Extreme Makeover: Rich Barton Has A $700 Million Stake In Zillow And Plans To Turn It Into A Home-Flipping Machine

^Every night for five months before the launch of Zillow’s website in February 2006, employees gathered their Dell desktops on Ping-Pong tables, connected them to harness their combined processing power, and strung together extension cords to get them all running. To avoid overloading the circuits, they unplugged the office refrigerator and banned Christmas lights. Then, while most of them slept, this jury-rigged supercomputer analyzed a decade of property records and American housing market data in order to spit out price estimates for 43 million homes.

Rich Barton had created Zillow in December 2004 because he believed technology would revolutionize real estate. Nearly a year into the venture, his efforts to sell homes via digital auction were going nowhere and the four cofounders he had drawn from his last company, Expedia, were nearing the point when they’d need to return to more stable employment.

As the founders tell it, Zillow’s future changed dramatically during a weekend email exchange among colleagues. One participant noted that Google Maps’ satellite view, launched just months earlier, gave a unique, bird’s-eye view of every neighborhood in America. Another wondered if they could put a price on every rooftop they saw. And so the Ping-Pong table project and the Zestimate were born.

The day it went live, Zillow crashed. The founders gathered in the technology chief’s office, where the six-foot-tall Barton recalls curling up in a ball on the couch and begging someone to “make the pain stop.” It did. According to Zillow, last year an average of 157 million people visited its sites (including Trulia, StreetEasy and HotPads) each month to view listings and Zestimates on more than 100 million properties. In May, the Web traffic tracker Comscore ranked Zillow Group 24th in total visitors, right below eBay and above LinkedIn. All those visitors allowed Zillow to book $1.3 billion in revenue in 2018, mostly from ads bought by real estate agents.

Today Zillow has a $9.5 billion market cap and Barton’s stake (the largest held by any individual) is worth $700 million. But not since 2006 has Zillow’s future been less certain. In February, Barton took back the CEO’s job—nine years after having ceded it to cofounder Spencer Rascoff, who continues to serve on the board.

Now back in command, Barton puts on shoes (he generally prefers to go barefoot) to greet a reporter. He walks carefully on the stepping stones that lead through the shallow pool of water that sits between the cavernous living room where he welcomes guests and his 40th-floor office overlooking Seattle’s Elliot Bay and Mount Ranier. He confides that he’s been strumming his guitar “to calm my monkey mind.’’ Yet he admits to no doubts about the new direction in which he’s taking his creation. “I sleep,” says the 52-year-old with a grin.

In April 2018, the company entered the fledgling on-demand home buying market (often referred to as ibuying) with a service called Zillow Offers. Prospective sellers in 11 markets (and growing) can go to the Zillow listing for their own home and ask for an offer. Within two days they’ll be sent a price derived from the Zestimate and other algorithms. Two local experts also provide input on each house, and if the seller likes the initial offer, a Zillow employee comes to inspect the property. (If a home is in poor condition the offer may be withdrawn or lowered.)   

A seller who takes Zillow’s offer gets the price it has set, less an average of 7%—Zillow keeps that 7% as its fee. Yes, that’s more than the standard 6% real estate agent’s commission, but the homeowner doesn’t have to lay out any money for repairs or to spiff up the house for sale, and he can get his money in as little as seven days after accepting an offer. Bottom line: A seller will often get a bit less selling to Zillow than selling the conventional way, but that, the company argues, is a small price to pay for speed and certainty.

In a sense, ibuying is the realization of Barton’s conceit from 14 years ago: that technology and tech entrepreneurs would fundamentally change real estate transactions. After all, while Zillow has changed how buyers get information about homes and how real estate agents find clients, the old-fashioned agent is still at the heart of most home sales.

“Genius is not always transferable. The people who have created Zillow are very well known for creating internet platform companies, but flipping homes is not an internet platform company.”

“Between virtual reality, augmented reality, discount brokerages, Redfin, there have been so many things that were supposed to disrupt real estate that it is easy to get jaded,” says Chris Smith, cofounder of Curaytor, a real estate marketing agency. “To sell your home in one day, with one click with zero showings, it is absolutely an attractive idea,’’ he concedes.

Once Zillow acquires a property, it makes modest repairs and then tries to resell the home—its goal is within 90 days. Think of it as high-tech home flipping, but without the fantastical profit margins trumpeted on Home and Garden Television. Opendoor launched Silicon Valley’s first serious foray into the heart of the real estate transaction in 2014 with a model similar to the one Zillow is betting on. Other companies followed suit. Opendoor, the market leader, bought 11,000 homes last year.

While its offers may be a bit on the low side, Zillow has actually had more success buying homes than reselling them. In the program’s first nine months in 2018, Zillow purchased 686 homes and sold just 177 of them, at an average price of $295,800—bringing in $52.4 million, with a pretax loss of $62.4 million. (Overall Zillow lost $151 million pretax last year.) In the first quarter of 2019, Zillow purchased 898 homes and sold 414. Home revenue for the quarter was $128.5 million, with a pretax loss of $45.2 million. Zillow ended the quarter with 993 homes in inventory, worth approximately $325 million.

Despite that sluggish start, Zillow boldly predicts that in three to five years it will be buying 5,000 homes a month—1% of all real estate transactions—and booking home sale revenue of $20 billion a year, compared with $2 billion or so from selling real estate ads on line. But most of the profit from the new business, as Zillow execs tell it, won’t come from marking up houses. “It is more important to price right when you buy the home than at the back end,” explains chief financial officer Allen Parker, who joined Zillow in 2018 after 13 years at Amazon. Instead, Zillow’s plan is to make money on auxiliary services, including title insurance and, most important, mortgages. If it’s selling 5,000 houses a month, it expects to finance loans on 1,650 of them.

It’s an ambitious plan, and so far Wall Street doesn’t seem totally convinced. At the end of June, as the S&P 500 was hitting new all-time highs, Zillow stock was trading at around $46, down 30% from its June 2018 high of $65, though up from its November 2018 low of $26. The lagging price reflects skepticism that a company built as an information and ad sales business has the skill set to fix and flip homes.

“Genius is not always transferable. The people who have created Zillow are very well known for creating internet platform companies, but flipping homes is not an internet platform company,” says Neuberger Berman portfolio manager Steve Eisman, who famously shorted the housing market ahead of the crash and who is now short Zillow. “A house is not a book. It is expensive to hold a house,’’ he says, adding that holding an empty house involves everything from getting the lawn mowed to making sure neighborhood kids aren’t sneaking in to smoke pot. Then, of course, you’ve got to sell it. 

Skeptics also question Zillow’s decision to finance a large portion of its home purchases with a $500 million floating rate line of credit, since interest payments will eat into already razor-thin margins and the company is exposed to additional risk should rates rise. Further spooking investors: Zillow’s Premier Agent (advertising) program, which in 2018 accounted for two thirds of revenue, went through a problematic update in the third quarter of 2018, leading to higher-than-average ad churn.  

Barton argues scale will ultimately keep Zillow’s home fix-up expenses down. To demonstrate his confidence, in November 2018, when the stock was hurting, he spent $19 million buying more shares. From the stock market’s point of view, Barton says, Zillow is “a modestly priced midcap in the penalty box as a public company because people are still trying to figure out what we are.” But he regards it as a startup—one that just happens to be 14 years old. “I decided the Zillow Group was a venture capital investment,” says Barton, who spent 13 years as a partner at Benchmark Capital and has been on the board of Netflix since 2002.

Say this for Barton: Given his impressive track record, he comes by his cockiness honestly. After earning a degree in industrial economics and engineering at Stanford, he moved to Boston for a sought-after consulting job. He hated it, so when a friend recruited him to join Microsoft in Washington in 1991, he jumped.

“Much of our original dream,” Barton says, “is just now becoming possible.”

Beantown wasn’t a total waste; he met his wife, Sarah, at an Irish pub, where he offered to help her study for a premed physics exam. It was Sarah’s career that put Barton on a path that would lead to Expedia and, eventually, Zillow. Unsure whether Sarah, then in medical school, would get into a residency program in Seattle, he transferred from the department in charge of MS-DOS to the team overseeing Encarta, a $400 CD-ROM encyclopedia. (Since Microsoft’s was essentially the only operating system around, he figured other skills would be necessary if he needed to switch companies.)

But Sarah landed at a hospital in Seattle, and Barton stayed at Microsoft. In 1994, at age 27, Barton was tasked with building an Encarta equivalent for travel booking. By this point, the team was thinking about how software could change entire industries rather than just spread information. “We didn’t really know what the future would look like, but we knew the tools that were going to be used to build the future,” he recalls.

Barton persuaded Steve Ballmer to skip CD-ROMs and run Expedia as a website, which quickly took off. In 1999 Ballmer, by then Microsoft’s president, agreed to spin out Expedia, whose shares rose 282% on the first day of trading. Barton missed the excitement because his first child was born the same day. Just after 9/11, media billionaire Barry Diller bought out Microsoft’s 75% stake in Expedia and two years later acquired the portion he didn’t already own, installing Dara Khosrowshahi, now at Uber, as CEO.

The deposed and by now wealthy Barton went with his family to live in Florence for a year. After that sabbatical, he started looking for a new industry to change and a place to invest his Expedia earnings. He landed on housing, after finding the process of buying a first home excruciating. Expedia veterans Lloyd Frink (now Zillow’s executive chairman), David Beitel (chief technology officer), Kristin Acker (senior vice president of product) and Rascoff signed on as cofounders.

Inspired in part by the success of eBay, the team thought they could solicit bids for a newly built home over the phone. In theory an auction could improve the process of buying or selling a home by making pricing transparent and the time frame of the sale definite. “The consumer wasn’t ready to do things digitally,” Barton acknowledges now. “They still wanted to sign physical papers. They didn’t trust digital signatures. There were no smartphones.”

By the time Zillow’s site launched, it had raised $32 million (out of an eventual $87 million in venture capital) from big-name firms like Benchmark and Technology Crossover Ventures. “If there is an incredible entrepreneur out there and they have a business idea, you say yes,” says Benchmark General Partner Bill Gurley. “We were excited about the real estate avenue, but if they had wanted to do something else, I am sure we would have gotten excited about that, too.” (Gurley still owns all the Zillow shares he got through Benchmark’s investment.)

Despite the site’s swift growth, Barton was unexcited about simply valuing homes and not too keen on running another public company. So in 2010 he handed the CEO title to Rascoff. Barton stayed involved as executive chairman but spent much of his time making elaborate breakfasts for his three kids, snowboarding, and investing in or starting other companies. His most notable venture outside of Zillow was the job review site Glassdoor, which the Japanese HR company Recruit Holdings acquired last year for $1.2 billion.

By many metrics, Zillow thrived under Rascoff, who saw the company through its 2011 IPO and 15 acquisitions. When he took over, revenue was just $30 million and Zillow had just 200 employees—it’s up to 4,336 today. But the company has never been profitable, and cracks started to show as early as 2017 when a group of home sellers in Chicago filed a lawsuit claiming, among other things, that Zillow ignored or refused to correct or delete “Zestimates that homeowners challenge as inaccurate or unfounded.” The case was eventually dismissed, but not before it got a lot of publicity. Also in 2017, Zillow said it would award $1 million to the person or team that could most improve the accuracy of Zestimates. The winning team, announced in January 2019, improved the accuracy by approximately 13%.

In February, with the stock still lagging, Barton took back the company. “We created Zillow Group in 2005 to make the real estate shopping and purchase process easier,” Barton said in a statement announcing the management shuffle. “Much of our original dream is just now becoming possible.” In a letter to employees, Rascoff added: “The world is finally ready for the seamless real estate transaction.”

Ten weeks later, Barton is musing about how Netflix, Grubhub and Uber have created a nation full of “one-click consumers” and bemoaning that real estate has been left behind. Sure, the old Zillow dragged home buying out of the dark and into the information age. But it didn’t change the home buying transaction. There is an undertone of regret that he couldn’t take Zillow farther faster, but also the zeal of someone who has been given a second chance.

“We just lit up the marketplace. People had been in the dark,” Barton says. “We showed them what was available, and we got them all junked up and fantasizing about what to buy. For a subset of them we’re a practical tool and helping them do that. Generally speaking, we were getting them to the edge of a chasm, which is this transaction, and just maybe lighting up the other side, but we really weren’t getting them there.”

This post first appeared on Forbes.com. To see the original, click here.