S1: A couple of months ago, Tony Santos found himself in an enviable position. His offer to buy a house in the suburbs of Raleigh, North Carolina, was accepted. Tony and his wife were overjoyed.
S2: And then I kind of got that sinking feeling of, Oh my god, we just want an offer on eight hundred and twenty five thousand dollars home. What are we doing with our current home?
S1: They talked to a traditional broker, but Tony was also curious about the phenomenon of I buy it.
S2: I’m kind of a self-proclaimed kind of technophile.
S1: Tony had heard about companies like Opendoor, Offerpad and Zillow that will buy your house, as is no repainting the bathroom, no open houses and no waiting around for bidders or banks or second thoughts. So Tony punched his address into Zillow.com.
S2: Basically, if you put in your address, the first thing that comes up, it’s, you know, they’ll tell you, Hey, this is what we think your house is worth. And then right below that, it says, would you like an immediate offer from Zillow Offers? Click here and we’ll we’ll offer you four hundred and seventy four thousand nine hundred Tony clicks.
S1: And after a few more steps, he gets a call from a Zillow market representative. And she says,
S2: We no longer inspect homes. We just basically will provide you an offer. If you go ahead and accept that offer, we’ll send you all the paperwork and the seller disclosures. And then before you’re closing, somebody will come in and inspect your home and then we’ll just do the closing. So I looked around and I said, Are you sure? I had zero interactions in-person with anybody from Zillow until the day before we closed.
S1: And did you ever wonder like, do I have the right people on the phone like, is this real? Is this really happening
S2: the entire time my wife does things like, we’re going to get scammed somebody. Somebody is doing some kind of fraud and they’re taking out our Social Security number or something,
S1: but they accept the offer. Zillow sends a contract, and the only thing standing between Tony and selling his house is the final inspection.
S2: So Zillow, two days before we were closing, says, Hey, we have you scheduled for your final walkthrough. We never even had an initial walkthrough, so I guess our final walkthrough was the walkthrough. Greg walks in. He has an iPad in his hand. He shakes my hand. He says, Hey, I’m here for your inspection. He walks on over, takes a couple of pictures, runs the sink, water a little bit, flushes the toilet, looks around and says, Oh, it’s in great condition. Meanwhile, I’m thinking in my head like, that needs to be replaced or we need to paint this place. There’s a windowsill that my dog. And so he’s like, I’m gonna go take a few pictures. And so as he’s walking out, I ask him, Do you want to take the crossface key like it’s locked? He looks at me. He’s like, Yeah, you can just tell he he didn’t want. It doesn’t necessarily go to the crawl space. So he goes around, he goes and he takes some pictures from the outside and he comes back. He’s like a probably. You take a look at the crawl space, right? And I was like, I think you should.
S1: And that was it. Next day, Tony and his wife went to a run of the mill suburban office park sign over the house.
S2: We sit in the car for about five minutes and then we just said, This can’t be this easy, like there has to be a catch like. But now,
S1: at four p.m. last Friday, Tony gets a notification. He has a new deposit in his account. It’s the money from Zillow, and then he gets a Zillow alert. His house has sold. How are you feeling about the whole thing? I love it. Tony closed on Friday, and that weekend, Bloomberg broke the news that Zillow was pausing its home buying operation. Today on the show, 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. I’m Henry Grabar in for Lizzie O’Leary, and this is what next TBD. Stay with us. Selling a home in this country has traditionally been a transaction that comes with a lot of friction. So you can understand why the so-called iBuyers internet companies like Zillow have gotten a ton of investment to try to streamline this process. They’re betting they can unlock economies of scale, buying paint, fixing plumbing, redoing kitchens. And it’s basically working nationally. The iBuyers share of the housing market is still below one percent. But just before the pandemic, iBuyers accounted for five to six percent of home purchases in cities like Raleigh or Phoenix, which is why it was so curious when Zillow hit the pause button last week after buying almost 4000 homes in Q2. A new record for them.
S3: I’ve always thought about these businesses as really it’s sort of like a machine right here. Your input is your first input as a house and your output is also a house.
S1: This is Pat Clark, a Bloomberg reporter who covers Zillow.
S3: 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, and their explanation is that they messed up the process of planning for and obtaining the labor they needed to process the harms of bebop. And they decided to rather than slow down the machine. They decided they’re going to shut it off.
S1: You probably still think of Zillow as that site you scroll through to find out how much your friend’s house cost. But the company actually 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. They’re not yet making money on all those transactions, though, and the company’s profit center is still in its foundational business.
S3: Advertise it and they get the Saturday Night Live bit on on Zillow being the adult pastime for cooped up adults during the pandemic. I actually think it got the business model right.
S1: You need something new, something exciting.
S2: I need a new fantasy. And then you need a sale at Zillow.
S3: You show up on the website and you look at a home and Zillow serves you like a little button that says, Do you want to talk to an agent about that? 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 like an updated model on how flipping and instead of trying to buy low sell high. They would say we try to buy at a market price, so the seller is getting fair value. And by doing this lots and lots of times, they gain all of these efficiencies and so can operate at a lower margin.
S1: That is something where this model is really not that similar to the traditional business of flipping houses, which you compare this to. So, so let’s go back a little bit. I mean, buying and selling houses in this manner, buying one, fixing it up, selling it three months later has been traditionally considered. It sort of a tricky business, first of all, like hard to do at scale and also considered a little seedy, I think.
S3: Yeah, that’s why I don’t like to be called flippers, because there’s some portion of people who are flipping homes who are you’re looking for bargains, right? You’re you’re looking for recent widows or widowers or people who just gotten divorced and or whatever you’re looking at. You’re very often looking for people who are in a circumstance where they need to sell, where they can 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 if 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 the co-founders, Mitchell, CEO of the company, said This iBuyers thing is the Zillow Offers thing is really important to us and we’re going to go after it really big. And what he said was we want to be buying 5000 homes a month within three to five years so that you’re 60000 homes a year by 2024. You know, and if you figure the average value of those homes going to be for $50000, what huge amounts of money and houses. And that was sort of the initial goal that he said. But it could easily, you know, if it works, it’s going to look in size. Nothing like what flipping has ever really been considered.
S1: When we come back, the promise of the iBuyers model for its customers. American homeowners. Let’s go back a little bit. 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 can see advantages on both sides to dealing with a big company instead of dealing with some eccentric homeowner who, if you’re buying from him, wants you to write a letter about how much you love and will care for his hydrangeas and if you’re selling to him, might make all kinds of weird demands about the painting and plumbing. And so I can see the advantage here I can. I can see the advantage of dealing with a big company.
S3: Yeah, I think that the idiosyncrasies of the seller could be a part of it. But I think the number one thing is that it’s a giant pain in the neck in many kinds of housing markets. You know, you’ve been putting off making 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 your move in, and now you have to make all the repairs for somebody else. So it’s kind of annoying. Right? So you let somebody else handle that thing. And then in order to buy your next house, you know 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. So there’s like this whole chain of transactions that have to come off and very often have to come off right on top of each other.
S1: So if you were, if you were buying, 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. Be a piece of cake.
S3: Yeah. And the nice thing about selling your house to Zillow or Opendoor is that they have the money, right? Like they make you the offer and they will come and inspect the house and make sure it’s what their data said. It was, right, but there’s not like the risk that their mortgage application is going to be denied, right?
S1: I mean, one thing I wonder what this is. 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?
S3: It’s not crazy to think that they know a lot about home prices, but if you own a home, I mean, this is something that Redfin CEO said to me once we have good algorithms. But but the person who’s lived on a block for however many years and seen what home prices in their neighborhood so far has a really good algorithm to 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, and we still have to see them do it when prices are less dependably higher and higher. I think most people outside these companies would say they remain untested and 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 and how you operate the business.
S1: Right. One thing I wonder is this model has been pioneered in a lot of Sunbelt metro areas where you have a relatively recent housing stock and fairly self similar one as well. And in some of those markets, it’s become a sizable share of all transactions. Could it become the default model that people just don’t sell their homes to each other in the same way that farmers don’t sell produce like directly to consumers? Like, is it possible that we end up with a permanent middleman model where these companies are just the companies that that that control this, this business?
S3: I guess it depends on two things, one, how painful, like how how, how eager are people, how desperate people are to replace the painful process of selling a home the old way with something that is like closer to ordering food from your phone or something like how bad is the 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 an easier way is really good. And then 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 right.
S1: That’s sort of what has happened to to our friend Tony, who we spoke to, which is that he got more from Zillow than it seemed like he would have gotten going the traditional route.
S3: No. Yeah, that’s probably not. That’s that’s probably not sustainable.
S1: Does the fact that Zillow is taking a pause here, does that mean that there you think there’s a fundamental problem with doing the iBuying model at at this scale? Or is this just a hiccup on their way to their goal of doing tens of thousands of houses every year?
S3: I don’t think they’re going to stop, and I don’t think this proves that they can’t do it. It it just proves that they’re not getting it perfectly right at the moment.
S1: Pat, thanks so much for taking a minute to chat about your reporting.
S3: Thank you.
S1: Patrick Clark reports on housing for Bloomberg. And that’s it for the show today. TBD is produced by Ethan Brooks, edited by Tori Bosch and Alison Benedict. Alicia Montgomery is the executive producer for Slate Podcasts. TBD is part of the larger What Next family. TBD is also part of Future Tense, a partnership of Slate, Arizona State University and New America. What next will be back next week? If you missed it, go listen to Mary Show from Tuesday on the legacy of Colin Powell. I’m Henry Grabar, thanks for listening.