:02 AM »
Some thoughts.... Zillow isn't a good business in my opinion. The business of flipping homes loses money on a gross margin basis even before accounting for all of the company's operating expenses. e.g. they lose money on each house before paying their internal employees and all their other operating costs. There just isn't enough spread between the price they buy the home and what they sell it for to pay two sides of closing costs, including attorneys, appraisers, inspections, carrying costs such as taxes and insurance, cleaning fees, painting, maintenance and repairs, etc...

Scale isn't always a good thing. If the price of your product isn't high enough to cover your variable costs, then you're just going to lose more money as you "scale". So scale is like leverage: it can work in your favor but it can also work against you. It's not automatically beneficial.

I know the real estate business fairly well, and I'm pretty convinced there is no way for Zillow to profit from the flipping business. The other issue they have: scale actually works against them because the only way to really make money flipping homes is to cherry pick great deals. You can do this as a small operator by being nimble and patient, but if your goal is to have 5% of the "TAM", then you lose the ability to get below market pricing in aggregate. Housing is a commodity and Zillow's ibuying service is a commodity, which means they'll pay market pricing on the way in and the way out.

And the worst part is that they are taking on massive amounts of debt to finance these money losing transactions because there core business isn't profitable either so they will continually need fresh cash to grow.

My hunch is that they saw the writing on the wall with their core business (which also has issues), and they are making a Hail Mary attempt to find something new. But the something new isn't profitable.

One thing I've thought about lately is the simple idea of profitability as a checklist item. If the business is public (and thus is relatively established) and is not profitable, then you have to ask why not? If Zillow has all this valuable data, why isn't it using it to make money now? If flipping homes is a profitable business, why are they losing money on each of the thousands of transactions? I think this general concept applies to a lot of businesses. Amazon is the one giant exception to the rule; but the rule might be: if the company isn't making money now, it's highly unlikely that it ever will be a very profitable business.

Spekulatius

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Re: ZG - Zillow Group
« Reply #5 on: November 15, 2019, 09:53:14 AM »
While I agree with Spek that this sounds like a kind of bad business, I think what Zillow is thinking is that they have so much data they can make more informed decisions on buying houses than anyone else.  Frankly Iíd rather be the guy that sells this decision making capability to other house flippers and ibuying businesses, but I donít run Zillow.

Fully agree. If data is the differentiator, the figure out how to monitize the data. This also avoids competing with their customers ( realtors) and stays true to a capital light business model.
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TwoCitiesCapital

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Re: ZG - Zillow Group
« Reply #6 on: November 15, 2019, 10:10:12 AM »
I haven't evaluated the numbers on the home flipping because I think it's impossible at this point. What I've mostly been watching is how many homes they successfully purchase because that pipeline is crucial for determining potential market.

Things I know:

1) The home buying process is massively stressful, expensive, and inefficient. I went through it in January 2018 and cannot remember a more problematic transaction in my life for someone who had excellent credit and a resources for the down payment. In the future, I'd be very open to the idea of selling to Zillow to avoid the headache and can absilt see the benefit to those who'd like to sell quickly and get money now.

2) If Zillows data is quality, they should be able to accurately price homes to ensure they aren't overpaying and have a small margin of error to compensate them for the trouble.They should also be able to anticipate turns in the market because they'll have direct access to sales data, how long things have been sitting on the market, etc all at the local level.  I'm concerned about them getting this right the first time, which is why it isn't a larger position for me, but I am hoping they do.

3) Even as their spread will trend towards 0 as their data/risk management gets better, the referral to an agent if you don't want to accept Zillow's price is enormously valuable to agents - they're much more likely to transact than someone random browsing the site AND there's information embedded as to what price they felt was too low to accept. This will help Zillow's legacy business with brokers as well.

4) Lastly, Zillow has the opportunity to dramatically improve the buying/selling process while still providing enormously valuable leads AND can make a small spread profit on an enormous potential market to do it. If done successfully, they'll have no problems making it rain for shareholders

I have about 2-3% of my portfolio in Zillow and have been accumulating in the low-to-mid 30s on every dip and selling calls at massive premiums on every pop while I wait for more clarity.

It's not a proven concept and is enormously risky, but if they get it right they will have successfully disrupted a trillion dollars industry and will collect the benefits that come from that.


Gregmal

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Re: ZG - Zillow Group
« Reply #7 on: November 15, 2019, 10:30:18 AM »
I remember a ways back, Zillow was pitched as a long, very simply as owning some very valuable internet real estate. Now it seems they're expanding into real world real estate as well. I think they have something potentially valuable and disruptive on many levels. Of course, this is subjective interpretation. At the same time, its important to remember that all the high level, sophisticated, analysis driven short sellers have been wrong for some time as well. Sure, they fault low rates, bubbles, and all the usual suspects, but maybe theyre just wrong. You dont get multi baggers from things that are easy to understand and consensus with everyone. The TAM for Zillow is huge, and then tangentially related opportunities are even greater. If all they need to bridge that, is temporary funding while they burn cash, well, they market has demonstrated its willing to provide that without crushing the equity...

That said I have no position in Zillow.

cameronfen

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Re: ZG - Zillow Group
« Reply #8 on: November 15, 2019, 12:11:32 PM »
I haven't evaluated the numbers on the home flipping because I think it's impossible at this point. What I've mostly been watching is how many homes they successfully purchase because that pipeline is crucial for determining potential market.

Things I know:

1) The home buying process is massively stressful, expensive, and inefficient. I went through it in January 2018 and cannot remember a more problematic transaction in my life for someone who had excellent credit and a resources for the down payment. In the future, I'd be very open to the idea of selling to Zillow to avoid the headache and can absilt see the benefit to those who'd like to sell quickly and get money now.

2) If Zillows data is quality, they should be able to accurately price homes to ensure they aren't overpaying and have a small margin of error to compensate them for the trouble.They should also be able to anticipate turns in the market because they'll have direct access to sales data, how long things have been sitting on the market, etc all at the local level.  I'm concerned about them getting this right the first time, which is why it isn't a larger position for me, but I am hoping they do.

3) Even as their spread will trend towards 0 as their data/risk management gets better, the referral to an agent if you don't want to accept Zillow's price is enormously valuable to agents - they're much more likely to transact than someone random browsing the site AND there's information embedded as to what price they felt was too low to accept. This will help Zillow's legacy business with brokers as well.

4) Lastly, Zillow has the opportunity to dramatically improve the buying/selling process while still providing enormously valuable leads AND can make a small spread profit on an enormous potential market to do it. If done successfully, they'll have no problems making it rain for shareholders

I have about 2-3% of my portfolio in Zillow and have been accumulating in the low-to-mid 30s on every dip and selling calls at massive premiums on every pop while I wait for more clarity.

It's not a proven concept and is enormously risky, but if they get it right they will have successfully disrupted a trillion dollars industry and will collect the benefits that come from that.

Certainly iBuying will become a significant industry, but will the fact that it is a capital heavy low margin business, benefit Zillow and Zillow investors?   As an analogy, it probably doesnít benefit big pharmaceutical from getting into the manufacturing of genetics, doesnít mean generic manufacturing doesnít add value to the customer and someone wonít do it. 

cherzeca

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Re: ZG - Zillow Group
« Reply #9 on: November 15, 2019, 12:13:50 PM »
I looked at Zillow and Redfin and liked the latter more, but have no positions