In a previous post, I looked at some of Opendoor’s transactions in Florida and drew some conclusions on very limited data. Well, I got my hands on some more data, this time from Phoenix and for Zillow Offers. Because I don’t have a data analyst on my team, and I’ve got a lot of things to do, I couldn’t quite do the depth and breadth of data research and analysis for this. But I got some done, and it’s fascinating as well.

What we have here is one month’s worth of closings for Zillow: March of 2019. I’ve tried to get as much information as possible on these, and present the key numbers. I removed two closings because no data was available on Zillow’s purchase price. But let’s see if these numbers from a different market for a different company still support some of our conclusions from the previous post.

Let’s do it.

Zillow Offers: March, 2019

The following table is a list of homes sold by Zillow. I filtered the data set only to show homes that were owned by one of Zillow’s subsidiaries: SPH Property One, SPH Property Two, and Signpost Homes. Yes, this could mean I’ve missed some if they were under a different corporate name. No, that does not bother me.

What does bother me a bit is that the Gross Margin column does not include any holding costs, renovation costs, or interest costs. Those were not available. But we can look at the unit economics published by Zillow and sort of back-of-napkin those in if necessary.

The Google Sheets spreadsheet here is a bit long and you may have to scroll. Sorry about that; limitations of WordPress publishing.

The summary takeaways from this dataset:

Seller Net Comparison

In terms of comparing how a seller might have done by going the traditional route instead of selling to Zillow, we have this:

The average seller according to these numbers would have made an additional $6,152 by going the traditional route instead of selling to Zillow, but spend an additional 3.2 months on the market with all that entails. In 19 of the 110 deals, the seller would have made less money for sure selling with a REALTOR than to Zillow.

Now, once again, these numbers are likely to be incorrect as they do not take into account holding costs, renovation costs, and interest costs. But three months of still owning a home while waiting for it to sell definitely has holding costs to the seller, such as property taxes and mortgage payments. Plus, as I’ve mentioned in the previous post about Opendoor, we can ask whether $6K is worth saving 3 months of the uncertainty and inconvenience of selling a home.

So this is far-from-perfect data. But it does give us something to go on.

Conclusions Confirmed

These numbers do indeed support my conclusions from the Opendoor post:

  1. Zillow pays market price for its acquisitions: the difference is 1.4% on average. This reinforces the point I made and keep making that the iBuyer/Market Maker model is not to be confused with investor/home flipper models.
  2. Zillow is making a tiny profit on each transaction, prior to renovation costs, holding costs, and interest costs — assuming that Zillow charges the seller a 7% fee.
  3. The seller, on these numbers, loses money selling to Zillow, but as in the Opendoor scenario analysis, we’re looking at $6K to save 3 months of Fear, Uncertainty, Doubt and Inconvenience that is the modern home selling experience.
  4. Zillow’s pricing algorithm is even more accurate than Opendoors, clocking in at 98.2% Sale-to-List ratio. However, since Zillow is represented on its sales by an experienced agent team, it isn’t as clear as in the Opendoor case how much of the listing pricing is Zillow’s algorithms, and how much is the human local expert on the ground, or a mix of the two. Nonetheless, 98.2% is excellent performance.

In addition, we can now say with some degree of certainty that Zillow is making one team very rich, and making 110 buyer agents a lot of money: $997,581 in one month, to be exact. I expect that to be the same for any other iBuyer using real estate agents for buying and selling properties and paying out full cooperating compensation.

I ran these numbers because the Opendoor analysis only used ~30 transactions. This one has 110. It still isn’t a huge sample size, and it is from one market, but I do think it’s a bit more confidence-inspiring in terms of drawing conclusions from imperfect numbers.

Question for You

Now that I’ve done two of these, I have a question for you, the reader. Post below or drop me a line.

Is this useful? This kind of sales analysis? Or have I made the point and now it’s just beating a dead horse? It does take a lot of work to look up the information, so I wouldn’t do it unless you people found it useful and interesting.

Let me know. Thank you!

-rsh

This post doesn’t deserve a music video… maybe next one will.

9 Responses

  1. I find it interesting & insightful. I enjoy all your writing. I also appreciate the higher frequency of your posts recently (thank you). Full disclosure, my perspective is as retail investor with a sizable long term bet on Redfin. I am not a real estate agent.

    One topic I’d love to read your in opinion would be the following (Feel free to ignore):

    I’ve spent a lot of time contemplating disruptor type businesses. I’ve come to the conclusion that in order to be a true disruptor you must be both “better” & “cheaper” than what you are disrupting. I can list many examples: Amazon v Retail/shopping malls, Netflix/streaming v Traditional cable, Uber v Taxi, Google maps v TomTom/Garmin, Ford v horse & buggy. If you are only “cheaper” or “better” you don’t accelerate your growth rate with higher levels of adoption. I’d argue this is Tesla’s issue. They “maybe” better, but they are not “cheaper”, thus they won’t reach critical mass. An upcoming IPO (Peloton) I think may experience a similar fate, despite me loving the product.

    Furthermore, I think a companies disruptor rate is concordant to these two factors. Meaning Google Maps destroyed individual GPS overnight because it was a free app. If it cost just 1$ a month, the growth rate would have significantly decreased overtime. This may sound completely obvious, but I think it’s an outstanding litmus test to predict the success of a wannabe disruptor.

    Jeff Bezos famously stated that your gross margin is my opportunity & he built Amazon on creating an outstanding consumer experience. Glenn Kelman is clearly using the same blueprint.

    Now my question: Compare Redfin Direct v Zillow Offers, both at full scale. Assume a 2% fee for Redfin direct v 7% fee for Zillow Offers. For sellers & buyers, what is more appealing assuming a price point between 500-750k?

    1. Very cool topic. I’ll think about that and write something soon.

      One reason I’ve been churning out so much content is that I have a hellish travel schedule coming up, so wanted to overload you all VIP readers for a bit. 🙂

      1. This likely requires a longer post for exposition, but I don’t think Redfin’s model is *fundamentally* flawed. The issue is one of execution. I think I wrote about this in a Red Dot somewhere, but I don’t recall the specific report.

        Redfin has far better control over the consumer experience, and therefore the brand promise, than does Zillow. Zillow’s new initiatives are an attempt to close that gap — Zillow Flex, Premier Agent 4.1, CSAT surveys, etc. etc. But with 1099 independent contractors, that’s always a bit of a crapshoot.

        Time will tell whether Redfin can nail down its execution in terms of hiring, training, motivating, and managing its employees. That’s a problem every company has from Google to Walmart. Zillow’s problem is whether Zillow can nail down its execution in terms of finding the best of the best agents and having them be the “order fulfillment” for its customers — think, Home Depot or Lowes.

      2. Hi James,

        Thank you for the link, unfortunately it won’t allow me to read it. If you are able, would you copy/paste?

        To clarify my thesis of Redfin is based on their potential of disrupting the buyers agent & creating essentially a full digital point of revenue by representing the seller at 2%. This scenario, I believe would create a super powerful network effect, analogous to LinkedIn, FB, the telephone, etc. The value of the product exponentially increases, not in the greater cost of service, but by network effect dynamics by buyers/sellers interacting in a market place.

        See, I believe GK has had this 2nd act planned for a decade. He knew that eventually we would reach this point when consumers would feel more comfortable buying products online, but he had to survive long enough to get today. By alternating their business model, over the last 10 years, representing more sellers, he is now in position to “change the game”.

        Many great companies must have had a 2nd act. Netflix, Apple, Amazon/AWS. GK aspires to be dominant. My $ is on Redfin.

      3. James,

        I obtained a membership & read the short case for Redfin. My first comment is the author did a nice job presenting the facts. I agree with most of the research, BUT if you read the comments the author states the following while discussing greater productivity for agents:

        “In that scenario I’m covering my short and going long, but I’m trying to be open-minded and I just don’t see what argument there is for that happening. Happy to hear bull case from anyone.”

        My response would be Redfin Direct. Redfin direct at 10-20% of Redfin transactions significantly alters the numbers in favor of Redfin. FCF & profitability becomes reality. Do you really think Glenn Kelman hasn’t already planned this all out?

      4. Hi Ben,

        Thank you for the follow ups, and for prompting Rob to write a piece addressing your initial comment!

        Quick aside, but the Internet is amazing, can’t believe I have access to both of you all while sitting on my couch here in NYC.

        Your point about Redfin Direct at scale is well made and I do agree this has long been the plan by GK. I guess where I am having trouble is mapping the scenario where Redfin gets to scale with Redfin Direct without significant pushback from folks who have a stake in the status quo. Redfin doesn’t have the same leverage over these folks that Zillow does because the former is not lining their pockets the way the latter is with its Offers and Flex programs.

        I’m not saying it’s impossible for Redfin Direct to get to scale but it will be a long road, one that the capital markets might not decide to finance given the company’s current FCF.

        Now if I could snap my fingers and magically fast-forward to Redfin Direct at scale, I’d sell my Zillow position and exchange it for a Redfin one in a heartbeat.

        Any way, I fully recognize that I might be wrong but want to close with saying that, as a subscriber of both your content, I appreciate what you do.

  2. I find this analysis extremely helpful. It supplies the continuing needed back up for anyone with a possibly different view of what iBuyer programs represent. Thank You for taking the time to work through these.

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