Zillow is here. As of two days ago they’ve officially entered the market in Sacramento and they have big plans to expand to other territories too. Let’s talk about this. Here’s what’s swirling through my mind. Anything to add?
Corporate flipper: Zillow is basically going to be flipping homes. Their website doesn’t use this language because “flipping” has a negative connotation sometimes. But they’ll be buying below market value, doing repairs as needed, and then selling higher. If it looks like a duck, quacks like a duck…
Narrow focus: Like many tech companies we’re going to see Zillow with a buy list. I’ve yet to see something published, but they’ll likely focus on conforming homes in a specific price range rather than unique or high-priced homes that might be more difficult to sell. This reminds us of Blackstone from 2012 and 2013 as they had specific standards for what they were looking to purchase. On a side note, if you work in real estate and you’re worried about the invasion of tech companies, then diversify into places and price ranges where iBuyer models aren’t going.
There is a place for tech: This may be an unpopular opinion and I may have a few people want to fight me, but there is a place for big tech companies in real estate. This doesn’t mean I’m excited about Zillow and Opendoor, but the world has changed and speaking objectively there are other models beyond the traditional model that will appeal to certain buyers and sellers.
Trust & getting a pass: Consumers tend to trust anything that’s online, so there’s already a high degree of trust with a brand like Zillow, and they’re now here to capitalize off of it. It’s as if they get a pass though because they’re not real estate agents or flippers (and they’re trying hard not to be seen that way). But let’s remember the obvious. They are here to work the system to their advantage and make money off consumers.
Tech is the minority: Tech companies are getting a ton of press, but these brands are the minority in the market right now by a long shot. For instance, Opendoor has 70 listings in the Sacramento region. That’s impressive for a start-up, but at the same time it’s only 1.4% of all listings. My guess is Zillow will be aiming to represent 2-3% of the market this year in terms of sales volume. Again, this is impressive, but let’s remember the vast bulk of sales in coming time are going to be sold traditionally.
The irony of the Zestimate: Zillow won’t be using their Zestimate as a basis for making offers. I get it, but I also find it ironic since they’ve built their brand around the legitimacy of the Zestimate.
Affordability: The unfortunate thing here about big corporations entering local real estate is it doesn’t help affordability. I’m not saying tech companies are going to cause prices to rise, but when the focus is on flipping homes, this won’t help keep prices lower.
Service fee vs commission: Lots of tech companies say stuff like, “Hey, we don’t charge commissions like real estate agents,” but this is disingenuous because there is a “service fee” that is basically the same amount or even more than we find in a typical real estate transaction.
The narrative of convenience & profit: Like many tech firms, Zillow is preaching the idea of convenience rather than profit. Their goal is to make escrows easier and smooth rather than helping a seller net the most money. If you listen carefully, few of these companies are saying sellers will actually make more because it’s simply not true in most cases. Remember, these corporate real estate machines have to buy low in order to make a profit. They’ll also be asking for credits for repairs, which makes sellers net even less.
Doing math: I strongly recommend for consumers to do the math when it comes to selling to a tech company vs selling on the open market. You’ll likely yield more profit on the open market if money is your concern.
Data issues: The data geek in me is thinking about numbers. I’m worried about properties being listed off MLS and data being watered down because there are missing sales. The good news here is I’m told homes bought by Zillow are going to be listed for sale on MLS (fingers crossed this happens). By the way, Zillow is going to be using a local brokerage for their acquisitions and sales.
Small investors: Corporate flippers coming to the market will make it more difficult for small investors because there’s an extra layer of competition now.
The price cycle: We are closer to the top of a price cycle, so I find it ironic to see tech brands jumping into the game. My guess is it’s much easier to find success in an up market than a down one. We’ll see how it pans out.
Other: What else? Please comment below.
Closing thoughts for real estate friends: It’s not easy when change happens and I know lots of people are worried about the future of real estate because of what we’re seeing right now. If I could offer any advice though, I’d say to accept the reality that tech companies are going to be a part of the real estate scene. For now it looks like the vast bulk of homes are going to be sold traditionally though, so I recommend focusing your time and energy on the larger portion of the population that won’t be working with these tech brands. Most of all, prove your worth. Why should someone hire you instead of a tech firm? What is your value proposition in a changing market? Prove it with uncommon service, deep knowledge, and results.
I hope this was interesting or helpful.
MY COMSTOCK’S ARTICLE: I wrote a piece in Comstock’s magazine this month on the invasion of tech companies in real estate. I can’t believe it happened to be published on the same day Zillow made their big announcement.
Questions: What stands out to you most above? What are your thoughts about tech companies entering real estate? I’d love to hear your take.
If you liked this post, subscribe by email (or RSS). Thanks for being here.
Kind of like the scam by homeadvisors, carvana and others. The public is unaware and I have not seen any push back by NAR or others. I guess we could call it the price of convenience, the public appears to be getting the short end of the stick from what I have seen so far.
Thanks Mark. The troubling thing in my mind is that tech companies seem to get a pass. The public tends to place strong trust in technology and certain online websites, so it’s a perfect storm for certain companies to swoop into the market because they already have the attention and trust of the public. It would be wise for the public to realize these big brands have one mission only. They want to make money off you. I think that gets lost a bit in all the excitement about a new model and the cute jingles we hear on the radio about being so convenient.
You have perfectly expressed my sentiments. To paraphrase Grace Slick of the Jefferson Airplane: I do not mind getting screwed over so much if I only got to enjoy it every once in a while. Perhaps when the attorneys catch on. Says more about current society than anything.
Carvana is a scam? I have heard of a few people having a few issues, but I bought my car there and it was a far superior experience to the ‘stealer’ship. Perhaps I honestly don’t know something about it that I should. Seriously, I am not being argumentative, just curious as to what about it is a scam? Sorry to go off topic.
It’s all good. This was mentioned, so it’s good for conversation. Thanks. I’ve never used that service before.
Interesting post. I suspect NAR is not commenting in public about the ibuyer model because of liability risk.
What happens to the zestimate for a property getting a zoffer? Does the zestimate reset to the zoffer price? Will the zestimate reflect how low the zoffer is? Who will be the first to sue Zillow for conflict of interest?
Thanks Joe. Great questions.
On a related note there may be an anti-trust or ethical element here we have to consider. Zillow is not a brokerage, but some of the iBuyer platforms are, so NAR or other organizations cannot speak against a particular broker or advocate for the use of only some because this could become an anti-trust issue and lead to lawsuits. I know for certain Opendoor belongs to our local MLS and they are a brokerage here, so it wouldn’t be prudent to speak out against them. Could it be an ethics violation to speak ill of some too? These are viable questions to consider and I wonder if that’s part of the silence. It’s very frustrating for the real estate community to watch, but I wonder if this is part of it?? Anyone wish to comment on that?
I suspect NAR has divided loyalty. Many have been paying Zillow for leads for years. Look what happened to Las Vegas mls when they tried to buck Zillow.
Yeah, agents feed Zillow money and Zillow feeds agents leads. This is a very powerful brand. Frankly consumers trust Zillow. There are no website that compete well with it too when easily searching for properties online. There are some big sites, but they fall short in design. This has been a huge missed opportunity.
Hi Ryan. Zillow showed up in a big way here in Denver earlier this year and their presence is real. Although there is generally a 10 – 12% spread between what they offer and “market” value, they have been very aggressive about going direct to the consumer and they are intent on establishing market share. Their rehab work has been lacking at best and sorry at worst. Most of what they’re buying in our market is neglected rentals and hoarder specials… which then get apartment-grade carpet and (maybe) eggshell paint. The yards are usually dead and when they list them, their pricing is off. This feels like a big tech company burning through money for market share (think Home Grocer, Webvan and Pets.com)… but you can’t deny they are serious about the land grab. Will be interesting to see what their model looks like in Sac.
Thanks for the perspective Dale. That sounds about what I’d expect to see. Getting directly to the consumer is the name of the game. We’re living in interesting times. I’m not sure it’s good or healthy for the housing market to have big corporations play the market like this. We’ll see how it pans out.
Any idea how much volume they’ve purchased? I wondered if anyone has published stats. This is what I’ll be watching closely. I want to understand what percentage of sales volume a company like Zillow has actually sold on the open market.
Ryan, Zillow is partnering with a company called Atlas Real Estate Group here in Denver as their exclusive marketing partner. Atlas has 238 active listings right now, virtually all Zillow homes. 108 others are under contract, so they have 346 total listings. There are just over 10,000 homes on the market in the Denver MLS, so that’s almost 2.5% of the active inventory. That’s not insignificant, given Zillow launched here less than 12 months ago. The ultimate long-term goal for them, in my opinion, is to become the “one stop shop” and universal marketplace for listing, buying and financing homes. They won’t kill the MLS, but you would be foolish to ignore what they are doing.
Thanks Dale. I really appreciate it. Yeah, I agree with you. They are clearly trying to position themselves to the one-stop shop. This is exactly why they bought a mortgage business last year. This lines up with what I think they’re going to do here in the first year. It is definitely significant for one office to get that much of the market. In that regard it reminds me of Blackstone.
Dude, I think you are my twin separated at birth. You are so spot on with what I have been telling people and training agents. I ibuyer model is much more attractive in a rising market and I suspect will struggle in a declining market. Most of the big real estate companies are offering some form of this model just to say that they offer it too, but it won’t be a significant amount of their total sales. The thing that you really nailed on the head is that consumers will do it for convenience. To that I say that I would buy a gallon of milk at the 7-11 and pay a premium, but I certainly would not do all of my grocery shopping there. Paying a premium price for arguably your largest asset is foolish. Zillow has created a great brand and gained consumer’s trust but it all comes down to numbers and I believe that when reasonable people look at the cost of the sale they will continue working with proven real estate professionals and appreciate the value that we bring. Remember Value=Quality/Price
Kevin, you are my brother from another mother. Really solid comment here. I think your 7-11 analogy nails it perfectly too. I strongly agree with you about doing the math.
Sad thing-most people dont do math, they read on the net or listen to a (sometimes) uninformed ‘expert”(realtor/broker/neighbor) and just go with the paint color and not trashed carpet.
Even in the above 200k market-people are making emotional and sometimes lazy decisions.
Ive bought a fair share of rentals and primary homes in the last few years and sometimes the emotion trips up the math and I shine on the math cause the emotion got it.
People pay GOBS of money for the ‘privilege’ of laziness.
Self-checkout anyone? Did you get a discount or cheaper food prices for doing the labor yourself?
Thank you Mark. I think your comment perfectly underscores the power of convenience. It’s easy to underestimate this because the numbers don’t work. But it’s not just about math to consumers. We live in a society where Amazon will deliver crap I buy to my door on the same day I order it. I can also have nearly any restaurant come to my door with one click on my phone. I can have a driver show up in the next ten minutes to my house to take me somewhere by using a phone app.
If anything I think the “uberization” of housing is going to help propel some changes in the real estate community as we know it now. It’s going to force better service and maybe tweaking things here and there to be more efficient.
The big irony still is real estate is complicated because people are involved. It’s not always smooth with tech firms too. I know that for a fact. There are so many emotions. Value is not always easy. There are sometimes crazy situations and repairs needed. In short, despite technology real estate isn’t quite as easy as the click of a button.
Ryan, this week I noticed a Zillow listing, so I searched the sales history, they bought it recently.
The comments were that the home has been painted and spiffed up.
There was less than a 10% spread between what they paid, and the new asking price. Not enough to make a profit, in my opinion.
I searched seven counties in So. Cal. and found that they had started buying this spring. One county had over 100 homes purchased in the name of the one LLC I identified in my search.
The margins do look pretty thin. But we have to consider that the purchase price doesn’t often represent what the seller actually got. Not only is there a near 7% “service fee” within that price, but there are credits for paint, carpet, etc… Thus in many cases an iBuyer company actually got the property for much less when you consider the credits they are getting from the seller within the final price. But other times I’ll concede it’s surprising to see how high the price is. Part of me wonders if there’s incentive to keep the margin tighter at first as momentum builds. A good story of a high sale can spread quickly…
Ryan,
Two points additional points that I wrote on my blog recently concerning Zillow and ibuyers in general.
1. If the seller rejects Zillow’s offer they will shoot that lead to a Premier Agent as this is now a hot lead–seller wants to sell. If the Premier Agent closes that seller, Zillow receives a 35% referral fee. If they never buy a single home they still make money. Hands in someones pocket.
2. Once penetration is achieved, would they not re-appraise all the homes surrounding purchased homes lower?
Thanks Vick. What a design for a system. That’s incredible to hear. So this is how Zillow can continue keep agents on their site too. It’s hard to say what they’re going to do with their Zestimates and algorithm. It’s all a big game really. The Zestimate tends to chase the list price. What will they do hear? It’ll be interesting to watch. There could certainly be a difference too in what they say they’re going to do and what they do. We’ll see.
For any onlookers, this is how Zillow’s accuracy rate works. It’s based on the most recent Zestimate before a property closes compared to the final sales price. So if a home listed at $350,000 and the price was reduce to $300,000 before the property sold at $300,000, Zillow would base their accuracy rate on the most recent list price instead of the original list price. So in this case we would see the property sold exactly for what the Zestimate was compared to the most recent list price. In this case Zillow could claim 100% accuracy. But the bigger truth here is the property was overpriced by $50,000. If wanted to really see accuracy, we’d have to say the property was overpriced by 14%. Does the public really care about this? I doubt it. But it’s how it works and it’s a good reminder of how we can use numbers to tell whatever story we want…
On a side note, Zillow is about to gain access to even more data as they enter new markets. They have designed a system and they are working it in their favor.
Ryan,
Is that not the same thing Metrolist does? The use of “last listing price” instead of “Original list price” to calculate % to sales price, seems to me, a misrepresentation of the facts.
A CMA does default to this unfortunately. Yes. And I think it’s a shame and it really doesn’t help anyone understand the market. In my MLS (not sure if you’re local) we have access to trends and there is both the sales to list price ratio and the sales to original list price ratio. The ratio that really matters here is the original list price. This is something that would be easy to correct and I hope it is done some day. Is anyone listening?
But what Zillow is doing here is building brand credibility and trying to take over an industry. So I’d say the way they are using it is different. But point taken. If I made the rules it would not be like this.
The “Flipper” ship has sailed in northern California. I don’t see how their business model can make an impact here.
There may be a place for them in the market but I doubt they will ever dominate. CARMAX didn’t put all the other used car dealers out of business.
CarMax is a great description of the ibuyer model.
Nice Tom. I appreciate the word picture.
Here’s an article talking about Zillow buying houses in Arizona and how it is working – https://www.bloomberg.com/news/features/2019-02-14/zillow-wants-to-flip-your-house
Thanks Kathryn. I know Opendoor has really found success in parts of Arizona from what a friend has told me. This article confirms it. It’s amazing to see three tech companies have a 4.5% share of the market. This is brand new territory. We’re going to have to see how this all plays out. Do you have a personal take here? I’d love to hear any observations you’re making (good and bad). No pressure.
Interesting post and conversation thread. Thank you Ryan.
Thanks Gary. I’m loving this thread. Keep it going everyone. Share your take. It’s okay if you disagree too. Just be nice. That’s the rule here.
Opendoor’s name was all over the price reduction list on MLS today. I counted 26 properties with price reductions just from Opendoor. One example I looked at was just lowered to $525k. Opendoor purchased it way back in April for $568k… (not accounting for their fees)
$525k sale – 2.5% comm to selling agent, escrow, transfer taxes, etc – maybe they are left netting $508k before accounting for the carry costs April-close.
Thanks Matt. Keep me posted if you continue to see anything interesting.
I see consolidation across the industry in the next few years. sadly Mom and Pops will be lost..
Yeah, consolidation happens when a market changes. We’ve certainly been seeing that in the lending industry. Models don’t stay the same, so being ready to adapt is paramount.
Thanks for your insightful post! I agree with you that there is a place for these companies in the market. I find it ironic that some will complain about how much they have to pay Realtors and appraisers for our services, but are in reality willing to pay even more to some if these tech companies for an”easier” experience. But, that’s what’s happening. Things are always changing. These things rarely upset me. There are no doubt new opportunities for us appraisers if we look. Fascinating times. I appreciate your point that it’s relatively easy to start up this type of business model in an up market. It will be interesting to see if that changes in a down market. Thanks for a great post my friend!
Thank you Jamie. Yes, that is ironic indeed.
I have heard from friends that the San Francisco Bay area market is almost totally consolidated already with Compass having having bought so many companies.
Interesting. Thanks Kathryn.
Great post, Ryan. One point you made that concerns me is the effect on small investors. I guess it’s like what happened to mom and pop stores when Wal-Mart moves to a town. I guess they will have to re-think their strategies. Since Zillow has more money and they are probably going to do more volume they may be able to work off of smaller margins. I will be interesting to see how this plays out.
Thanks Tom. Yes, this is definitely something to watch. It means small investors have to keep finding ways to connect with locals and pick up properties. There is simply more competition now. The good thing for them is not everyone is going to want to sell to big corporations. I found this sentiment in my market back when the investment fund Blackstone was buying so much. There were definitely sellers saying, “I’m not going to sell to a fund.” I suspect we’ll have a similar dynamic with big tech companies. We’ll see though.
Great article Ryan. I heard from several people using Open Door that they charge 7% service fee and all repairs, even small ones, have to be deducted from the seller. I was also told that the “repair list” is put on the seller right before closing to strong-arm them into further lowering the net price.
I think the profit margins are too small for Open Door to survive, but maybe they’re trying the Uber model of taking a loss initially and then upping the prices when they have more market share. I think this will be a game changer and this model is here to stay.
Thanks Richard. Yeah, that’s true about the service fee. I’m not certain it’s always 7%, but I’m guessing it’s never less. A Realtor friend emailed me a closing statement today for Opendoor and they took 8.5% which included a minor credit for repairs within that percentage (only a $2,000 credit in this case). I don’t know when the repairs are mentioned and negotiated with the seller. I can’t speak much to that now. Let’s keep watching though. Thanks for your take.
It’s no surprise these companies are seeing a huge opportunity given legacy commission structures that facilitated skimming 6% of the proceeds on a real estate transaction for what is now little more than secretarial work and significantly higher property values.
Gone are the days where agents had exclusive access to the MLS, had to put in lots of legwork vetting properties, always network and keep an eye on what’s new on the market, and drove clients around all day for showings.
The internet has really changed the dynamic of how people shop and do their due diligence on a property, and if we’re honest, most “realtors” really have little value to add to the transaction.
Thanks for your take Laurence. The irony of course is these tech companies are actually charging consumers more money than the traditional model and they’re also tending to pay less for the homes. Agreed that technology is changing things and because of that the real estate community as a whole needs to articulate its value proposition to the market. I would personally say the value an agent brings isn’t so much in finding the property, but in bring advice, negotiation skills, and being able to close deals. There are still lots of moving parts. Technology promises to make things easy and seamless, but dealing with buyers and sellers and all the issues that make deals move or stop isn’t always so easy. The market gets to decide. We’ll see what happens.