Why soaring revenue doesn’t mean home flipping success for Zillow, Redfin

Publicly traded companies across the country are holding their second quarter earnings calls this month, and Zillow and Redfin reported some eye popping results related to their home flipping businesses.

Zillow raked in $248 million in revenue from home flipping, which accounted for 41.5 percent of the company’s total revenue for the quarter. A year ago, Zillow didn’t report any home flipping revenue. Redfin reported $39.9 million in home flipping revenue compared to $8.9 million last year, contributing to a 39 percent jump in total revenue from a year ago.

These reports produced a number of rosy headlines about their respective “iBuyer” programs. iBuying, a concept pioneered by tech startup Opendoor, is when the company buys your house for a “fair market price” determined by an algorithm in an all-cash offer that closes in a matter of days. This allows the seller to take the money and move more quickly and with less hassle.

But does this jump in revenue mean that iBuying is working for Zillow and Redfin? Not necessarily. The revenue the companies report from this segment of their business is the proceeds from selling the house, plus the transaction fee, which is a small percentage of the value of the house—on average 7.5 percent for Zillow. The median sale price of existing homes in June was $288,900, according to the National Association of Realtors.

Zillow’s legacy business is selling ad space to real estate agents, transactions that bring in far less than $288,900. Redfin’s legacy business is as a discount brokerage that brings in a commission of 1 to 1.5 percent of the value of the house, not 1 to 1.5 percent in addition to the full value of the house like with its iBuyer program.

Point being: because transactions in their legacy businesses are proportionally smaller than transactions in their home flipping businesses, any company like this that starts expanding into iBuying is going to see their revenue rise dramatically just because the nature of the iBuying business.

And a rise in revenue in iBuying doesn’t necessarily mean it’s “paying off.” Redfin doesn’t give much detail on the per unit economics of its iBuyer program, but Zillow provides a breakdown in its shareholder letter. The company made 0.5 percent profit on the 786 homes it sold in the second quarter of 2019; when taking interest expense related to financing the transactions into account, its iBuyer program lost 1.01 percent on those 786 home sales.

Zillow says it believes that after it scales the business, it can get its profit margin up to 4 or 5 percent, before interest expense; for the 786 homes sold in the last quarter, interest expense was $3.5 million. It also believes Zillow Offers can fuel its other businesses, like mortgage and title insurance; if a customers sells their house to Zillow, Zillow can refer them to its mortgage division when they buy their next house.

Zillow and Redfin have taken divergent approaches to expanding their iBuyer programs. Zillow has been highly aggressive and plans to be in 26 markets by the middle of 2020. Redfin has more cautious. It’s currently in Dallas, Denver, and most of southern California. It has actually partnered with rival Opendoor in Atlanta and Phoenix to feed referrals to Opendoor, for a fee of course.

But the bottom line is iBuying is still an unproven concept. And with headwinds growing in the housing market and the economy more broadly, it may ultimately prove to have not been worth the risk, no matter how much it makes revenue pop.