3 Things Zillow CEO Spencer Rascoff Wants You to Know

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Zillow (NASDAQ: Z) (NASDAQ: ZG) CEO Spencer Rascoff cleared up some misconceptions about his company's new homebuying and mortgage origination operations during its second-quarter earnings call. Investors may be underestimating just how large these businesses could become in the years ahead.

Expanding an already huge market opportunity

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Real estate agents spend more than $12 billion on advertising every year. Yet even after years of torrid growth, Zillow accounts for less than 10% of that figure. As the largest online real estate marketplace with 188 million users, Zillow should continue to take share of this multibillion-dollar industry in the years ahead.

Yet although its core business should provide Zillow with many years of steady growth, the company is moving aggressively into even larger markets. During the call, Rascoff noted that housing sales generate $1.8 trillion in transaction value with "tens of billions of market opportunities" in ancillary services. He also highlighted the $1.1 trillion of purchase loans that mortgage lenders underwrite each year, generating "tens of billions of dollars in origination and advertising market opportunities." Zillow's new homebuying and mortgage businesses will allow it to compete -- and I believe win -- in these massive markets.

With its online and mobile expertise, Zillow should be able to provide consumers with simpler and more flexible homebuying, selling, and financing processes than are available via traditional means. In turn, Zillow has an opportunity to establish a stronger relationship with its customers through the entire home life cycle. And with its trusted brand and large audience, Zillow should have plenty of demand for its homebuying and mortgage origination operations.

Early results prove this to be true: Rascoff said that homeowners representing as much as 15% of the value of homes sold in its test markets are requesting offers from Zillow. I expect Zillow to quickly become a powerful force in the homebuying and -selling marketplace.

An $800 million opportunity in mortgages

In addition to the revenue figures quoted above, Zillow expects its new mortgage origination business to help it more quickly sell the homes it buys, thereby further improving the profitability of its Zillow Offers segment. Together, these businesses have the potential to generate over a billion dollars of revenue for Zillow, and perhaps more quickly than many investors currently expect.

Don't call us house flippers

Rascoff doesn't like it when Zillow Offers is referred to as a "flipping business." Instead, he views it more as a fee-based service business, in which Zillow receives a fee for providing sellers with a guaranteed price and closing date for their home. Zillow likens this process to selling homeowners a put option on the value of their house.

Moreover, Zillow thinks this service will be attractive to a far larger base of home sellers than is typically seen with house flippers. And rather than just distressed homes, a relatively small percentage of the overall housing market, Zillow says it could potentially make offers on as much as half of all homes sold in the top 200 real estate markets -- approximately 2.75 million homes annually. In turn, Zillow sees this as a volume-based business, albeit at lower margins than can sometimes be earned via flipping distressed homes.

Better still, when homeowners request offers that Zillow chooses not to bid on, it's passing those leads on to customers of its Premier Agent program, who can then potentially turn them into listings. Zillow has not yet begun to monetize these leads, but it intends to do so in the future, thereby creating another significant revenue stream.

The way its mortgage business complements its homebuying and selling operations highlights the strength of Zillow's ecosystem, in which many of its services reinforce the others. This helps to further strengthen Zillow's brand, while also allowing it to better monetize its massive audience. And it makes Zillow a force to be reckoned with in the multitrillion-dollar real estate industry.

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Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Zillow Group (A shares) and Zillow Group (C shares). The Motley Fool has a disclosure policy.