The Death Star Is Nearly Operational

It started with a portal, then the iBuyer, and now mortgages. How far will Zillow take it? Or will they be their own worst enemy?

Zillow Gets into the Mortgage Business

18 months ago Zillow launched it’s “Instant Offers” program that enables the company to buy houses via investment, offering a quick close and cash purchase price to the sellers.

The next step was removing the investors and taking their place, buying the home directly and working with local agent to resell it through Offers. What’s become more clear is the next step in Zillow’s game plan: the mortgage process.

Earlier this week Zillow announced they’ve acquired Kansas-based national lender Mortgage Lenders of America. This move will allow Zillow to, “Streamline and shorten the home-buying process for consumers who purchase homes through Zillow Offers.”

Additionally, Zillow announced it has closed down the opportunity for other investors to participate the Offers program, cutting off it’s conduit for investors to participate in the marketplace.

How this will affect Zillow’s lender-advertising revenue stream is yet to be determined, but the market has rendered it’s opinion.

The Market Disagrees

Zillow announced this week its second quarter earnings and watched shares plummet 17%, wiping out nearly $1.6B in shareholder value. Rental revenue was projected lower, says Zillow CEO Spencer Rascoff, but deeper analysis reveals the market was unhappy with Zillow’s business model amendments.

Per CNBC, Bank of America analyst Nat Schindler said the mortgage integration, “poses risks for 2019 results.” Offsetting this was a 22% gain in year-over-year revenues. Included in the release is the fact that Zillow Offers contributed a net loss of $12.1M in the quarter, since Zillow has only bought, and not yet sold the homes in Q1, while a quarterly update letter reveals the company has indeed sold nine homes and expects between $2M and $7M in revenue in Q3.

Both of these hiccups appear to be shorter-sighted. Quarterly results of Zillow Offers do not cover a full year and reflect the potential of the program. Likewise, jumping to conclusions about the cost of the acquisition against the longer term value-add could be a misstep for investors.

Summary

Adding a mortgage origination business to it’s home buying portal and growing inventory of available homes for purchase is a natural extension. How far Zillow goes is yet to be seen, but agent revenue remains the life-blood of the company, and moves to displace agents would materially affect Zillow’s ability to retain it’s competitive advantage and value.

I’m not yet ready to call this a bad move. Bold? Yes. Zillow will need to carefully balance biting the hand that feeds with continuing to differentiate itself, stave off competitors, and provide shareholder values.

TechnologyAustin Guyzillow