(Pardon me a moment while I go put on my asbestos suit for the inevitable flames coming my way.)
The Zillow Group Q4/2018 earnings call yesterday was a shocker in many ways. What most people immediately focused on was the change at CEO from Spencer Rascoff to Rich Barton. I gather from social media this morning that the news was met with fairly typical stuff from some in the ranks of individuals who swear to a Code of Ethics. I’m still processing a lot of what I saw and heard, but….
Missing in all of the drama was an incredible piece of data that Zillow released in its Supplemental Financial Tables for Q4.
Unless I’m missing something, or making an incredibly obvious calculation error, it appears that homeowners actually net more money from selling to Zillow than they do by selling with a REALTOR in the open market.
If this is true, then the case I made previously about how iBuyers could come to be the default way that people sell homes is not only proven out, but it’s proven out way before any of the really speculative stuff I wrote about in that post.
Thing is, if you’re a real estate agent, you can relax. You’ll still get paid, no worries. But if you’re a real estate investor? Time to worry.
Let’s get into it.
The following is taken straight from Zillow’s Supplemental Financial Tables, from the tab “Homes Non-GAAP Measure”. I have manipulated the numbers a bit to illustrate the point, but the data all comes from Zillow itself.
|Zillow's Numbers||Per Home|
|Service Fee (7%) to Seller||$18,489||7% of Home Acquisition Cost|
|Actual Sale Price of Home||$274,752|
|Home acquisition costs||264,134|
|Selling costs||13,043||4.75% of Actual Sales Price of Home|
|Total operating costs||288,887|
|Return on homes sold after interest expense||$1,723|
A few things to note here.
First, that 7% service fee to the seller comes from Zillow’s press release. I didn’t make it up.
Second, I’m assuming that the Selling costs line consists of REALTOR commissions (probably 1% to the listing agent and 3% to the buyer agent, which would be completely normal for institutional clients) and 0.75% in closing costs like title and escrow.
Third, holding costs according to Zillow includes “utilities, taxes and maintenance.” This could be important.
Given the above, Zillow paid $264,134 to buy a home that it sold in Q4. That homeowner who accepted Zillow’s offer paid Zillow a 7% Service Fee, which comes to $18,489. Zillow then sold the home for the Actual Sale Price of $274,752 in Q4 of 2018, which gets us the total Homes revenue line of $293,241.
The homeowner who took Zillow’s offer received $264,134 less the $18,489 in Service Fee, which means that her net from the sale was $245,645.
Selling With a REALTOR
If that same homeowner chose not to accept Zillow’s offer, and listed it with a REALTOR instead, then her expected net looks like this:
|Actual Sale Price of Home||274,752|
|REALTOR Commission||16,485||6% of Actual Sale Price of Home|
Some reasoning here is necessary.
- Sale price. There is absolutely no logical reason to think that she would get more in the open market than Zillow would, since both are represented by a REALTOR. Zillow has said from the very inception of Zillow Homes (then Instant Offers) that they, unlike competitors, will use a REALTOR to list and sell the homes in their inventory. I realize someone is going to claim that they would have sold that house for $300K; all I can say is, give Zillow a call, because they sure would like to list their homes with you.
- Renovation and holding costs. Similarly, I see no logical reason to think that an individual would somehow spend less on renovation and holding costs than Zillow would. In fact, an individual’s holding cost might be higher than Zillow’s, since Zillow doesn’t have to pay a mortgage every month; its interest costs are calculated into the unit economics above. I’m willing to bet good money that Zillow gets a better interest rate on its corporate bonds and credit facilities than an individual homeowner would on a mortgage.
- REALTOR commissions at 6%: I know some would argue that prevailing commissions are lower, but I’ve actually looked for information on what the average commission in Phoenix (the ground zero of iBuyer activity) is… and I’m finding 6%. If you know differently, please let me know.
Yeah, that’s right. Her expected net selling with a REALTOR is $244,496 vs. $245,645 selling to Zillow.
She makes less money, with more effort, more uncertainty, and more work, by listing her home with a REALTOR and going into the open market.
[Note that even if we change the REALTOR commission to 5%, her net only goes to $247,243. So she went through the dain bramage of the home selling experience for an additional $1,598? I’ll gladly pay that to avoid the hassle and the delay and the uncertainty of selling my home on the open market. YMMV.]
If that’s not a gobsmacker, a gamechanger, a paradigm shift, insert-other-hyperbolic-buzzword-here, then I don’t know what is.
Now Layer On Mortgage and Title and…
In my previous post where I made the case for iBuyer becoming the default, I wrote:
Assume that Zillow Offers improves to a point where it’s only 2% over using a REALTOR. On a house that ultimately sells for $250K, selling with a REALTOR the traditional way would cost the homeowner 6%, or $15K. Selling it to Zillow, with the fees and lost opportunity for gain, would cost the homeowner 8%, or $20K. The difference is $5K.
But if the seller uses Zillow Mortgage to buy their next home (which could be a Zillow-owned home, or could be some other home), Zillow stands to make $9K from the mortgage business. Knowing this, Zillow offers to charge only 4% as a fee to sell the home to Zillow, if the homeowner would use Zillow Mortgage for his next house.
So now, the homeowner sells to Zillow for $250K, pays 4% in fees, which is $10K. Now selling to Zillow costs the homeowner less than using a REALTOR. But Zillow ends up making an additional $9K on the mortgage, for a total of $19K in income from that coupled transaction. The consumer doesn’t care, because he has to get a mortgage from somebody at some point to buy his new home. Might as well be Zillow and save $5K (or make $5k more on the sale of his old home).
To review, then:
- Sell with REALTOR: $250K – 6% ($15K) = $235K
- Sell to Zillow: $250K – 8% ($20K) = $230K
- Sell to Zillow, but use Zillow Mortgage: $250K – 4% ($10K) = $240K
Now what percentage of consumers would use iBuyer?
All of that seems… quaint… when the consumer is actually netting more from selling to Zillow at the 7% Service Fee. Layering on mortgage alone and dropping the Service Fee to 4% means an additional $8K in the seller’s pockets.
Zillow Homes: Real Estate Investor Killer
I realize that some of the folks in the REALTOR crowd are going to panic, but… relax. If you were sharp, you caught that Zillow spent $13K in “Selling costs” and most of that was commissions paid to real estate agents. You’ll get paid; maybe not as much as you might want, but real estate agents are going to be fine.
Real estate investors, on the other hand…. If you need 20-30% discount off of the “market price” of a home to make your numbers work, Zillow Homes just killed your business model. They’re making money, a tiny amount of profit but still a profit, while putting more money into the home seller’s pocket than if she were selling at full price with a REALTOR. There is absolutely no reason for any homeowner to sell to an investor/flipper unless Zillow passes on the house.
That, of course, puts the kibosh on most of the so-called “we-have-iBuyer-too” stuff from real estate companies and real estate agents, which are really nothing more than hard money lenders and real estate investors in different clothing. Zillow Homes and real iBuyers are something different. The numbers say so.
Did I Miss Something?
As is normal, this post passed muster with the eagle-eyed and former-broker editorial standards of Sunny Lake Hahn. So I don’t think I missed anything major. But maybe I did.
If you see something obvious jump out at you, please let me know what I missed or what I got wrong.
But as far as I’m concerned, this whole iBuying thing got a whole lot more interesting and a whole lot more disruptive overnight.