ZipRealty Is Betting Its IPO Will Be a Hot Property on Wall Street
ZipRealty Inc. is looking to bring down the house this week, hoping the way it helps people buy and sell homes -- online -- will lure investors to its initial public stock offering.
The company, based in Emeryville, Calif., has been around only since 1999. When they filed their registration papers for the IPO, executives noted that their business model was “relatively unproven.” They cited other risk factors too, including the possibility that rising interest rates could lead to a downturn in home sales and a plan by the National Assn. of Realtors to restrict property listings on the Internet.
But ZipRealty sees promise, and is betting investors will, in the way that people are looking for homes these days: More than 70% use the Internet at some point in their search. Industry experts agree that it’s only a matter of time before other aspects of the home buying and selling process move online.
“Generation Xers especially don’t want to deal with agents until all their homework is done,” said Steve Murray, an industry consultant and editor of the newsletter Real Trends. “And they are increasingly price-sensitive.”
ZipRealty executives, Murray said, seemed to figure that out early on. “The company has gotten to where it is simply because it beat everybody else online.”
Buyers and sellers hook up with ZipRealty by registering on its website. They then get direct access to the vaunted Multiple Listing Service, or MLS, the primary stock in trade of real estate agents.
The company does other things differently. It offers cash rebates to buyers -- the money is taken out of ZipRealty’s commission -- and gives sellers discounts of up to a quarter of the traditional 6% agents fee. And ZipRealty agents are full-time employees who work for commission and get benefits; most traditional real estate agents are independent contractors.
Company executives see their Internet-based model doing for real estate transactions what firms like Expedia Inc. and E-Trade Group Inc. did for travel and stock trading: make the process more efficient and less costly.
Online real estate merchants account for only a tiny fraction of the $1.3-trillion in residential properties sold annually in the U.S. ZipRealty, for example, has closed only 16,100 transactions with a total value of about $5 billion since its inception.
In Southern California, ZipRealty “doesn’t have much of a presence,” said Pat Veling, president of Real Data Strategies, a Brea-based industry consultant. The online brokerage currently lists only about 50 properties in the region, where more than 40,000 are listed for sale.
“It’s not even in the top 50” of Southland realty brokerages, Veling said.
ZipRealty was founded during the height of the dot-com era by UC Berkeley business school grads Scott Kucirek and Juan Mini. The pair received financial backing from a handful of Silicon Valley venture capital firms, most notably Benchmark Capital Management, which was a key financier of Shopping.com, which went public last month and posted the year’s biggest first-day IPO gain.
In 2001, ZipRealty brought in hospitality industry executive Eric Danziger as chief executive. He helped focus the company on customer service and expanded into new markets. Today, in addition to California, ZipRealty operates in eight metropolitan areas: Atlanta, Baltimore, Boston, Chicago, Dallas/Fort Worth, Phoenix, Seattle and Washington, D.C., and its suburbs. The company has 919 employees, including 782 real estate agents.
ZipRealty’s revenue is generated mostly from brokerage commissions, which in 2003 totaled $33.8 million, nearly double that of 2002. Through the first nine months of this year, the company posted revenue of $44.7 million. The company is newly profitable, racking up net income of $2.3 million through Sept. 30, after logging annual losses every year since 1999.
Because of the so-called quiet period imposed on companies by the Securities and Exchange Commission before a public stock offering, ZipRealty executives declined to discuss the company and its prospects.
ZipRealty’s revenue growth and profit came during one of the best years in real estate. Existing-home sales are projected to rise 7.3% this year to 6.55 million, compared with 6.1 million in 2003, according to the National Assn. of Realtors. And the trade group said it expected sales to soften a bit in 2005, to 6.3 million.
Beyond shifting economic trends, ZipRealty must also deal with the maneuverings of the Realtors trade group that go to the heart of the firm’s business model: giving customers access to full MLS data. The association plans to implement rules Jan. 1 that would allow real estate brokers to refuse to put their listings on a competitor’s website.
ZipRealty may get some help from the government. The Justice Department is investigating whether the proposed Realtor group rule is anti-competitive, and Rep. Michael G. Oxley (R-Ohio), chairman of the House Financial Services Committee, has called on the Government Accountability Office to review the issue.
From a stock standpoint, ZipRealty’s offering probably couldn’t be coming at a better time. In recent weeks, investors have lapped up a spate of new offerings -- from highfliers Google Inc. and DreamWorks Animation SKG to Southern California technology firms Jamdat Mobile Inc. and Cogent Inc. -- and their appetites seem far from sated.
In the offering that is expected as early as today, ZipRealty is looking to raise at least $44.5 million with the sale of 4.55 million shares of its stock. The company is hoping to price its shares from $10 to $12.
Proceeds from the sale would be used “for general corporate purposes, including working capital” and possibly for acquisitions, the firm said in its SEC filing. Shares would trade on Nasdaq under the ticker ZIPR.
“Given the hunger of IPO investors right now,” ZipRealty’s offering could fetch twice as much as planned, said Tom Taulli, co-founder of CurrentOfferings.com, a Newport Beach-based research firm.
“ZipRealty is doing some good things and it’s growing,” he said. “It’s taking a service industry that’s backwards and systematizing it” by doing away with traditional overhead costs and infrastructure. Besides, Taulli said, “There’s been deregulation of buying stocks and bonds, why not real estate?”
Company officers and directors, some of whom represent the venture capital firms, currently own 88.8% of ZipRealty’s stock but after the IPO would have a 72.1% stake. Benchmark Capital, the largest shareholder with a 31.9% stake, would own 24.7% after the IPO.
The sale is being underwritten by UBS Investment Bank, Deutsche Bank Securities, Thomas Weisel Partners and Pacific Growth Equities. They have the right to purchase up to 682,500 shares of the IPO.
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ZipRealty Inc.
* Headquarters: Emeryville, Calif.
* Founded: 1999
* Number of real estate transactions since inception: 16,100*
* Employees: 919
* 2004 revenue: $44.7 million*
* 2004 net income: $2.3 million*
*As of Sept. 30
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Source: Company filings
