iBuyers Are Not House Flippers: Spencer Rascoff Edition

In the August Red Dot, The Truth About iBuyers, I made the point that the real estate industry fundamentally misunderstands what the iBuyer movement is all about:

Perhaps because the pioneer of iBuyer was Opendoor, which focused on the selling experience at launch, the real estate industry has perceived iBuyers to be something like technology-powered house flippers.

This is par for the course in any industry where a disruptive challenger arises. The incumbents put the challenger into their conceptual framework so they can understand it. After all, automobiles were called “horseless carriages” at their introduction and Uber was and remains framed as a tech-enabled taxi service.

The real estate industry, therefore, looked at the direct-purchase model of Opendoor and immediately framed it as an investor flipping houses. That is a business model and an archetype that has existed for decades, after all, and the industry knows how to understand it.

I have been saying since the very beginning of iBuyer movement with Opendoor that this is a new thing. I’ve written about it, and given presentations on it. I talked about it on the Industry Relations podcast. But now, I no longer have to be the voice in the wilderness. Yay, me.

Zillow’s Q2 Earnings Call

This comes from Zillow’s Q2/2018 earnings call, where Spencer Rascoff, Zillow’s CEO, answers a question about its iBuyer program called Zillow Offers:

To address the investor concern or media concern about this overall business expansion, I think it is a gross mischaracterization and misunderstanding to call this a flipping business. Flipping requires distressed homes and distressed sellers, people that are selling their home under duress, and it only applies to a very small segment of the market. Most people are not willing to sell their home to a flipper because their home doesn’t meet that type of criteria. They’re not desperate. They’re not willing to sell it for 20% or 30% below market. What we’re doing at Zillow Group appeals to a much, much broader segment of the market. It appeals to anybody that values speed, certainty, ease, convenience, the ability to sync up the timing of the sale of their home and the purchase of the next home. That is appealing to a much broader swath of consumers. Arguably, most people need to lighten up the sale of their home with the purchase of the next home. So you can think of it as a service for which we charge a fee. It is not a flipping business.

And the early stats that we’ve seen are providing the data, hopefully, for skeptics to start to wrap their minds around this, things like the 10,000 home sellers coming through our funnel in just the first couple of months representing over $2.5 billion of total real estate. It’s broadly appealing. So we’re comfortable with people misunderstanding this for a long period of time, as I say, but we have conviction on it. We think it’s a service that is very appealing to home sellers and can be very profitable for us in its core but also profitable in its attached mortgage business and its attached listing lead generation business for a Premier Agent. [Emphasis added]

So. Pretty much everything I wrote in the June Report and then the August Report is being validated. Good for me, I guess. [For Red Dot Subscribers, the only reason I didn’t include the above in the report is that it happened after I published the August Red Dot.]

The iBuyer movement has never been about flipping houses. Companies like Opendoor and Zillow are not WeBuyUglyHouses cooking with gas. They are trying to solve for consumer pain, which is to quote Spencer, “broadly appealing.”

The great thing about Spencer Rascoff is that he’s transparent. He answers questions straight up. There’s no dissembling going on, no vagueness, not a whole lot of “what does he mean by that?” going on. Think about it. 10,000 home sellers representing $2.5 billion of real estate in the first couple of months of operations? In like two markets (Phoenix and Las Vegas)? Yeah, that’s some small tiny little niche there.

In the paragraph before the quote, Spencer tells us that Zillow’s current “buy box” represents 2.75 million transactions in top 200 markets. Top 200. Top. Two. Hundred. That means way more than the NFL cities. Far more than Redfin’s markets. Way beyond the Top 20 markets Compass targets. Top 200 MSA’s includes places like Sioux Falls, SD and Longview, TX.

“Yeah, Rob, but what about inventory risk?!!? Zillow gon’ go bankrupt when the market turns!”

Stop. Seriously, just stop. Think about what you’re saying. Remember when Zillow and Redfin were founded.

What This Means

I’m actually trying to think through what this means for the industry. I might have to devote an entire Red Dot on it. But for now, some of the contenders for brainwaves in my head are these. I apologize in advance that these are not entirely thought through, but we’re thinking things through together.

1. Local Investors Need Not Apply

First, I’ve been seeing some local brokerages and even agent teams offering “iBuyer” products, like OfferDepot which I wrote about. My initial inclination is to think that these guys can’t really play in this game. Because local investors are house flippers. They need to make a return on their money, which means buying low. That falls right into what Spencer talks about as “distressed homes and distressed sellers.”

iBuyers are not targeting distressed homes and distressed sellers who are desperate enough to sell at a 20 or 30% discount. They’re targeting (at least Zillow is) prime homes and happy sellers who just want certainty and speed. It’s not the same game, and local investors need not apply to play in that game unless they have big fat swoll pockets.

Personally, I don’t see it.

2. Capital vs. Labor

In this post from 2008 (wow, ten years ago!), I talked about the problem of capital vs labor in real estate. Back then, I wrote:

Analyzed on the basis of labor vs. capital, the real estate brokerage industry is almost entirely labor-driven with very little capital investment. I had an email exchange with Nicolai Kolding, COO of Better Homes & Gardens, who has spent ten years doing real estate M&A and has been involved with north of 350 transactions, about the impact of capital assets on brokerage valuations. His answer was basically that there is no value: “Very often there’s only 3 categories of assets valued – fixed assets, pendings & listings, and goodwill. Often the depreciated value of the assets is next to nothing.” Could it be that brokers invest millions every year into capital assets, but get them valued at next to nothing? Or could it be that brokers simply do NOT invest in capital assets (including things like their website) which results in zero value for assets? I say it is the latter.

What this capital/labor structure creates is an industry made up of thousands of small mom & pops, rather than one made up of a few sophisticated enterprises able to bring the power of technology to the consumer. The end result is that real estate looks more like dry cleaning than it does financial services.

In turn, this fragmentation leads to opportunities for the new generation of real-estate technology firms, such as Trulia and Zillow, who leverage capital investment in technology that the mom & pop’s simply cannot make, and the Big Brokerages did not make.

Ten years on, we now know that the “new generation of real-estate technology firms” have won that battle. All is proceeding as I have predicted.

Well, the emergence of iBuyers potentially means that capital makes a comeback with a bang. As in LL Cool J level of “Don’t call it a comeback!” type of bang. But that means drawing a pretty sharp line between smaller companies who have little access to capital and the big companies who do. The latter can survive and even thrive; the former are on their way to Home Depot Effect dystopia.

3. Platform, Shmatform

Finally, it appears that the real estate industry has finally pivoted to the newest buzzword: platform. I mean, sure, the industry is still addicted to “AI” and “Big Data” and maybe even “Blockchain”, but the latest buzzword that everyone wants to jump on is “platform,” as in, “We’re a local social marketing platform” or “We’re a lead qualification platform” or whatever. I do love the phrase “end-to-end platform” but not what that signifies in real estate.

My current take is that this is yet another example of the industry staying busy fighting the last war. When the end comes, it will come quickly and surprise just about everybody. Why?

Because “platform” in real estate means a hodge-podge of websites, lead generation, CRM, marketing tools, document handling, and communications and so on and so forth… all of which lead to the same outcome: pain in the ass process of buying or selling a house. The ideal platform in real estate is, “push a button, and a Realtor calls you.” Meanwhile, the real platforms have already moved on to the future of real estate, which Jeremy Wacksman, CMO of Zillow, calls “push a button and magic happens.”

But, Hey, Don’t Stop Believin’

So, I think I’ve proven my point that iBuyers are not house flippers. Doesn’t mean I’m right of course; I could be dead wrong. And opinions are like… uh… noses… everybody has one. Unless you’re like Michael Jackson, who had many. But I digress….

I suspect this issue, like most issues, won’t affect the agent on the street that much… yet. It will, however, impact teams, brokerages, franchises, MLS and Associations, and tech companies. Hmm. Maybe I ought to do a full report on it.

Either way, it is still the high summer selling season. Please return to what you do best, and don’t stop believing. Hold on to that feeling. Some will win, some will lose. Some were born to sing the blues. Oh, the movie never ends — it goes on and on and on and on.

-rsh

13 Comments

Join the discussion and tell us your opinion.

  1. “appeals to anybody that values speed, certainty, ease, convenience, the ability to sync up the timing of the sale of their home and the purchase of the next home.”

    Spencer is correct. Sellers are attracted to these value propositions (we have been offering such for 17 years).

    But why on earth would ZG want to take possession of the home?

    IMO, that’s where the trouble will be and why “brokering” the model is more profitable with less risk….just say’in 🙂

    Thanks,
    Brian

    1. How exactly have you been offering such for 17 years without taking possession of the home, especially the “sync up the timing” piece?

      1. We acted as brokers (we have since become a vendor with a RE license).

        Our business centers on property whose value is in the land. In many markets these “land-valued” homes will either be renovated or torn down and replaced with new. Because most of this activity is happening in and around higher-end markets there is a lot of money running around.

        Buyers of this property type (land-valued) are usually cash buyers – just like the iBuyers. The pros that buy know they have to make a cash offer to compete, the individual buyers know this and do the same – an iBuyer model for the more luxury markets, without creating ownership.

        So, given that this type of property (land-valued) is in demand from retail and professionals and the owners of such property are normally senior citizens selling their last home – buyers offer terms that are accommodating to the seller: value, convenience (“sync up the timing”) and expertise.

        I’m sending you our “Big Picture” now….love to hear your thoughts.

        Thanks,
        Brian

  2. Hi Rob,

    I hope you feel better.

    My father who was a well known real estate attorney in Germany, passed away many years ago used to say, if you put a crown on a donkey it will not turn it to be a king, it will remain a donkey with a crown.

    The nice words from Mr Spencer, are the same to this donkey with a crown.The trick in life is not what you say, it is how you say it. The words you choose can give a totally different meaning, but it would not change the reality.

    The reality is, Zillow and the rest pioneers in this “movement”, are still buying homes 5-15% below market value not including the outrageous fees.

    In most situations, in my opinion, these “movement” pioneers, do the home seller a disservice. Sellers would put much more in their pocket if the`ll go the traditional route. Sellers are paying an average of 11 percent in fees. Also, sellers pay for all repairs that are found during inspections.

    I have read many online reviews from sellers on this business model.There are 50 bad reviews on every 3 good reviews. Mr Spencer can say whatever he wants, it is a free country. But the last judge is the consumer and the consumer (seller) clearly giving up significant equity in exchange for convenience.

    1. The data that I have seen disputes that (at least for Zillow Offers) the consumer is “giving up significant equity in exchange for convenience.” See, for example, Mike DelPrete’s awesome post on this very topic: http://www.mikedp.com/articles/2018/8/9/zillows-instant-offer-numbers

      He’s showing Zillow’s purchases have had 2.5% price appreciation. That’s not chump change, but it isn’t quite to the level of 5-15% below market.

      If you have other data that MikeD and I are missing, I’d love to know about it. My opinions are subject to change based on evidence and data. 🙂

      1. This detailed article about Open Door’s stats also seems to suggest an average appreciation of 5.5%. https://medium.com/@sibjeet/inside-opendoor-what-two-years-of-transactions-say-about-their-prospects-73a0a2d5b49.

        So 2-6% seems to be the range.

      2. Basing your opinion on a data that is only 5 weeks old, is not convincing me.This data means nothing to me and not proving a successful profitable business model.

        It is very clear to me that Zillow is not trying to make money now. All it does, is trying to compete with the other pioneers to get their name into this game.

        Zillow is seeing it as spending money on advertising which is not a waste, it is an investment for the long term.The time will come that Zillow will make money on its long term investment.That will happen only in a distressed market.

        But from here to name it a “movement” is far away like the sun from the earth.

      3. /shrug — OK! Do let us know if you have any data we could look at. 🙂

  3. As unpopular as it might be with the “destroy Zillow”mob, Spencer is spot on with his comments and his strategic direction.

    The “platform” created by the iBuyers is one that is not a disintegrated mess of products, but an organized, formatted series of tech that enables processes for iBuyers to avoid putting consumers through the typical root canal resale real estate experience.

    Enter what everyone should understand is desired by the consumer. A viable alternative.

    At the core of the iBuyer model as applied to resale real estate, is an amazing discovery. Consumers are very willing to pay added fees, and take less for their properties for the offer of what the iBuyers are now providing. A much improved consumer real estate experience.

    I am aware that the traditional brokers are in denial about this fact, but it is likely only because through their random, independent agents they are incapable of duplicating these processes and to uniformly deliver this experience.

    Factions that intend to be in this business have only two options now. Believe that the future of the industry is vested in the independent agents and let them design a random consumer experience – or understand that the future of the industry is vested in serving the needs of the consumer first and then back-filling with only those agents that get it and will play by the new rules.

    There are really no other options at this time.

  4. Dee,

    You are missing the point.If you base your opinion on articles on Medium, I can give you many links to very unhappy sellers.

    So, the main point is, Rob named this business model a “Movement” which in my opinion is nothing but another buyer who is name is Zillow that has tons of money.

    I can give you some real estate buyers firms names who has the same piles of cash and are doing exactly the same.They do not think that they created a “movement” They call themselves cash buyers.

    1. You suggested 5-15% below market value. I provided data that suggests its not as high as 15%, it might be half of that. I never mentioned anything about seller reviews.

      Do you have any rebuttal on your 5-15% number, any data, research? Or you can just admit you are wrong.

      1. Wrong? No! I am not inventing stories. I am going by the facts. I am basing my response based on true sellers who saying that. Yes, there are happy sellers as well but that doesn’t change the facts of their high fees and low balls offers.

        https://www.highya.com/opendoor-reviews?page=2

        All of the good reviews are made up from people who work at Opendoor. They are the worst. They take 8%-12% fees! That’s twice as much as what realtors take, and realtors are much better than Opendoor. No one can replace an agent. Just no one.

        I can’t even begin to tell you how awful Opendoor is. They wrote me an offer for $70k under the market price. I didn’t accept, and then I put my house on the market for $85k more, and it went under contract in three days. A friend of mine used Opendoor to buy a property, and they told her everything was fixed and repaired with no issues. She still got her own inspector and they found SO many issues, including issues with the things they said they fixed. She backed out immediately.

        Bottom Line: No, I would not recommend this to a friend

  5. Re prices: my guess is that everyone is right. In a hot market, the right property can support 2-5% fees. A house that doesn’t match the market would require 10%+ fees.

    The result could be that Zillow, et. al. skims the best (easy) listings and leaves the rest for local agents.

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