Zillow as mortgage lender: Real estate giant going ‘further down the funnel’ of buying a house

Zillow as mortgage lender: Real estate giant going ‘further down the funnel’ of buying a house

Zillow CEO Rich Barton and President of Media and Marketplace Greg Schwartz at Zillow Premier Agent Forum 2017 (Geekwire Photo / Kevin Lisota)

Thousands of would-be home buyers looking for a mortgage will soon have a new option: Zillow Group.

The Seattle-based online real estate giant is preparing to go deeper into the business of mortgage origination, making loans to help people buy the same homes they come across in the Zillow app.

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It’s part of a broader transformation that promises to make Zillow Group a drastically different company than it was just a few days ago. The mortgage news was largely overlooked amid two other major changes announced by the company last week: Co-founder Rich Barton’s return as CEO, and Zillow’s announcement that it will go all-in on direct home sales.

Zillow is taking a cue from companies like Amazon, Uber and others that have created a “one click, magic happens” expectation, Barton told GeekWire in an interview last week. That’s what the new Zillow is trying to offer for buying a house, with simplified mortgages tied in, “just like payments are integrated into Uber,” Barton said.

In a telling sign of its ambitions in the mortgage business, Zillow will add a new segment to its financial reports, starting next quarter, focused on home loans. That includes some existing Zillow offerings, such as a marketplace that connects borrowers and lenders, and its new undertaking of originating its own mortgages.

Mortgages are part of Zillow’s overall shift from media and advertising to “moving further down funnel and closer to the real estate transaction to create better consumer experiences,” according to its annual 10-K filing with the U.S. Securities and Exchange Commission last week. Headlining this shift is Zillow Offers, the direct home sales initiative that Zillow kicked off last year, but the move into mortgages is another major indication that Zillow wants to get into every aspect of buying a home.

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Zillow has been quietly originating mortgages for a few months, following the acquisition of Mortgage Lenders of America last year. At the time of the deal, Zillow didn’t say how much it spent on Mortgage Lenders of America. But the 10-K filing reveals the price: $66.7 million in cash. Mortgage Lenders of America originated approximately 4,000 home loans in 2018 across 40 states, or roughly 333 per month.

Over the next few years, Zillow will kick its mortgage business into high gear. The company aims to originate 3,000 home loans a month within three to five years, nearly 10 times the amount Mortgage Lenders of America is producing. Following through on the integration with Zillow Offers, the company expects to originate loans on one-third of all its home sales.

For 2019, Zillow expects the Mortgage segment to bring in revenue of $100 million to $115 million, good for annual growth between 25 and 44 percent. Zillow brought in roughly $80 million in mortgage-related revenue in 2018, down 1 percent over the year before.

It’s an unusual move for a $9 billion company to so dramatically re-align its focus like this, but Zillow clearly sees an opportunity to disrupt the home sales process through direct sales and mortgages.

“This is why we founded Zillow, to actually change the way people bought and sold houses, and the way they found a new place,” Barton said. “This was our original conception, something like this to actually solve the headaches that we were experiencing, that our moms and sisters and brothers were experiencing.”

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Investors are on board so far, as Zillow’s stock has risen 25 percent since the company announced the major changes last Thursday.

Zillow co-founders Rich Barton, Spencer Rascoff and Lloyd Frink. (GeekWire Photo / Kevin Lisota)

Zillow’s traditional core offerings of advertising and real estate information remain the primary drivers of the company’s balance sheet. Those businesses made up 96 percent of Zillow’s total revenue in 2018, and 88 percent in the fourth quarter, with the Homes segment just getting off the ground and mortgages not yet in their own category.

Barton, CEO for the company’s first five years, will oversee Zillow’s radical transformation. Barton is returning to the job because of his affinity for “big swings”, and he will take over for Spencer Rascoff, who is stepping down from the CEO seat but will remain on the board.

The journey to become Zillow 2.0, as Barton called it last week, is going to be costly and risky.

“We’re taking [the media business] and using profits from that to fund what some people believe is a speculative business that is unproven, that requires capital investment, that has low gross margin — but has radically larger scale potential,” Barton told GeekWire.

Zillow added a number of warnings to investors in a 10-K section about the company’s risk factors. For one, Zillow may have to raise additional money to fund the expensive expansions of mortgages and home sales. The company also acknowledges the potential of conflict with some of its mortgages partners, who will become competitors in some cases.

“Our recent entry into the mortgage lending business may also cause a negative reaction within the mortgage industry, including among some of our mortgage advertisers, which could harm our reputation, results of operations and financial condition,” the company wrote in the filing.

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Zillow’s decision to expand its scope opens it up to a whole new set of rivals. Comparing Zillow’s 2017 and 2018 10-K reports, the section on competitors has gotten longer.

Zillow doesn’t name names, but in 2017 its list of competitors was fairly simple: “companies that operate, or could develop, national and local real estate and rental listings search, as well as mortgage lender mobile applications and website.” The move to buy and sell homes puts it in competition with companies like Redfin, Offerpad and Opendoor. Zillow will also soon face off with other mortgage originators, as indicated in the updated language.

Our competitors include companies that provide, or could develop, technology, products and services for real estate, rental, new construction and mortgage professionals and other residential real estate market participants, including operators of mobile applications and websites. We also compete with companies and individuals purchasing and selling homes in the metropolitan areas where we offer our Zillow Offers service and with companies originating mortgage loans in the states in which MLOA is a licensed lender.

Despite the risk, the increased competition and additional investment it may require, Barton said he’s excited about the company’s move “down funnel.”

“My eyes are wide as I look up in the sky and see the moon and I want to go,” Barton said. “To me, this is one of the more exciting opportunities I’ve seen in my business career and it’s why I’m recommitting in all kinds of ways.”

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