Zillow surprises investors by buying up homes
techcrunch.com
techcrunch.com
Zillow will borrow money to buy the homes, which means that (a) the clock will start ticking the instant each new home is purchased, and (b) this endeavor can be profitable only if proceeds from resales/rentals are sufficiently high to cover cumulative debt service costs -- in addition to all property taxes and ongoing maintenance expenditures associated with home ownership.
Why would a heretofore capital-light SaaS business like Zillow want to do this?
The only sensible explanation I can think of is that Zillow's current business is no longer growing quickly, i.e., Zillow is now a boring, mature company.
The stock dropped 7% on the news last Friday.
Zillow wins by buying an asset it has more information on the true market value of, then providing an easier, economies of scale on the associated services (inspection, legal, repair, etc), then being able to offer a standardized product to home buyers.
Buyers win from taking a lot of the uncertainty out of a transaction. And from possibly lower fees if Zillow decides to rebate a portion.
Let's not forget there's a standard 6% commission in US real estate transactions... most retail would kill to start with a 3% margin.
If Zillow has high confidence a home is underpriced, it makes sense to time arb that into profit when it can match with a buyer.
I never really understood this, the last time I sold a house in the UK the fee was 1.5% and only on my side, the buyer pays nothing.
2) In the UK, the buyer pays stamp duty (tax) on the purchase.[0]
3) You can put a bid on a property in the UK and it's non-binding (until exchange)[1]
In other words - very different markets with very different dynamics.
[0] - I forget the percent, but it's material. This effectively disincentives people from buying, making the market less liquid.
[1] - This is frankly ridiculous.
(I've bought and sold in both US&UK markets)
I wonder how this will impact disclosure rules versus sales advertising? Existing model to use, or adopt another industry's? Will this cause fears of LIBOR-style manipulation?
This will be interesting to watch...
edit: p.s. Maybe another chance to make a Carfax-like system for homes? In the US market, I find there is not a lot of opacity, especially when one gets into larger/commercial deals.
What info would be available that you could not see via Zillow or the MLS listing?
Question I have is if whatever "pie" Opendoor is grabbing is actually sustainable in a recession/down market...seems like the worse case scenario is that they are left holding a bunch of illiquid inventory of declining value they can't get rid of.
1. buy at a discount (essentially a fee for the service of selling your house with a click)
2. sell at a markup (we're talking a small one in most cases, but the fact is in a good market you can reliably print small amounts of money with some paint, some minimal landscaping, and new kitchen appliances. Zillow will not be using a high-interest loan for the purchase or repair, so they will not be sweating like your typical flipper on TV.)
Assume for the sake of argument that Zillow has data to decide where these bets are safest based on comparables and key economic indicators. And they will say no to sellers as often as the data suggests they should.
I don't think this has much to do with finding super-profitable deals with data, but with reliably shaving points off a large pipeline of deals.
If it doesn't work in a healthy economy, they stand to lose the difference between the discounted price they paid for a house and the market value they can sell it for. In a recession, they can probably stay afloat by renting properties they can't sell at a decent price.
We are very far along in the current economic cycle, and a downturn is inevitable. It would be unwise to be sitting on a large real estate portfolio you can’t quickly unload when that occurs.
Will be interesting to see if this Hail Mary pays off.
The question becomes if there are enough opportunities like that to move the needle for them.
If I had to guess, I would have guessed moving into Lending Tree's matchmaking area would be easier and have a better ROI.
The rest of the listings are from MLS systems and they pull housing data from county systems. For that, I'd assume there is a data broker and Zillow isn't integrating with thousands of counties. If that's the case, then both the MLS and county data can be had by anyone. With that information, you'd get lot details, house details, listing history, county tax valuations and sales history.
What other data do you need?
A lot of house flippers are agents because they get the MLS listings ahead of the public and can move faster on them. I don't know when Zillow gets their MLS data, but listings almost always hit Realtor.com a day before they hit Zillow, so I don't see that as an advantage either.
That's not the case, MLS is a giant mess and the reason why Zillow was/is amazing is that it aggregated and normalized lots of different unconnected systems. They still have gaps and it's common for an individual MLS to play hard ball and not give out their data, but it's still a large competitive advantage.
They must be making a lot of money from this if they're going it alone. The 7% drop is probably not because of riks here but because it signals lack of growth.
[0]: Very rough estimate, may be market-specific.
That being said, I wouldn't say 10% is a super high overestimation. On my street are two identical houses and one sold for $150k while the other sold for $180k, even though they're literally identical other than the color of the siding.
The number that really matters is the appraised value. Zillow had my house at $110k when I bought it and the buyers were asking $140k. It was a surprise when the appraisal came back at $145k. If Zillow was right, the bank would never have given a loan for $30k over the value of the house. But there was no way for Zillow to know the amount of work the previous owners put into the interior of the house.
If it was static, an estimation tool wouldn't be useful.
And it's not just "the price of housing isn't static and certainly isn't objective." After all, Redfin faces exactly the same difficulties. Somehow Redfin uses more or less the same data and comes up with estimates that are much closer to the prices houses actually sell for (in this area).
The median house sold in my area cost ~$660k last year (zip code 98117). 10% overestimation is a (much) larger absolute error than $15-30k.
And there is plenty of sale volume in this area of similar houses -- the average/median of which are far below Zillow's estimates.
I wouldn't say appraised value is what matters. What matters at the end of the day is what buyers are willing and able to pay. Appraised value is both a factor in that as well as a result of that.
See also: Amazon
Ethically, it seems a bit fuzzy for me given that one of Zillow's big features is there zEstimate. How can they demonstrably prove they aren't tweaking that somehow for their own gain?
I wouldn't be surprised if they make a bunch of money and then make a big mistake and lose a much bigger bunch of money.
The key advantage here is that they can make these low offers to a much bigger audience than anyone else can do. This should allow them to be either be more profitable per house than anyone else, do more volume than anyone else, or hit any mix of these two better than anyone else.
Of course, they can shoot themselves in the foot pretty well if they:
- Try to go for volume over profitability, and then catch a downturn. - Do a bad job of running repairs. - Don't do a good job of catching houses that are much worse than they appear.
However, there's no physical reason this can't be extremely profitable. They have the data to see their current home investors making money. If they feel they can identify the most profitable attributes of these flips, then they can route all the extra profitable ones to themselves. The only losers here are the existing people in Zillows home flipping program. They are almost guaranteed to now be getting the second best homes, once Zillow has skimmed off the profitable ones.
Maybe that's not a big part of the cost?
It'd be pretty inconsistent to put in a lowball offer when your company publishes an estimated value for every home in the market.
Sometimes people just want sell now.
Unless Zillow has some new efficiency that no one else has (super contractors that can fix up cheaper than other investors, low cost capital) I don’t know how they will be able to outbid the market consistently as there aren’t enough dumb sellers with dumb agents out there.
But maybe I’m missing a way how they could use analysis to identify “bargains” without the seller getting clued in and upping their price.
There is value in certainty.
It’s why a $100 now is worth more than a pronise to pay in the future
Could Zillow use some combination of data from data brokers to find out how motivated a seller really is and then take them for as low as they can go?
For instance you’re selling a home and I see your job has changed on LinkedIn and your home hasn’t sold yet.
A few other things to consider. 1: The above example was in a relatively hot market. But in a more 'normal' market, homes can sit on the market for months at a time before attracting a good offer. So in a lot of markets, waiting for the next offer could mean months at a time. 2: There is a bit of a 'stigmatization' around properties that fall out of contract, because a common contingency is an inspection contingency, so the theory is that buyers start to shy away if a home falls out of contract because they are worried it is a lemon. I have personally seen a few listings where the realtor will explain the contract failure in the top of the post (i.e. buyer couldn't get a loan or something like that) as a clear attempt to ward off the 'lemon' concerns. And because mortgage buyers usually require a long list of contingencies, the risk of a failed contract is a lot higher than cash buyers. So cash buyers are 'safer' in that sense. 3: Sellers are often rolling over the proceeds of a sale into their next house, so any extra money on their home sale will most likely show up as a slightly lower monthly payment on the next house. So for every extra $10k you will only see about $50 lower on your next monthly mortgage payment (assuming 30 year).
I have been studying this part of the business quite a lot lately. A few considerations:
1) It seems to me that Opendoor, Unison, etc, and now Zillow, are trying to capture "pre-foreclosure" opportunities before they hit the market. Think about this: why would you want to sell your house quickly, and leaving money on the table, if not because you're short on cash and you know you will soon lose your house?
2) Secondarily, especially in the case of Opendoor, some homeowners might want to simply avoid the complex and time-consuming task of "changing homes" (fixing small details, picking the agent and listing it, staging it, handling the delicate balance between selling the current one and securing the next one, etc). Opendoor promises to vastly simplify this part, which I think is good.
3) I believe that some of these assumptions are specific of the current market situation, where in most "hot" real estate areas (SF, LA, Seattle, NY, Honolulu) prices are wild, the appetite for real estate has never been stronger, and at the same time there's still many opportunities to make a quick buck by flipping, accessing certain information earlier, etc.
I am not completely sure what will happen when/if the market corrects (might also depend on the size of the correction).
4) In the US the whole process of buying homes, financing them, and potentially use LLCs/Trusts/etc to handle various real estate properties as investment is still very fragmented, and still very dependent on which State you live in and in which State the property resides. There are essentially thousands of different combinations and configurations, and the optimal answer to each can also vary over the years, following updates to the legal code or to tax rules.
All in all, I think that Zillow is trying to carve out another piece of the market, and not necessarily because their current market is showing signs of slowing down (even if that has discussed just recently [0]). Heck, it might even be that Opendoor's outstanding fundraising results might have triggered the decision to go against them.
5) Long term, I think most real estate assets will become fully digital, and handled exactly like a small piece of software - that is, for everything that pertains property and ownership, taxation, transactions, etc. Of course, fixing a leaking pipe will still require a physical intervention :)
For background: I'm co-founder/CEO of a startup which will provide a software platform to digitize real estate assets, and legally transact on properties using APIs. We leverage the Ethereum Blockchain as a global land registry where these transactions are recorded. (I don't intend to use this comment to publicize it, hence no link).