Tony Santos began the process of selling his home by punching his address into Zillow.com. A few clicks later, it offered him $474,900 for his house. Tony filled out the requisite paperwork, and Greg from Zillow came to inspect the home. Greg took a couple of pictures, ran the sink water, flushed the toilet, and declared the house in great condition. The next day, Tony and his wife went down to a run-of-the-mill suburban office park and signed over their house.
The same weekend that Tony got a notification that Zillow had deposited the money from the sale into his bank account, Bloomberg broke the news that Zillow was pausing its home buying operation.
Buyers like Zillow have gotten a ton of investment to try to streamline the frustrating and complicated process of selling a home in this country. They’re betting they can unlock economies of scale on buying paint, fixing plumbing, and redoing kitchens. Nationally, iBuyers’ share of housing market is still below 1 percent. But just before the pandemic, iBuyers accounted for 5-6 percent of home purchases in fast-growing cities like Raleigh or Phoenix, which is why it was so curious when Zillow hit the pause button last week, after buying almost 4,000 homes in Q2—a new record for them.
On Friday’s episode of What Next: TBD, I spoke with Patrick Clark, a Bloomberg reporter, about why Zillow hit a bump in the road and what it says about the billions of dollars of houses that are now being bought and sold each quarter through online middlemen.
Henry Grabar: Zillow takes in more revenue from their home buying and selling business—$1.5 billion in the first six months of this year—than from anything else. But they’re not yet making money on all those transactions. And the company’s profit center is still in its foundational business, advertising.
Patrick Clark: I think that the Saturday Night Live bit on Zillow being the adult pastime for cooped-up adults during the pandemic got the business model right.
You show up on the website and you look at a home, and Zillow serves you a little button that says, “Do you want to talk to an agent about that home?” And it basically sells agents the right to be the name that pops up in that part of the screen. And it’s a really high-margin business, certainly compared to real estate. Flipping homes in general is a much lower-margin business. I think of it as just sort of an updated model on home flipping: Instead of trying to buy low and sell high, they would say, “We try to buy at a market price so the home seller is getting fair value.” And by doing this lots and lots of times, they gain all of these efficiencies, so it can operate at a lower margin.
It’s also a really complicated business, and while Zillow has been around for a long time, they’ve only been in this business for a few years, and they messed something up. Their explanation is that they messed up the process of planning for and obtaining the labor they needed to process the homes that they bought. Rather than slow down the machine, they decided to shut it off.
Buying and selling houses in this manner—buying one, fixing it up, selling it three months later—has been traditionally considered a tricky business, hard to do at scale, and also considered a little … seedy, right?
Yeah, that’s why they don’t like to be called flippers. There’s some portion of people who are flipping homes who are looking for bargains. You’re looking for recent widows or widowers or people who just gotten divorced. You’re very often looking for people who are in a circumstance where they can’t afford to fix up their house to get the best value for it, and so they’re willing to sell for less. So it’s both considered a bit seedy and a bit risky. Public companies don’t want to be considered either one of those things.
When Zillow really pushed its chips in on this business, one of their co-founders and the initial CEO of the company said, “This iBuyer thing, Zillow Offers, is really important to us that we’re going to go after it really big. We want to be buying 5,000 homes a month within three to five years.” So, figure 60,000 homes a year by 2024. If you figure the average value of those homes going to be $400,000, that’s huge amounts of money. That was the initial goal.
The big competitor to Zillow and the slightly more established company in this sphere is Opendoor, which started in 2014. What is their pitch to buyers and sellers?
I think the number one thing is that it’s a giant pain in the neck. You’ve been putting off making a small repair, you’ve been meaning to replace the tile in your kitchen for five years, you’ve never gotten around to it or never been bothered by it enough to spend the money and disrupt your life by doing it. And then you decide you’re moving and now you have to make all the repairs for somebody else. It’s kind of annoying, right? So, you let somebody else handle that thing. Then, in order to buy your next house, you need the money that you get for selling your old house. And in order to sell your old house, the buyer of that house needs to get approved for a mortgage. They may need to sell their old house. And so there’s this whole chain of transactions that have to come off and very often have to come off right on top of each other.
So if you were buying and selling from a company like Zillow or Opendoor, you could line up these transactions to happen on the same day, hire a moving van, take it from one house to the next, it’d be a piece of cake.
Yeah, and the nice thing about selling your house to Zillow or Opendoor is that they have the money. They make you the offer and they will come and inspect the house and make sure it’s what their data said it was, but there’s not the risk that their mortgage application is going to be denied.
Has Zillow or Opendoor really come up with innovative ways of evaluating homes, inspecting homes, improving homes, or are they just the first to be able to corral enough money to do this kind of thing at scale?
It’s not crazy to think that they know a lot about home prices. But Redfin’s CEO said to me once, “We have good algorithms, but the person who’s lived on a block for however many years and seen what home prices in their neighborhood sell for has a really good algorithm too.” These companies are certainly applying a lot of technology to the job of deciding how much a home is worth today and how much they’ll be able to sell it for six weeks from now. But we’ve seen them do it when home prices are rising. We still have to see them do it when home prices are less dependably higher and higher. I think most people outside these companies would say they remain untested in a true down housing market and they’re chasing fast growth, and it’s a lot easier to grow quickly when home prices are rising quickly because you don’t have to be as accurate or as efficient in how you operate the business.
This model has been pioneered in a lot of Sun Belt metro areas where you have a relatively recent housing stock and a fairly self-similar one as well. In some of those markets, it’s become a sizable share of all transactions. Could it become the default model? Is it possible that we end up with a permanent middleman model where these companies are just the companies that control this business?
I guess it depends on two things: one, how eager are people, how desperate are people to replace the painful process of selling a home. How bad is the old way of selling a home? And I think that for a lot of people it’s really bad, and the prospect of doing it in an easier way is really good. The second question is, at what price? And to the degree that the iBuyers give you full value for your home, then it’s a great deal and lots and lots of people will want to do it.
That’s sort of what has happened to our friend, Tony, which is that he got more from Zillow than it seemed like he would’ve gotten going the traditional route.
Yeah. That’s probably not sustainable.
Just the fact that Zillow is taking a pause here, does that mean, do you think, there’s a fundamental problem with doing the iBuying model at this scale? Or is this just a hiccup on their way to their goal of doing tens of thousands of houses every year?
I don’t think they’re going to stop, and I don’t think this proves that they can’t do it. It just proves that they’re not getting it perfectly right at the moment.