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Things can get much worse right now for homebuyers, and not just in Greater Boston, but in major metro markets across the country.
Listings are down by double digits. Buyers are forced to duke it out in bidding wars for increasingly overpriced and older homes in need of work, especially in the Boston area.
Enter Zillow. The San Francisco-based online real estate platform is best known for its listings – complete with its quirky “zestimates” of each home’s value – and its steady stream of reports and data crunching on the latest market trends. The majority of its $1.1 billion revenue comes partnerships with brokers and brokerage firms that use the platform for leads and advertising.
Now Zillow is trying its hand at a very different game, the down and dirty business of flipping houses. Not alone, it joins online real estate brokerage Redfin, which has embarked on a similar venture.
My first reaction was that this is the last thing the market needs, more investment dollars scooping up scarce listings and reselling them for a fat profit, further driving prices out of the reach of the average buyer.
Certainly Wall Street isn’t thrilled. Zillow’s stock fell 8 percent after the announcement last month, though its share price is now almost back to where it was three weeks ago.
Analysts critiqued the move – with $250 million committed so far – as both risky and labor-intensive. Zillow has kicked off the initiative in Las Vegas and Phoenix, with a wider rollout to other parts of the country, including the Boston area, possible down the line. The aim is to buy and resell homes within 90 days, including renovations, though Zillow doesn’t plan to take on major fixer-uppers.
Cash on Hand
But what looks at first glance to be a dubious exercise in profiteering at the expense of hapless homebuyers may actually have some less obvious redeeming values that could make it a net positive.
I have to admit that when I chatted with Jeremy Wacksman, Zillow’s marketing chief, his initial pitch didn’t make a lot of sense. Zillow’s “Instant Offers” would be a boon for sellers, guaranteeing them a cash buyer, he told me.
Scott Van Voorhis
Huh? Sellers are already in the driver’s seat in markets from Boston to Chicago to San Francisco, so the logic or appeal of this wasn’t immediately apparent.
If you can’t sell your home right now, then you are either in the middle of nowhere or it’s down the block from a hazardous waste dump. The issue right now is finding another home to buy – that’s where help is needed.
So Wacksman took another swing at it.
As the market is current constituted, homeowners are forced to wait until the sale of their current house is almost complete before committing to the new home they want to buy. Once the sale of their home is finished, the clock starts ticking. Sellers must nail down their next house in a matter of a month or a few weeks – or get ready for a long slog in a rental.
Instant Offers gives buyers a cash offer and the flexibility to schedule it their around their needs. Home sellers can then focus on trying to land their next home, as opposed to finding a buyer for their current home, Wacksman noted.
And sellers who are looking to move up to a bigger house – or for that matter, downsize – can also take advantage of having that cash on hand to edge out other buyers. This is especially the case with other move-up buyers relying on traditional mortgage financing and who may have far less control over the timing of the sale of their homes.
In addition, Wacksman believes there may be other current owners interested in selling but dreading the process. They don’t want to go through all the hassles of open houses and marketing, as well as the uncertainty and waiting that are inevitable features of the sale process.
This could kick some additional homes onto the market that would not otherwise have been listed, he argues.
Serious Business
Interesting arguments – and I’d add another one to the pot.
Home flipping is a tough business, but Zillow’s business model may offer a more palatable alternative to sellers than the small-time operators who currently dominate the market.
Zillow’s business model calls for making money on sales volume rather than gouging on individual transactions, with relatively modest margins. We’ll see how that works in reality, but it seems encouraging.
In exchange for the cash offer, sellers who work through Zillow can expect to get roughly 10 percent less. The online real estate giant envisions making $2,000 or so on each home, not a huge markup.
By contrast, for the local small-time developer or real estate agent who has built a lucrative side-business flipping, and there are more than a few trolling Greater Boston, the incentives all point to pushing the envelope and getting the highest possible markup, buyer be damned.
Local flippers are already anticipating the potential onslaught of competition from Zillow. One broker south of Boston who flips homes is urging other small-timers to pressure the real estate agents and brokers they work with to take their listings off of the portals entirely.
“This is serious business … Redfin and Zillow are now your competitors. They are buying houses that you could’ve bought,” the broker/flipper writes.
Sure, but why should sellers care, especially if they can get a better deal from Zillow?
Finally, there’s another factor to consider. As it stands now, there is not a lot of transparency or accountability when it comes to the business of flipping homes; every town and city has its own crew of agents, builders and hustlers on the hunt for deals.
A big and respected brand like Zillow could bring some order and some consistent standards to a fragmented market. And given the fact Zillow is publicly traded, there is also a degree of accountability that you won’t find with the innumerable small players out there.
Yes, sometimes bigger is better. At least if something goes wrong or you get stuck with a lemon, you’ll know just where to go.
Scott Van Voorhis is Banker & Tradesman’s columnist; opinions expressed are his own. He may be reached at sbvanvoorhis@hotmail.com.
