Zillow is one of the most recognized brands in real estate. When the business made the decision to move into iBuying, many were skeptical that it could work for a company that built its success on technology rather than operational expertise.
At Qualia’s Future of Real Estate Summit, Nate Baker, CEO of Qualia, sat down with Spencer Rascoff, entrepreneur and co-founder of Zillow and Pacaso, to discuss Zillow’s successful move into iBuying, the rise of other tech-enabled real estate models, and why more startups are making their exits via special purpose acquisition companies (SPACs).
Zillow decision to enter into iBuying: a “one-way door”
Rascoff detailed Zillow’s entry into iBuying as a challenging two-year decision-making process. The company knew that its decision to start an iBuying arm was a one-way door. “Once you go through it, there’s no turning back,” he said.
Zillow saw competitors such as Opendoor start to do iBuying; however, Zillow was skeptical that it would work. “We had been trying to value home for over 15 years, and no one knew better than us how hard it is to value homes algorithmically,” Rascoff said. As iBuyers started to raise more money and earn more press, Zillow started to pay greater attention to their success and track their results.
Eventually, Zillow decided to perform some consumer research to understand the opportunity. “The results came back unequivocal that people hated selling their homes,” Rascoff said. Home sellers have traditionally been tasked with a lot of work just to sell their home, much less buy a new one. “And iBuying presented a solution to this problem.”
The decision to transition from online advertising to a fully-operational real estate business was a big move for Zillow. “It was a scary leap. We had a 95% gross market business selling digital advertising… and everything was going great so there was certainly the mindset of ‘let’s not screw this up,’ but the consumers were speaking,” Rascoff said. Ultimately, Zillow decided to enter the iBuying arena.
The company started with a marketplace model whereby Zillow would send a potential home sale to multiple iBuyer bidders. Ultimately, this model created an inconsistent experience for the consumer, so Zillow decided to shift to an in-house model. “It’s too much of a high-touch transaction to rely on a third party to be the one that’s actually buying,” he said. “We recruited a fantastic team of industry professionals who had a lot of experience buying a huge number of single-family homes.”
Rascoff believes iBuying will be a “big part of the market”
Rascoff said that iBuying won’t just be a small, niche part of the real estate market moving forward—it will be a “big part of the market.”
In areas such as suburban Arizona where the housing stock is more homogenous and it’s easier to algorithmically value homes, iBuying will be more prevalent. Meanwhile, in places where there are older homes that are more difficult to value, iBuying may be less prevalent. Rascoff said that the “buy box” for iBuyers will be between $100k and $400k. “A lot of homes in that range will be bought and sold by iBuyers,” he said.
Rascoff noted several benefits of iBuying for both buyers and sellers including timing certainty, a quicker process, and less hassle for the seller.
Other PropTech business models on the rise
“This is a super exciting time for PropTech,” Rascoff said. “When Zillow and Trulia merged I remember thinking: ‘That’s it. We won. There will be no more innovation in real estate.’ But boy was I wrong.” He added that after the success of Zillow and Trulia, founders and investors realized the massive potential and opportunity in real estate.
Rascoff himself is continuing to innovate in the real estate space. He described his latest business, Pacaso, as one example of new PropTech businesses cropping up. “Pacaso allows buyers to buy a portion of a second home. We’re fractionalizing second homes,” he said.
Rascoff also noted a few other categories of PropTech companies that are on the rise including:
- Companies that are democratizing access to real estate investing by allowing people to buy into a portion of a real estate development.
- Cloud brokerages that are disrupting brokerage franchisor-franchisee relationships.
- Businesses that are trying to solve the “time-matching problem” for moving. These companies are helping homeowners time the sale of their home with the purchase of a new one.
Rascoff added that these innovative models are creating greater liquidity in the real estate market. People’s lifestyles are also shifting and creating structurally higher transaction volume—today’s homebuyer is no longer interested in purchasing a home and living there for 20+ years.
More PropTech Startups are Choosing SPACs as an Exit Strategy
In addition to shaking up homebuying and selling, new PropTech startups are also challenging norms for taking their businesses public. Rascoff said that many PropTech businesses including Opendoor, Matterport, Latch, and Porch, chose special purpose acquisition companies (SPACs) to go public.
SPACs are shell companies that a group of people take public. After going public through an IPO, these shell companies merge with a private company to take the private company public. Rascoff himself has a SPAC entity called Supernova.
He listed a few benefits of SPACs:
- The business can go public much quicker than a traditional IPO
- Unlike a traditional IPO, the company can emphasize value through projections for the next 5-6 years out rather than merely the past few
- The business receives the counsel and advice of the SPAC group when they make the challenging transition from private to public
Rascoff said that while SPACs have become vogue in the past two years, he believes that they are here to stay. “I think they are an important part of the capital raising ecosystem,” he said.
To watch Baker and Rascoff’s conversation from the Future of Real Estate Summit, click below to watch a recording of the session.