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This house at 6630 S. Nash Way in Chandler, Ariz. is the first one Zillow ever purchased directly through Zillow Offers. (Zillow Photo)

When Seattle-based online real estate giants Zillow Group and Redfin jumped into directly buying and selling homes to the consumer, the real estate market was blazing hot. Now things are starting to slow down — a trend foreshadowed by Redfin CEO Glenn Kelman — at a time when both companies have ramped up their commitment to these new programs.

UPDATE: Zillow Group shares dip 20% after Q3 earnings

Zillow and Redfin will give updates on their home sales businesses this week as part of their quarterly financials. While Redfin has been buying and selling homes for more than a year, this will be the first time we see numbers from Zillow’s program, which just kicked off in April and hadn’t completed any sales in the previous quarter.

Both companies are hoping that buying and selling homes directly can open up a new revenue stream and simplify the often vexing sales process. But the move is a risky bet against the backdrop of a national housing market that is starting to shift as more houses hit the market and buyers frustrated by sky-high prices are sitting out.

“Buyers have just said ‘enough is enough. I am not going to pay those prices,'” Redfin CEO Glenn Kelman said at the 2018 GeekWire Summit. “When you have wages growing very slowly, relative to housing prices, and then you add to that that interest rates are starting to move up, you reach a breaking point. And we have reached that breaking point.”

UPDATE: Zillow reported its third quarter earnings Tuesday afternoon, and the company posted $11 million in revenue from the Zillow Offers program, and the Homes segment that program falls under reported a loss of $16 million. Zillow purchased 168 homes and sold 36 homes through Zillow Offers in the third quarter.

The pace of Zillow’s buying and selling homes is speeding up. In October alone, the company bought 130 homes and sold 32, Zillow CEO Spencer Rascoff said on a call with investors. It won’t be long, Rascoff says before the company is buying and selling as many homes in a week as it did in the third quarter.

Zillow expects to generate $30 to $40 million in revenue from Zillow Offers in 2018, which is down from earlier projections in May of $125 to $255 million. It expects to hold 300 to 550 homes in inventory, down from 300 to 1,000 homes.

GeekWire chronicled the first house Zillow ever purchased directly over the summer, a 15-year-old, four-bedroom, two-bath ranch-style home in the Phoenix suburb of Chandler, Ariz. Zillow purchased the house in May for $410,000 and put it on the market a few weeks later for $425,000.

Zillow aims to turn around and sell the houses it buys in roughly 90 days. The Chandler home sat on the market a little longer — about 4 months. Zillow reduced the price and it eventually sold in late September for $403,000.

Zillow spokesman Viet Shelton called the Chandler house an “outlier.” He warned that looking at the sale price alone does not show whether Zillow made or lost money on a given home. Baked into the process is a fee — usually around 6 to 9 percent of the home’s price, but it’s different on each transaction — that Zillow charges for the convenience of doing the work of sprucing up, listing and selling the house.

Shelton explained that Zillow tries to price the houses, both when it buys and sells them, as close to fair market value as possible. Zillow isn’t looking to make huge profits on each house. Instead it is relying on volume, and that convenience fee, to bring in small profits on each place that add up to a big number.

“It’s too early to estimate how many sellers might choose to sell (to Zillow) or what our typical net profit per transaction might be, but as an example, if 5 percent of sellers select this method, that is 275,000 transactions,” Zillow CEO Spencer Rascoff said on a call with investors earlier this year. “For illustrative purposes at scale, using $250,000 as the typical home value, a $3,500 net profit per transaction would result in a nearly $1 billion profit opportunity annually.”

The first home sale completed through Zillow Offers was this two-bedroom condo. (Zillow Photo)

Shelton pointed to several other deals in the Phoenix area that he said give further insight into what Zillow is trying to accomplish. Two of the four examples sold above Zillow’s list price and two others were slightly below.

  • The first ever completed sale through Zillow Offers was a two-bedroom condo in Mesa, Ariz. Zillow purchased that unit, which is part of the Superstition Lakes community, in early June for $180,000. It was originally priced at $195,000 and sold July 13 for $188,000.
  • Another two-bedroom condo, this one within the Phoenix city limits, sold for $408,000 on July 27. Zillow bought the unit June 12 for $407,000 and originally listed it at $410,000.
  • A four-bedroom house in Glendale, Ariz. sold on July 18 for $236,000, which was $6,000 above Zillow’s list price. The company paid $220,000 for the house and originally listed it at $230,000.
  • Zillow bought a four-bedroom home in Gilbert, Ariz. in mid June for $335,000. Zillow sold the house about five weeks later for $353,000, $8,000 more than the list price.

Zillow Offers is designed to work well in both hot and cool housing markets. Zillow has as much insight into the market as anyone and can adjust if major changes appear on the horizon. Shelton says Zillow Offers can prosper in a down market because buyers will be more inclined to go with a quick sale rather than having to deal with the home sitting on the market for months.

Redfin CEO Glenn Kelman at the 2018 GeekWire Summit. (Photo by Dan DeLong for GeekWire)

Redfin started testing its direct home buying and selling operation, Redfin Now, in 2017. In August, Redfin removed the “experimental” tag, doubling down on the program and announcing its intention to staff up Redfin Now and expand beyond Southern California. As part of Redfin Now’s evolution to a long-term business, Redfin started breaking out its quarterly results under a new reporting group called “properties.”

Redfin spent $17 million buying homes in the second quarter, up from $6 million in the first quarter. Redfin sold all 17 of the purchases it made in the first quarter, with second quarter sales totaling $9 million, up from $3 million three months ago.

Redfin has said it made money on each home it bought and sold. However, the properties segment lost about $100,000 overall in the second quarter.

“Every home we’ve sold has sold for a higher price than we paid for it,” Kelman said during a call with investors. “But there’s a difference between a gain on a sale and profit. Once you account for the cost of our labor, renovations and capital, Redfin Now has been about break even. The good news is that we expect as we get bigger within a market and build more software to manage the renovation process we’ll be able to spend less time and money bringing each Redfin Now home to market.”

Kelman warned of a slowing housing market back in August, saying that frustrated buyers tired of getting beaten out on offer after offer were deciding to sit out. Speaking at the GeekWire Summit three months later, Kelman showed concern that if the real estate market turns drastically, the company could be left with a large inventory of homes on its books that it can’t sell.

“And so I did say that in the earnings call, and I did walk down the hall to the Redfin Now team and say, ‘Take it easy on the number of houses you buy, because we could end up unable to sell them,’” Kelman said.

Redfin went public in July 2017. (Pamela Hayes-Kong Photo)

Shares in both companies have been hit hard in recent months. Redfin and Zillow have both seen their stocks decline about 30 percent since early August on investor fears of a declining real estate market, while the Nasdaq Stock Market has dropped about 14 percent in that same time frame.

Zillow will report its latest financials later today. Analysts surveyed in advance expect Zillow to report earnings of $0.17 per share on $344.29 million in revenue. Redfin’s earnings will come out Thursday, and analysts expect it to post earnings of $0.02 per share on $139.27 million in revenue.

Zillow and Redfin are different companies in a lot of ways. Zillow makes a majority of its revenue from advertising and lead generation tools for real estate agents, while Redfin is closer to a traditional real estate brokerage that is enhanced by technology.

Though the two companies are now on the same turf, buying and selling homes directly, they don’t compete in that arena because they aren’t in the same markets. Redfin and Zillow are competing with a crowded field of companies in the so-called iBuyer movement — where sellers will take a discounted price in exchange for the certainty of a fast sale — such as Opendoor and OfferPad, as well as several new startups.

Alternative home sales transactions have always been a part of the market, but tend to make up a small percentage of all sales, says Mike Grady, COO of Seattle-area brokerage Coldwell-Banker Bain. However, with 6 million homes to be sold in 2018, according to Grady, there’s still money to be made in the iBuyer market and someone is going to gain an advantage in that area.

Programs like Zillow Offers and Redfin Now have gotten a lot of hype, but Grady doesn’t see them as a transformative force in real estate.

“I just don’t see very many sellers willing to take that much less no matter what the market is like,” Grady said, “It’s just not human nature to say ‘I’m going to let you have 15 percent of my equity in order for me to save 60 days on the market,'” Grady said.

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