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Zillow’s home-flipping business could be good for buyers. Is it good for Zillow?

The company announced massive home flipping revenue and massive home flipping losses

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The vision of Zillow becoming a one-stop shop for real estate transactions is coming closer to fruition.

On its earnings call last week, the company announced it’s expanding Zillow Offers—its new home-buying and selling division—to six new markets within the year, and Zillow’s quarterly revenue came in higher than expected as a result of a spike in revenue in its Offers program.

Zillow Offers is the missing link to providing end-to-end service for anyone looking to buy or sell a home, or as is often the case, both. Zillow purchased and rebranded a mortgage company in the last year. Its legacy business is the real estate portal through which people can shop for and advertise home listings. You need something done in the homebuying process? Zillow wants to be able to provide anything and everything.

Wall Street signaled approval of this vision when Zillow’s stock price jumped by 19 percent in the evening after the earnings call, driven in part by higher-than-expected revenue growth in its Offers business. But is home flipping a good long-term move for Zillow?

The company’s earnings show that is a serious question without an easy answer. Zillow Offers sold 414 homes in the first quarter of 2019, with $128.5 million in revenue, which caused overall revenue to jump by 51 percent over a year ago. But after accounting for costs like sales, marketing, technology, and administration—not to mention the cost of actually buying the homes in the first place—the company ultimately took a $45.2 million loss in its Offers program, a whopping $109,190 per home flip.

Since its IPO in 2011, Zillow has never been a profitable company. Home flipping is a capital intensive business, meaning it takes a lot of money to participate because you have to buy houses. But when your capital intensive business is losing tons of money, should you be in that business?

But declaring Zillow Offers a failure now would be a little unfair. A new business often takes time to develop. The iBuying concept has gotten a lot of attention in the news media, but is still widely foreign to the public at large, so Zillow and other iBuyers, like Opendoor and Offerpad, have to spend money to educate the public.

And then there’s the broader strategic vision to consider. To some degree, Zillow Offers is about defending its primary revenue stream; the real estate portal that collects advertising revenue remains its highest revenue generator, raking in $298.2 million in the first quarter of 2019. These real estate listings have often been the first place people go when they embark on buying or selling a house, and the money Zillow makes on it depends on that remaining the case.

But the advent of iBuying by Opendoor and quickly replicated by Offerpad and other startups threatened to cut in line between the customer and Zillow, making a Zillow Offers program necessary to protect its advertising revenue, even if the business itself loses money (for the record, it’s advertising business loses money, too).

This quandary was described well by Keller Williams CEO Gary Keller in January. While Keller Williams has a different business model than Zillow, it’s also been threatened by iBuyers. When Keller Williams announced its intention to get into iBuying, Keller said he felt like the company had to.

“I feel like I have no choice now,” said Keller. “I can’t allow Opendoor or Zillow to go out and be the only player in the iBuyer space and then begin to dictate terms and build brand around ‘they buy houses.’”

Whether Zillow feels like it has to flip homes or not is irrelevant at this point, as it’s clear the company is ramping up that side of its business at an escalating pace. Can they turn it into a money maker?