Zillow Offers vs. Traditional Selling: Data from Zillow

Back in February, I wrote a post that is one of the top read posts of 2019. It was titled, “Homeowners Net More Selling to Zillow Than With a REALTOR.” I wrote that based on the unit economics that Zillow released in its Q1 earnings call, and I have been collecting data on Zillow Offers, Opendoor, and Offerpad since earlier this year. I don’t know that most sellers will net more selling to Zillow, based on the data I’ve seen, but let’s just say it’s very close.

The comments on that post were actually very thoughtful and not crazy, because Notorious readers are the best informed people in the industry. But… the rest of the industry is filled with hysterical and emotional Zaterade drinkers, so we have been treated to all kinds of interesting insights with precious little backup.

For example:

Ignoring the fact that the agent here used one Opendoor offer to criticize Zillow Offers, this kind of “analysis” has been rife in the industry over the last several months. The best example, and the one most shrouded in respectability, might be this study by Collateral Analytics, which I have seen REALTORS cite all over social media.

So it is somewhat surprising but refreshing to see that Zillow itself has released some information on Zillow Offers in a blogpost by Errol Samuelson, Chief Industry Development Officer, who is also one of the smartest and nicest guys in real estate. You can call me biased as Errol is a friend, but I’ve been known to disagree with and even take to task friends of mine. So, make up your own mind on that front.

The Strength of Zillow Offers

The blogpost makes a simple claim:

Recently, some analysts have suggested that traditional sales models will deliver far better value to home sellers than our approach. The reality however, is that selling on the open market may not result in a significantly higher price than Zillow’s offer.  We looked at 3,200 homes where a seller declined a Zillow Offer and then went on to sell traditionally within 120 days. We found that these homeowners sell for an average of about 0.22% more than Zillow’s offer.

That sound you hear is the sound of thousands of REALTOR jaws hitting the floor, as well as roughly 16,000 heads exploding in Lab Coat Agents.

I do wish I had access to the original dataset, but it tracks with my findings over the past several months.

In Q2, for example, looking only at Phoenix data, I thought that the average seller net $5,338 more by selling with a REALTOR vs. selling to Zillow on a home worth $310,027. That’s 1.7%. In Q3, those numbers were $2,496 with a $323,667 house, which is 0.78%. Those aren’t 0.22% that Zillow found by looking at actual sales data of sellers who had turned down a Zillow Offer, but it’s not too far off.

On the $323,667 house in Phoenix in Q3, 0.22% is $712.07. So the seller went through the hassle of staging, yard signs, buyer tours, etc. for an average of 40 days on market… for $712.

Holding Costs and Renovation Costs, Y’all

The key to the analysis is to compare apples to apples, which means taking holding costs and renovation costs into account. The Youtube REALTOR above doesn’t bother to talk about that at all, but fact is, it isn’t free to live in your house. You have to pay property taxes, pay for utilities, make mortgage payments, pay HOA dues, mow the lawn, and so on. I’ve done some research on holding costs in every market where I do iBuyer data analysis, and it turns out Zillow’s data nerds feel the same way:

Now many analysts have simply compared our service fee to the 6% agent commission costs from a traditional home sale. But this comparison using only commissions ignores that a home seller has to manage, or incur other costs: cleaning the house, staging, HOA fees, or the cost associated with the misalignment of a home sale, such as carrying two mortgages, renting an apartment, etc., when selling traditionally. These are meaningful costs that add up quickly. With Zillow Offers, a home seller doesn’t have to worry about doing any of these themselves. What’s more, because of our scale, the costs associated with repairs when we do them tend to be lower than what an individual homeowner would pay if they contracted out the work themselves as individuals.

And then there are renovation costs:

We also provide potential sellers with a list of needed repairs to get the home ready for resale. In a Zillow Offers sale, Zillow does this work, and the cost of labor and materials is subtracted from the purchase price. Making repair concessions is a common cost when selling traditionally, but doesn’t often get talked about. It should be. Our research shows that concessions occur 81% of the time in a traditional sale – so it’s a cost that a seller does need to factor in.

I’ve pointed this out before, but the idea that the buyer (who is represented by a competent REALTOR) is not going to make repair demands of the seller that Zillow made in its Offer is silly. A house that needs new carpet is going to need new carpet whether Zillow’s inspector demands it or the buyer’s agent demands it.

So I’m not at all surprised by the 0.22% figure that Zillow has released.

A Note: Zillow is a Public Company

I’m sort of sad that I have to write this, but… since it is a given that someone somewhere is going to say something along the lines of “Lies, damn lies and statistics” and “Zillow is a big fat liar” and so on, let me just point out that Zillow is a public company. Lying is not an “Oops, I did it again!” situation. It is a criminal matter and people responsible, like Rich Barton, can go to jail for fibbing. Rich Barton is not going to jail. He’s not close to even taking a remote chance that he or any Zillow spokesperson is going to even slightly misrepresent anything.

So disagree if you’d like, or point out errors in analysis or whatever, but seriously… accusing a public company of straight up making up lies is silly unless you have solid evidence.

In Defense of Critics: Zillow is Not Anybody Else

Let me also add a note in defense of the critics of iBuyers. These numbers are for Zillow only. Opendoor and Offerpad and Redfin have never released their unit economics numbers. It may be that those other companies are nowhere close to the 0.22% Zillow released. It may be that their criticism of iBuyer programs are on point when it comes to those companies.

We will never really know until private companies start releasing more information.

Vindication?

Since I know we’re all going to argue about this disclosure from Zillow, let’s leave it there for now. I am trying to get more details on the data and we’ll see if I can, in which case a followup may be necessary.

But suffice to say that at least I feel vindicated in my previous assertions and analysis. If anything, my numbers are too large in terms of what a homeowner might net selling with a REALTOR instead of selling to Zillow. And if that’s true, then I continue to stand by my bet about iBuyers making up 60% of transactions in five years and look forward to James Dwiggins (and other friends) buying me nice steak dinners in 4 years.

-rsh

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  1. the idea that you think anyone running a public company is using numbers that aren’t complete bullshit most of the time (sure they can back them up with assumptions but its crap out crap in all the time) makes me take you a lot less seriously. Especially in the context above. I’m not saying Z is lying here but if you’re basing the veracity of the data on ‘they can’t lie because they’re public’ I have a solar roof to sell you.

    1. “most of the time”?

      Mmmkay.

      And you had to go anonymous to post THAT? Wow. Where do I send your Profiles in Courage medal?

  2. If the Phoenix analysis it true (virtually no advantage to full MLS prep and exposure), then we need to know what Zillow ultimately sold the home for after it incurred its own holding costs, prep expenses, and time on market. And it it in fact profited. It may be buying for reasons other than profit at this stage. I’m skeptical that it can provide the same Seller Net, truly, all things considered.

    The wholesale choice has always been a choice for sellers, even before iBuyers, and for many it makes sense to avoid the traditional MLS retail effort. That’s how a lot of us have acquired rental and flip properties over the years, by finding sellers motivated by something different than “Top Dollar”, which is usually a combination of timing and hassle-avoidance.

    It’s not too far off to say to a retail MLS seller “subtract 10% off the selling price, then your mortgage balance from that amount, and that will be your walk-away (Net) amount after closing”. So, a $300K home with a $150K mortgage will net a seller $120K. Normally it will be more, but this is a pretty reliable quick and dirty Net estimate in my market.

    If instead of walking away with $120K, a seller can walk away with $100K, but not have to do anything at all, and also gets to pick her closing date, that’s a compelling thing to consider for some, if they can afford to “leave money on the table” in exchange for timing and process/hassle-avoidance. That would equal about a 6.7% “discount” on the sales price but a 16.7 reduction in net proceeds.

    The dollar amounts are vastly different than trading in or wholesaling a car, but the concept is the same. When iBuyers can get the differential on the actual net amount down below 10%, then I think more sellers will go for it.

    But let’s remember that the iBuyers cherry pick the markets and the homogenous product that they will buy. I wonder if that’s “discrimination”? Are Realtors allowed to not do business in some areas? No. How will iBuyers do if forced to play under the same set of regulatory burdens Fair Housing imposes?

    1. We do know what Zillow sold the home for after all of its prep, etc. It’s within 1.3% in Q3, and 1.2% in Q2 of the purchase price. The VIP Subscribers have been following that for months now. I understand your skepticism, but the data is what the data is.

      Again, what Zillow and Opendoor and to a lesser extent, Offerpad, are doing is nothing like “wholesale.” They’re paying market. So everyone has got to get over the “leave money on the table” mindset with these new breed of market makers. Either that, or produce actual data that shows consumers are leaving money on the table. In this case, Zillow is saying that consumers are leaving 0.22% on the table, or $700 on a $300,000 house.

      As far as Fair Housing goes, not sure how that’s relevant since Zillow is the actual buyer. If they’re discriminating on selling, maybe there’s a case to be made, but if they are the actual BUYER don’t they have to discriminate and pick and choose which houses to buy, you know, like every single buyer anywhere ever?

      1. Interesting. I admittedly may be in some form of denial, but if your data are neither flawed nor misinterpreted, then how is this profitable for Zillow?

        I have an “Offer” from Opendoor for a home I own in Austin. The offer price is above market value (the price the home would be listed for in MLS). Once seller costs are subtracted, it comes out significantly less than what a retail MLS sale would net to seller (me), even with commissions on both sides factored in.

        So, what is the definition of “Zillow Offer”. If it’s just the contract price before seller expenses, then I could see how they make money on volume, and perhaps other ways.

      2. Hi Steve,

        Because Opendoor has never published its unit economics, it’s really hard to determine whether their offers are the same as Zillow’s. I do think, based on what data I have, that Opendoor is within the ballpark. We’re talking 2-3%, not 10-20%.

        Having said that, the profit for Zillow is in ancillary businesses, particularly mortgage.

        I’ll let someone from Zillow define what a “Zillow Offer” is; I think I know, but I’d rather the people who know the details speak to that.

    2. Realtors choose to do business in certain areas all the time. I only work the Killeen, TX area, even though I’m technically licensed to do real estate in El Paso. Am I discriminating if I decline to represent a buyer/seller in El Paso?

  3. Hello Rob,

    Do you know if the sales price posted in the tax records is the “actual” purchase price of the iBuyer ? If it actually is the price they offered and then shaved the Seller for $25,000 in repairs where is that noted in public information or is it just buried on the Settlement Statement as a concession since it is a cash purchase with no lender restrictions against that?

    I am also curious if iBuyers that are discounting due to $25 000 in repairs are quoted the “actual” cost or a retail number?

    Is there any transparent follow-up that defines whether or not the “entire” concession was actually fully used since reno prices are deeply discounted for bulk iBuyers.

    If the purchase price is actually $400,000 and there is a publicly hidden $25,000 seller concession it feels a little like some puffing going on across the board in contrast to the actual discounted public sales price of $375,000 which is really what we should be seeing.

    The 1 and only Settlement Statement that I have been exposed to, showed the discounts as a concession yet the actual public sales price was the pre-concession number.

    When I look at purchase prices vs listing prices here in Phoenix there is a very small or negative delta which would make the leigh person wonder why on earth someone would buy thousands of homes and barely make any money or if they make any money at all. Often these numbers do not line up.

    Having spent more than 35 years in construction and Real Estate, I have learned there are all kinds of people and products and no single product will ever be the “only” way for humans to buy, build, and sell Real Estate.

    The “manufactured fear” that Laura Monroe speaks about is so true….if Agents want to believe it. RE Agents have got to be bombarded with the next big thing more than any industry when all they need to do is stay current, work diligently, and drive an honest line of business and it will always serve you just as well as you serve it.

    All the best!

    1. I completely agree with your puffing statement. I’ve been involved in some Open Door deals in Nashville where the concession was FAR more than normal concessions in my market. On one deal, it was nearly $8,000 on a 150k deal. These concession numbers are hidden in the math, which is just misleading, especially in all-cash deals.

  4. I’m going to hon out on a limb and amassing that the numbers are correct (.22%). The main thought that my spinning head can formulate about all this is this: is the original offer from Zillow creating an anchor in the sellers’ minds (and the agents)?

    What I mean is- say Zillow offered $290,000 on a home listed for $299,000. That same home goes on to sell for $290,638 (0.22% variance from Zillow’s initial offer. What if Zillow had offered $292,000? What would it sell for, then? This is the scientist in me (not a real one, just a practicing real estate nerd) , and he’s curious about the psychological impact of the original offer. Does it make a difference in the end result? Hard to tell but wanted to contribute my single clear thought on the matter.

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