When Zillow Group pivoted from an advertising-based business model to the algorithm-based Zillow home flipping business in 2018, its executives knew this day for the home flipping markets would come. Zillow and other tech-driven companies were able to refine their technology enough to make tiny profits on cookie-cutter houses in deserts and small metropolitan areas.
But to make $20 billion a year in revenue from Zillow Offers within five years as executives boldly projected, the Zillow home flipping business would need to crack major coastal markets, where homes are at least twice as expensive, and prices can change dramatically from one block to the next.
Home Flipping Markets are Growing
According to The Real Deal real estate news, Zilllow Offers, the firm’s iBuying arm is moving into the Los Angeles housing market with a field staff and two veteran brokers. More hires are expected. Zillow Offers is already working in 21 other home flipping markets including San Diego, Sacramento, Houston, San Antonio and Atlanta. “L.A. is easily the biggest and most complex market that we are going into,” said Zillow president Jeremy Wacksman. “It is not a market, but a whole bunch of markets. Of the ones that we’ve opened in, it’s the biggest geographically, population and the average home price.”
The Zillow home flipping business iBuying model offers sellers a chance to quickly offload their property, giving them fast access to cash to buy other homes. It’s a business with extremely thin margins, and requires Zillow to set aside large pools of money to make the purchases, perform simple updates to the property, and sell it again, with the ultimate goal of financing the buyer’s purchase through its new mortgage arm.
Zillow lost an average of $4,826 on each home sale in the third quarter, after interest expenses — up from $2,916 in the second quarter, the company revealed last month. Still, Zillow does make money on the home flipping markets transaction fee, which runs between 6 and 9 percent. And that’s the focus.
Zillow is looking to move as quickly as possible and earn their money off the transaction fee. And ultimately because this transaction sits at the nexus of all of these adjacent markets that we know so well, that are big businesses in and of itself, they’re dying to be integrated into one thing. For Zillow, the L.A. launch will be a defining test on how far its Zestimate technology has come, and whether it can gain an edge in higher-stakes markets.
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