Zillow Should Treat iBuying as a Marketing Expense

iBuying is a Marketing Expense

In theory, Zillow’s Homes Segment could make money flipping residential real estate.

Zillow leadership claims each deal will one day make a small profit according to a preferred metric that omits an actual cost (interest) and all of the overhead. However the target per-deal profit appears uncertain due to structural profit limitations on flipping homes, and is dwarfed by the overhead of building, operating, and marketing the iBuying platform.

Zillow Offers, the public brand of the Homes Segment, is a marketing play. An offer to buy the customer’s home is the natural evolution of the Zestimate that initially put the company on the map more than a decade ago.

Zillow is absolutely making the right decision by offering an iBuyer service. They constantly battle for public attention in the real estate media market. Competitors could outflank them if Zillow did not build out iBuying. It is a compelling feature that they need to offer if they want to continue being the leading source of real estate information.

My objection is that iBuying is presented to investors as a standalone business.

It is a discrete service, but it is loss leader used to attract and retain monthly users to the Zillow platform. Very few customers who request a Zillow Offer accept the bid they receive.

A rejected Zillow Offer is likely more profitable for the company than one that is accepted. The company has gotten to the customer early and has a chance to sell the listing lead to an agent. If the customer is also planning to purchase a new home, then Zillow can profit on the buyer lead and the mortgage too. The customers Zillow Offers attract feed directly into the existing business lines.

Rather than considering iBuying a business, it is more appropriately classified as a marketing activity.

An advantage of moving iBuying to a marketing expense is to reframe the public conversation. Zillow’s competitors in the iBuyer market are mostly start-ups funded by venture capital that don’t have established channels for monetizing their customers. They need show they will one day make money on the flip to justify their next round of funding. By setting the expectation that iBuying is a marketing expense rather than viable business, Zillow can put pressure on the competition. And, of course, Zillow can still optimize their iBuying to try to make money on each property (and ignore the sunk cost of building the platform).

Moving iBuying to a marketing expense would stop distorting the company’s reported revenue. Management projects that Homes Segment revenue will be $20b compared to $2b for the traditional media business. The “revenue” from iBuying is not proportionate to the value it brings to the company, skewing the financial metrics. Analysts can make this adjustment on their own spreadsheets, but they shouldn’t have to.

Moving iBuying to a marketing expense would presumably hide some of the details of the operation from the public, including competitors. The focus of financial disclosures would go back to what Zillow is making on its other two Segments.

The Homes Segment is a fun thing for the executives to talk about with investors. It’s a fast growing business activity, and it involves a large amounts of money. I’m sure that they could figure out a way to continue using it as a primary talking point even if iBuying is no longer a separate business segment.

We need to be honest about what iBuying is … marketing.