Hold on Zillow and Redfin. Sparkling Q2 2019 results of $248M in revenue for Zillow and $39.9M in revenue for Redfin do NOT mean that iBuying is “paying off,” according to Curbed’s Jeff Andrews.
Redfin’s legacy business as a discount brokerage brings in a commission of 1%-1.5% on the value of a median priced existing home, $288,900 according to the National Association of REALTORS®, NOT 1%-1.5% in addition to the full value of a house as with its iBuyer program. Zillow’s legacy business of selling ad space to agents brings in less than that median priced existing home of $288,900.
The bottom line? Because these legacy business transactions are proportionally smaller than transactions in their respective home flipping businesses, any company that “…starts expanding into iBuying is going to see revenue jump just because of the nature of the iBuying business.”
The problem? Neither of these iBuying businesses is “paying off” at the moment. Zillow’s Q2 2019 earning report indicated that when the company factored in the interest expense relating to financing the 786 homes it sold during the quarter, its iBuyer program lost -1.01% on those 786 sales. (We don’t have specifics from Redfin on its net profits…we only know that Zillow’s interest expenses totaled $3.5M for those 786 sales in Q2 2019.)
Zillow believes the company can get a profit margin up to 4%-5% BEFORE interest expenses once it gets its iBuying business segment to scale. That’s the rationale for expanding its iBuying into 26 markets by mid 2020. Zillow also believes it can fuel mortgage services and title insurance as income generators when its iBuying customers buy their next house.
Redfin believes in a more conservative approach for its iBuying business segment. Currently, Redfin operates in Dallas, Denver and most of Southern California. It also just recently announced a partnership with Opendoor in Atlanta and Phoenix to feed referrals, for a fee of course, to Opendoor.
Time will tell if this yet unproven iBuying becomes “successful.” What with the current headwinds blowing in the real estate market and the general economy overall, it may just be that iBuying might not be worth the risk regardless of how much revenue iBuying produces.
Thanks to Curbed’s Jeff Andrews for source data.