You take the blue pill – the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill – you stay in Wonderland and I show you how deep the rabbit-hole goes.
– Morpheus, The Matrix
Let me be honest here — I’ve been saying more or less the same thing about Zillow for so long both in my longer reports and in shorter (but still long) blogposts that I’m not entirely sure what more there is to say. For anyone coming to Notorious VIP for the first time, let me just suggest that you use your membership and go back and read some of the archived member-only articles. If you want more, contact me for longer reports, some of which date from 2017-18.
Zillow reported Q2, and as everyone knows by now, it blew the doors off. Not in actual numbers, mind you, but in exceeding expectations. With COVID, everyone kind of expected that things would not look great in Q2, so expectations were suppressed. Well, Zillow blew through those.
As Allen Parker, CFO, put it:
Stronger revenue, combined with continued focus on managing costs, delivered consolidated EBITDA of $16 million, significantly outperforming our expectations of a loss of $61 million at the midpoint of our outlook range.
And everyone expected Zillow to take a hit because of the 50% discounts they were offering to Premier Agents in Q2, and so they did: down 13%. But again, that’s helluva lot better than the 25% hit they were expecting.
Long story short, when Zillow entered into the crisis, they raised some additional money and put $2.5 billion in cash in the bank to weather the storm. Well, they ended Q2 with $3.5 billion in cash and investments.
This is where I’m glad I switched the format of these quarterly analysis posts, so I don’t have to really deep dive into the numbers. Q2 numbers were going to be wonky anyhow, and even Q3 might be overly hyped because of the snapback effect of the V-shaped recovery going on right now.
But we can talk about some substantive things, and at least a couple of them are new(ish) and potentially important.
iBuying is Back, and Zillow is All Alone Atop the Mountain
When COVID hit and all of the iBuyers, Zillow included, paused activities, the haters in the industry did a little song and dance, pointed and laughed, and did a lot of “See, I told you so!” I kept telling you all, including in my COVID-19 Report, that iBuyer was not dead, this was a pause not a pivot, and that there was a ton of consumer interest that was only going to get stronger in a time of pandemic.
Well, Zillow is now back to buying and selling in all 24 markets after the pause.
If you were one of the few to have read my COVID-19 Report, you already knew that vacant homes were going to be far more valuable going forward. From the Report:
Second, and more long-term, the psychological impact of COVID will not entirely fade away until and unless a simple, over-the-counter cure being not only introduced, but proven. The selling process was already inconvenient, uncertain and time-consum- ing. If the seller has to worry about strangers walking into his house and whether they are infectious, and the showing process now has to involve booties, masks, disinfectants, and the like… the incentive to simply sell to an iBuyer increases significantly.
And here’s Rich Barton during the call more or less confirming my hypothesis:
So starting with your question, Robert, about how aggressive we want to be with Zillow Offers, well, we’ve now, as of today, actually opened up all 24 of the markets that we had open before COVID hit. And so you can tell, by the way, we’ve opened markets and how aggressively we’ve reopened markets, you can tell we feel good about it. And the supposition is that this price certainty, this time certainty and convenience and the kind of safety associated with — if you’re a seller, not having to have a bunch of people go through your house; and if you’re a buyer, letting yourself into a home with a Zillow app with nobody there, those both feel like good things in the midst of a health crisis, and we’re seeing that play out.
What’s more, the COVID crisis washed everybody else out of the market maker game. Redfin is out of that game despite saying they’re back with RedfinNow, since RedfinNow looks like a flipper bait-and-switch deal in every respect. Opendoor and Offerpad converted to (or are trying to convert to) traditional brokerages, who are using “iBuyer” as a flipper bait-and-switch like Redfin is. So as we come back from the brink and the uncertainty, Zillow is the sole remaining market maker in the game.
And I’ll repeat myself once again to remind everyone that iBuying is not house flipping; what Zillow (and formerly, Opendoor) is doing is market making. Rich Barton had to remind even a Wall Street analyst on the call that they’re not doing a “distressed situation, deep discounting, take advantage of a seller situation and make a big profit” business. No, that business is now something that Offerpad and Redfin are doing, and probably Opendoor.
Zillow’s thesis is that quality matters, and that consumers are not stupid. They can compare offers from different “iBuyers” and see that one stands heads and shoulders above the rest. Then their REALTOR who keeps telling them that “iBuying” is leaving tens of thousands of dollars on the table had better think about credibility issues….
In any event, let’s move on.
The O-to-O Shift
During the conference all, Rich Barton kept using the term “o-to-o” and at first, I was a bit puzzled by what he meant. Then I read the transcript, and “o-to-o” stands for “offline to online” and it all made sense.
The o-to-o shift as it pertains to Zillow is, in part, what we’ve been talking about as real estate 2.0, and we’re seeing years of adoption accelerate in the months. Real estate 2.0 will be an integrated transaction with virtual shopping, digital document routing, and one day, a trade-in button for your house. Zillow has the tech and R&D capabilities to enable this shift. And with the leading brand in real estate, we are best positioned to capture more transactions as more change the places they call home.
He’s right, of course. Zillow is the leading brand in real estate. It has the tech, the R&D capabilities, and the money to enable the shift. While others remain trying to navigate the rapids of change, Zillow is digging a canal.
VIP readers have known this for quite some time now, so I won’t belabor the point any further. We might not quite be ready to crown Zillow on the Iron Throne just yet, but it sure does feel like Zillow has the Dothraki and a few dragons on its side.
But in that O-to-O Shift, there are a couple of interesting new(ish) things to have come out of this call.
Newish News
There are three kind of new things to emerge from the Q2 conference call that are worth highlighting, as they all tend to reinforce the narrative of Zillow taking over the industry and crafting Real Estate 2.0. They are: Flex, Seller Lead Monetization, and Technology Development.
Let’s take them in order.
Stealth Flex Rollout Nationwide
Ever since Zillow introduced Flex in its various forms, then pulled it back, then tested it in a couple small markets, then in Phoenix and Atlanta, we have been waiting for Zillow to finish testing it and roll it out across the board.
So during the Q&A of the Q2 conference call, an analyst asks whether the pandemic “accelerated Flex or how you’re thinking about that.” Rich Barton replies:
So on the — yes, on the Flex question, certainly early in the pandemic, you heard us comment that we were certainly happy that we had the Flex arrow in in our quiver. We had the Flex entrée on our dinner menu of stuff that we can offer our partners as we move to get these better partners who are better at converting and are focused on customer satisfaction and transactions. And we’re willing to delay gratification from revenue in order to do that. So it’s been — it was certainly nice to have, especially at an uncertain time. It’s still uncertain, but a decent amount of fog has cleared. And the way we’re thinking about this really, Ron, is as kind of the menu that I described. We have these different business models, these different ways we interact with different partners in different geographies, and not just in PA, but also on the businesses that surround Zillow offers.
And what we’re finding is that having a flexible menu of things that we can figure out how to make them work the best with different partners has offered us a really interesting optimization opportunity. And that’s really what’s going on now. We continue to test and roll out this and other models, but we think about this just in a much broader context of continuing to get more dollars to drop out the bottom of this customer funnel. And so you’re going to probably hear less specific stuff about Flex, I think, going forward. And that’s not to say we don’t love it. We do. It’s just become part of the way we do business. And because of the — we don’t — I should let Allen speak about it. But the only reason we started talking about it as a separate thing initially was because of this revenue recognition thing. And I think we’ve kind of — that’s just not as necessary anymore to focus on. [Emphasis added]
Unless I’m misreading something, or mishearing something, or completely do not understand the English language, I think this is announcing that Flex is now available nationwide in every Zillow market.
“It’s just become part of the way we do business” strongly suggests that Zillow offers Flex to various Premier Agents, based on its own criteria. But since Zillow is looking for “better partners who are better at converting and are focused on customer satisfaction and transactions,” if you’re a Premier Agent and you’re not offered Flex, it’s because you’re not one of those better partners who qualifies for better treatment.
Allen Parker, CFO, followed up saying that Flex is just optimizing revenue:
I’d just add, Rich, it flows out that one question that now that we are also offering and monetizing Flex, alongside MBP in the same markets, it just becomes more of an optimization, how do we manage our business versus our Flex versus MBP by market assessment.
The New Normal has arrive rather quickly, don’t you think?
Seller Lead Monetization
Another stealth news announcement, that confirms what everyone has been waiting for, is that Zillow is monetizing seller leads that come off of its Zillow Offers program. Literally everyone under the sun was expecting it; I know I wrote back in 2017 when the first version of Zillow Offers was launched that all it was doing was generating seller leads. People left and right were doing valuation of Zillow based not on its actual market making business but on the basis of seller leads the program would generate.
So we’ve all been waiting for this, for news that Zillow has officially begun to sell the incredibly valuable, high-intent seller leads from people who contacted Zillow about buying their homes.
The answers here are a bit… more cagey than the Flex answer. Lloyd Walmsley from Deutsche Bank straight up asks about seller leads from Zillow Offers. Allen Parker responds:
So on — we call it partner leads. But on partner leads, what I’d say is that Zillow Offers buying pause was an opportunity for us to look at and refine our partner lead generation channel. We’re continuing to enhance our processes to better support our customers. We’re providing them with multiple options now early in the pipeline, whether they want to sell to ZO or sell traditionally through with our PA partners. So we’re very excited. It’s still very early. We’re seeing some positive trends, but we’re still iterating, and we’re excited about the opportunity here.
That sure sounds like Zillow is selling those seller leads to me, how about you?
They weren’t asked, nor did they offer, any further details about how these seller leads are being priced, whether it’s just part of Premier Agent now, or if there’s an upcharge, or if it’s all Flex (which goes to the best agents that Zillow has).
But it sure does seem to me like there is now a formal next step after a homeowner who has requested a Zillow Offer either (a) refuses to take the offer, or (b) isn’t given an offer for whatever reason (buy box, condition, etc.). Seems to me like the homeowner is given the opportunity to have a Premier Agent contact them about listing the home.
What is interesting here is that this “List With Me!” is coming from someone everyone identifies as Not-Zillow. That lets both Zillow and the Premier Agent avoid the “ugly baby problem” that Glenn Kelman pointed out in a 2019 earnings call:
We know that most people turn down an offer and end up listing the property. The only challenge we have is if we come in with a low offer from RedfinNow, we tell them their baby is ugly and they’re less likely to turn that baby over to us for any other reason. So I think that we have to get better in that area. They often choose another broker instead of Redfin to list the house.
With Zillow, you don’t have this problem. The Premier Agent can literally badmouth Zillow all day long, tell the homeowner just how unbelievably awesome their house is, and how they’re going to sell it for top dolla’ and make those bastards at Zillow regret not offering more. It’s an easy Good Cop/Bad Cop routine, right?
Since we hadn’t heard about it until this earnings call and only in the Q&A section, I assume that Zillow hasn’t quite ironed out every detail, and they’re not eager to go around blowing their horns about “We gotz seller leads!”
But I’ll say this: we are in an unprecedented inventory crisis right now in real estate. Literally every company that reports publicly has mentioned the severe inventory crunch. In 2020, if you have high-intent seller leads like these… oh my Lord, the money you will make….
Agent Technology Development
Finally, there was an interesting discussion on the topic of technology development. I honed in on it instantly because I wrote extensively on this in the Q4/2019 earnings analysis. After quoting from Rich Barton, who talked about “a woeful lack of application of software” to nurturing leads and to improve the transaction experience, I wrote:
This is the next piece of the puzzle for Zillow’s domination of the residential real estate industry. It feels like a deathblow to the ambitions of RE/MAX, Realogy, Keller Williams, and most of the traditional brokerages who have been busy talking about technology. KW went so far as to declare that they are now a technology company.
It’s one thing to play that game when the opponents are other brokerages. It’s a whole different deal when the opponent includes Zillow, who spent $477 million on technology and development in 2019 alone. KW wants to boast about the $1 billion budget for technology? Zillow already spent $1.7 billion in the last five years, and on current trends, I’ll bet Zillow will spend $500 million in 2020 on technology.
No wonder Rich Barton flat out says what we have been saying for years: there has long been a woeful lack of investment into technology in real estate. And now, it might be too late.
I was curious whether COVID had changed Zillow’s priorities. With so much drama in the LBC, did Zillow still want to keep comin’ up with funky ass shit like every single day?
The short answer is yes. Nothing has changed. From Q4 when he first mentioned the “gnarly problem” to Q1 when Barton talked about COVID wiping out barriers to technology adoption, we get this exchange.
Heath Terry of Goldman Sachs asks how much more Zillow wants to spend on broker and agent technology, and if there is a road map of priorities. Barton responds:
Yes. Heath, I think if I broaden out, if I could at least choose to hear your question in a broad framework, I’d say there’s no greater priority. We are — it’s weird, but real estate has been a laggard in adoption of modern technology even before COVID. And for a lot of legacy regulatory complexity, fragmentation, distribution reasons, it’s been pretty stubborn in its resistance to technology adoption. So I really — I believe we are at the beginning of a cycle of complete re-platforming and near gear being escorted out and a new foundation for the industry being built. And so unlike — this is it. We are really excited about this. And we’re excited that we’re in a position to be able to just have the talent and hire the talent , that is able to dream up what that looks like. Make it all work together, and to do so in a way with the ultimate customer in mind, not necessarily the legacy industry user in mind. But the industry user matters a lot, but it’s really the customer experience that we need to fix.
It’s really quite broken, and we’re at the early stages of that. So broadly speaking, I would say, it’s like — it’s the top development platform that we have. Specifically, I think you’re asking more about kind of the virtual touring stuff and the stuff that we’ve been talking about. And yes, we’re leaning into that, too. It’s pretty clear that people want to shop this way even as we ask them about shopping post pandemic, would you still want to take virtual tours? Yes. Would you still want to let yourself into a home so that you can tour it yourself? Yes, et cetera. And so we do think that these are rapidly becoming industry norms. And so we’re leaning into that. We do have — there is some competition there, no doubt, that is investing in this, but I think our collective — our R&D expenditure and capabilities in this area really give us an advantage.
It would have been a bit surprising, perhaps, but 100% understandable if Barton had said, “Well, yeah, we’re still thinking about all that, but with this pandemic and everything, we’re focusing on our own stuff first.” He didn’t say that. He said this broker/agent technology is the top development priority for Zillow. And whatever they produce, it will be created with the consumer in mind first, “not necessarily the legacy industry user in mind.”
I find it interesting that he talked about competition. Maybe from Amazon or Google or somebody else, because within real estate, there is no competition. Every single vendor, every single brokerage, every national franchise does software development with the legacy industry user first, second, and third in mind. They don’t really have a choice; they have to. That’s who buys their software; that’s who pays them.
Red Pill Real Estate
I thought the theme of blue pill/red pill made some sense for this essay, because we are talking about Real Estate 2.0. We are talking about the great reshuffling, the O-to-O migration, whatever.
But there is massive divergence of opinions on the viability of this new future. There is no shortage of brokers and agents who will still scoff, “Zillow loses money every year!” and “nothing replaces belly to belly.”
I get it. Because as The Matrix makes so very clear via the character of Cypher, the red pill is unpleasant to take. It disrupts the mind and forces you out of extremely comfortable situations. Most of us would choose to go back to The Matrix if we could, because we realize that ignorance is bliss.
We see this clearly in Q2 results. The old school blue pill real estate companies got hammered; I already wrote about Realogy, and I’ll be discussing RE/MAX in the next post. Redfin is like Cypher, who just wants to be reinserted back into The Matrix, but still realizes what’s going on. eXp did extremely well… because it excelled at blue pill real estate practices of recruiting and retention, but the fact that it remains blue pilled is concerning for longterm prospects.
There are many elements to the red pill real estate; I won’t cover them here, but may start a series in the future or something. If you want to discuss that, get in touch and use your VIP benefits. 🙂
Thanks for reading!
-rsh
