Zillow entering the Wholesale Market

Buying & Selling Real Estate
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Zillow entering the Wholesale Market

John Nachtigall
Santa Rosa, CA · Member since 2017 · 325 posts · 701 votes

I saw this in depth analysis of the Zillow Offers product.   This struck me

"Going back to Exhibit 4, renovation, holding, and selling costs have averaged 3.0%, 0.9%, and 4.5% of sales so far, leaving a return before financing of 1.6%. Interest has eaten up 0.8%, leaving a 0.8% margin after interest.

Clearly, bottom line profit margins are thin, but that is by design. The overarching strategy is to give homeowners the best deal Zillow can afford while still breaking even on the transaction. That will maximize adoption of Zillow Offers, and will drive lots of ancillary revenue streams."

Given that the typical wholesale offer is APV x 70% - renovation theoretically Zillow would offer a lot more to the typical "distressed" home seller.

Thoughts?   It is very common for a company like Zillow to enter a market at zero to negative margin to take up market share.   If people hit the Zillow Offer button instead of go to wholesalers that could sink a lot of individual business models.  

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Aidan Mulligan
Rental Property Investor · Charlotte, NC · Member since 2019 · 161 posts · 178 votes
7y

The pros and cons of Capitalism, this is one of the items in the cons column

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  • Aidan Mulligan
    Rental Property Investor · Charlotte, NC · Member since 2019 · 161 posts · 178 votes
    7y

    The pros and cons of Capitalism, this is one of the items in the cons column

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  • TJ Jeff
    Investor · Austin, TX · Member since 2016 · 39 posts · 12 votes
    7y

    @john Nachtigall

    i'm surprised this is not a bigger topic on BP, not only can Zillow get very low funding to work in cash, but can lose a lot of money in an Amazon style market share grab from realtors and investors simultaneously, hence massive cold calling and mailing operations, major advertising. so who has more credibility the huge company buying yr house, or the guy who lives down the street and says he's better at valuation than Zillow? they have a first goal of buying 5K a month, it will only go up if they figure it out

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  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    7y

    You know the "We beat Car Max" ads?

    We beat "Zillow Offers". Zillow does the heavy lifting (CMA, rehab valuation, etc.) and we offer just a tad higher price.

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  • Guy S.
    Rental Property Investor · New York City · Member since 2019 · 58 posts · 29 votes
    7y

    I've been hearing about the next real estate "market disrupter" for a few years now. I'm not arrogant to say it's impossible, because it is, but I think it's going to be harder than what might be understood from Zillow's actions you mentioned. Here are my thoughts:

    1. Pricing - the most basic rule in real estate valuation, is that every property is unique, no two properties are alike. Even in a condo building, or a cookie cutter SFR neighborhoods, each parcel is different, every house has its unique attributes. You say Zillow use local realtors for accurate evaluation? I say accurate valuation is worthless if you end up buying with thin margins. The market hicks up and your company is bellow water. You can't really operate on this scale losing all the time - this is not Uber or Amazon, it's a cash flow intensive business. I believe Zillow is aware of that.

    2. Evaluations - if focusing on cookie cutter neighborhoods evaluations are pretty straight forward and easy so they might focus on this type of properties. But when you go to big cities or metros? Every property is unique and buying a property with thin margins on large scale\volume without doing on-site inspections is insane. I believe Zillow is aware of that too.

    3. Capital - there is a limit to how much they can buy - there are a lot of big institutional players that are in these markets. Blackstone is buying SFR for a long time now. Can Zillow grow a bigger portfolio than Blackstone? It could, but there's enough for everyone. The housing market in the US is estimated at 33 trillion dollars.

    4. Concept - market disrupters are usually platforms for others. The platform usually moves revenue from different streams, concentrate them in one place, and take a bite. Uber took work from taxi drivers and shifted it to freelancers. Amazon grew insane only when started the 3rd party marketplace. Meaning - in order for Zillow to become a monopoly they need to facilitate other investors under their wing. Doesn't seems like that's the intention

    Finally, the most important thing in my idea is VALUE. I think every investor and especially wholesalers need to think with themselves what's the VALUE they are bringing to the table. If it's just to be able to find properties where the owner is unaware of the real value of their property then fine, do it now, but do expect to be the first eliminated by a market disrupter at some point. Accurate information is getting more accessible by the day. All other investors or wholesalers that help distressed sellers can sleep quietly because there's is probably no entity in the private sector that can devour the entire market

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