Zillow stock sinks on company's plan to start flipping homes

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Zillow shares closed 6.5 percent lower Friday after the online real estate database company announced it will begin buying and selling homes, a capital-intensive endeavor.

With Zillow's new program, announced Thursday, home sellers in the test markets of Phoenix and Las Vegas will be able to use Zillow's platform to compare offers from potential buyers — and Zillow. When Zillow purchases a home, it will aim to quickly flip the home, making updates and repairs and listing it as soon as possible. An agent will represent Zillow in each transaction.

"We're entering that market and think we have huge advantages because we have access to the huge audience of sellers and buyers," Zillow CEO Spencer Rascoff said on CNBC's Squawk Alley. "After testing for a year in a marketplace model, we're ready to be an investor in our own marketplace."

But investors are less enthusiastic. Flipping homes, a model that's being utilized by start-up Opendoor, is very different than operating an internet marketplace. It carries additional risk associated with buying and selling homes and requires a hefty investment in operations. And it also potentially puts Zillow in direct competition with the realtors on its platform.

"This is a business model that to date has been all advertising revenue driven, which is high gross margin," said Mark Mahaney, an analyst at RBC Capital Markets who has a "buy" rating on Zillow. "And now there's this pivot into this other category which has balance sheet risk and it has much lower margins and is in an uncertain housing environment," Mahaney said on CNBC's Squawk on the Street.

In May 2017, Zillow announced the launch of Instant Offers, which enables home sellers in the Las Vegas and Orlando test markets to get cash offers from potential investors on Zillow's platform. The company said homeowners prefer the process, and that most of them who requested an Instant Offer ended up selling their home with an agent.

"Home sellers welcome a hassle-free experience selling your home without decluttering your garage or taking the kids out of the house," Rascoff said.

Rascoff said the company will take on collateralized debt to purchase the homes, and hopes to have between 300 and 1,000 homes held for sale by year's end. He called the move "industry friendly," benefiting buyers, investors and agents. He also said it could help stimulate the real estate market and open up new inventory for prospective buyers.

"There are people that are basically stuck in their home that would love to go buy another home, but can't sell," Rascoff said. "This could provide the ability to unstick people from their homes."

Mahaney said that it will help Zillow test how much the real estate market is turning.

"This is an interesting experiment on the company's part," Mahaney said. "They've reached the point of scale with both real estate agents and with consumers. There are data points in the market that suggest this way of buying and selling homes is really starting to gain traction."

Too big to fail comes to mind here! Lol!

Just when you think they can't muddy the waters anymore. I actually hope they do that here, because they'll lose their a$$!!

They have whole developments comp'd at 50% of actual market value. Good! Let them scarfs them up and sit on them forever.

Get ready folks, the fallout from this could be huge!!

It's always been my opinion that Zillow's goal is to either replace agents or control them by yanking MLS away from the National Realtor Assoc. And lucky for us, through NAR's stupidity, they're helping Zillow destroy the real estate industry by selling them MLS data. Glad my National Assoc of Realtors dues are going towards a good purpose.

Some day, agents will be working for Zillow.

Looks like Zillow will have a experienced investor.

LOTF: There are limitations as to what NAR can do.

For starters NAR signed a 10 year decree (2008 ) with the DOJ to curtail their anti-competitive practice of controlling the pricing and strong arming new startups trying to force them out of business.

NAR's attempt to limit Zillow's access to listings would be an anti-trust violation. They have tried to limit Zillow over the years but Zillow has managed to successfully push back in court.

And the local associations are not making it any easier to fend off the Zillow model by trying to defend their turf rather than create a national MLS database. If Zillow has any credence it is their ability to provide national data albeit rarely accurate.

If all Realtors stop marketing their listings on Zillow that would be a huge hit. But I for one cannot afford to do that. The MOST successful placement for rentals and MLS listings is Zillow especially if your target market is under 40.

LOTF: I didn't see any specific reference to price range but I have to believe it will be high. They are getting outside investors to fund this little hat trick and no doubt the investors are looking for strong returns.

There are a number of savvy RE pundits who think this could topple Zillow. Overbearing pressure to sell flips while losing a lot of their realtor subscriptions for leads.

TRYAN: