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Companies often beat other companies by providing better services or products.

But in real estate, “sustained unprofitability” has become a competitive advantage, according to real estate analyst Mike DelPrete, who gave a presentation Wednesday morning at Inman Connect Las Vegas entitled “iBuying Disrupted: The Battle of the Behemoths.”

Zillow Group, tech-touting brokerage Compass, iBuyer Opendoor and Redfin, a high-tech brokerage, are growing rapidly in large part because they have so much money and are under limited pressure to turn it into more anytime soon, DelPrete said.

“The biggest disruption in real estate is financial disruption,” he said, adding, “Red is the new black,” to audience laughter.

Zillow is particularly well positioned to leverage this edge, DelPrete argued.

According to DelPrete, Zillow’s preferred measure of accounting suggests the firm is profitable, but less so than last year. By this measure, it was “buying every dollar for 95 cents” in the first quarter of 2019, up from 85 cents for all of 2018.

But by another measure of profitability, one established under generally accepted accounting principles (GAAP), Zillow is a money-losing machine, DelPrete said. In the first quarter of 2019, it’s buying dollars for $1.20 a pop, up from $1.10 for all of 2018, he claimed.

One reason that Zillow has recently been moving farther away from profitability, rather than edging closer, is that it has embarked on a hugely expensive endeavor: buying and reselling homes, not just selling ads. Zillow got into this game, DelPrete suggested, because revenue growth from its advertising business has “basically ground to a halt,” which is a “big problem” for a publicly-traded company.

Another is that some homeowners began reaching out to Opendoor rather than going to Zillow’s website first. The promise of a real offer from Opendoor, he suggested, was even more alluring than the estimate of value that made Zillow a consumer magnet in the first place, the Zestimate. That’s why DelPrete describes iBuying as “the new Zestimate.”

Zillow had already established itself as a collector and distributor of buyer leads. Now, its iBuying business is allowing it to do the same with seller leads.

The real money to be made in iBuying, DelPrete suggested, will not come from flipping homes. It will be the business model’s ability to capture serious homesellers and rout them to agents in exchange for referral fees.

Through Zillow Offers, its iBuyer, Zillow is generating roughly 1,500 leads per month per market. Only about 2.5 percent of its offers are accepted, he said, while the remainder are referred to its agent partners.

If Zillow Offers were collecting that level of leads in 20 markets, it would hoover up 360,000 seller leads per year.

Assume 20 percent of those leads convert into transactions, and that Zillow collects referral fees on those deals. DelPrete estimates that number would convert into close to $200 million in annual profit. That would overshadow what Zillow could earn if it turned a gross profit of 1 percent on every home flip — which it is not; it’s losing money on every flip at the moment, he said.

In Phoenix, the most mature iBuyer market, 40 percent of sellers are requesting offers from iBuyers, DelPrete said. That number might only grow, and could ultimately apply to many other markets.

“If you’re a homeowner thinking about selling your home, why wouldn’t you get an offer?”

All of this paints a bleak picture for agents who might like to make first contact with potential sellers without paying to do so. But not all hope is lost.

The new era in the industry, DelPrete said, could be called “The Incumbents Strike Back.”

Agents and brokerages are jumping on the iBuying wagon by creating or partnering with iBuyers.

“Through all of this [these efforts] agents are positioning themselves at the center.”

Email Teke Wiggin.

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