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.
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.
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.