iBuyer Market Share Plummets, With a Measured Recovery Ahead

Like many businesses, iBuyers took a significant hit during the pandemic. Home purchases dropped 90 percent as the major iBuyers paused their operations, and as they come back to life, the iBuyers are rebounding cautiously and slowly, suggesting a long road to pre-pandemic levels.

Purchases Down 90 Percent

With the pandemic and associated lockdowns earlier in the year, iBuyer purchase volumes plummeted 90 percent. The major iBuyers (Opendoor, Offerpad, Zillow, and Redfin) paused new home purchases in March, citing safety concerns, before resuming operations in May.

With a gradual recovery in purchases throughout the remainder of 2020, total iBuyer purchases for the year could be half that of 2019.

Pausing new home purchases didn't stop the iBuyers from selling thousands of homes in inventory during the lockdown. In May, iBuyers only purchased 200 homes but managed to sell over 1,700, a clear sign they were trying to clear their inventory as quickly as possible. The pandemic stopped iBuyers from purchasing homes, but it didn't stop them from selling homes.

After announcing a resumption of purchases in May, all of the iBuyers have slowly ramped up their operations -- but at different velocities. In June, Zillow purchased around 50 homes, Opendoor about twice as many, and Offerpad about three times as many. The ramp up in activity is slow.

A Slow and Measured Recovery

iBuyer purchase volumes are recovering much more slowly than the overall markets they operate in. For example, in Phoenix, the overall market has recovered to pre-pandemic transaction levels. But iBuyer market share of that volume is still well below pre-pandemic levels.

The data suggests that iBuyers are taking a slow and measured approach to ramping up purchases. Many U.S. markets are hot: low inventory, massive buyer demand, and rising prices -- not a great environment for iBuyers.

Total iBuyer purchases across their top five markets are still a fraction of what they were earlier in the year.

Strategic Implications

The pandemic has put the iBuyer business model -- along with countless other businesses -- under strain. The past few months has seen them pivot and adapt, by launching traditional brokerage services, increasing agent referral fees, and Opendoor partnering with leading portal realtor.com.

The iBuyers are back to buying houses, but the evidence suggests a more slow and cautious approach. And once the iBuyers prove they can survive the pandemic, they're still faced with the same challenge they had pre-pandemic: profitability.

iBuyers Turning Into Brokers Turning Into iBuyers

The biggest evolution of the iBuyer business model in four years quietly occurred last week: Opendoor and Offerpad launched traditional brokerage listing services. Both companies will now list homes directly, alongside their core instant offer business, underlining the growing convergence of iBuyers and the traditional industry.

The Value of Seller Leads

One of the biggest opportunities in iBuying is monetizing seller leads (consumers that request an offer but don’t sell to an iBuyer). At scale, converting even a portion of these high-intent leads to a traditional listing could be a billion dollar opportunity.

iBuyers only buy a small fraction of homes from consumers that request offers. In 2019, Zillow bought 6,500 houses of the 264,000 consumers that requested an instant offer (about 2.5 percent). The remaining 257,000 homeowners didn’t sell to Zillow, but many -- upwards of 40 percent -- eventually sold via a traditional listing.

Historically, iBuyers have struggled with converting seller leads. Zillow farms these leads out to its Premier Agent network, and Opendoor has a network of Partner Agents.

It’s a difficult process. Connecting consumers who are interested in an instant sale to a real estate agent feels like a bait-and-switch, and because the partner agents are independent contractors, there’s an inconsistent experience and misaligned incentives.

Launching a listing service is an effort to make a sale on every consumer that enters the funnel. It moves from a “take it or leave it” product choice to presenting consumers the illusion of choice (would you like the instant offer or the traditional sale?), a common sales tactic to increase conversion.

The Lines Between Traditional and Disruptor Are Blurring

It’s not just iBuyers that have evolved their business models. Traditional brokerages are adopting new, disruptive models, and making them their own.

Traditional agents and brokers are providing instant offers and “buy before you sell” services alongside their listing services, utilizing start-ups like zavvie and Homeward. A growing list of brokers have raised capital and have launched their own iBuyer programs -- Lamacchia Realty, Matt Curtis Real Estate, and 8z Real Estate -- while industry behemoths have launched programs like Keller Offers, Redfin Now, and Realogy’s RealSure.

Over time, by adding these new tools to their toolboxes, traditional agents are slowly turning into iBuyers themselves -- or at least offering their full range of services. New ideas are not the exclusive domain of start-ups and disruptors; the best ideas are being co-opted by the traditional industry.

Strategic Implications

With this move, Opendoor and Offerpad have achieved feature parity with traditional brokerages. They are no longer an option to be considered as an alternative to a traditional listing; they’re a complete solution for any homeowner.

Both Offerpad and Opendoor are acting as their own listing agents, utilizing salaried employees to list and sell homes (exactly how they currently sell thousands of homes purchased from consumers). In some markets, Opendoor is also using partner agents for this new service.

The tendency of disruptors to utilize internal, salaried agent employees is noteworthy. Employees offer a consistent, controlled experience, which yields higher conversion rates for converting seller leads and ancillary services (which is why Redfin’s agent productivity is exponentially higher than the industry average, and why fixed-fee brokerage Homie has an 85+ percent attach rate on its mortgage product).

Ultimately, this new service -- which is in the early stages and not fully rolled out -- represents a way for iBuyers to make money without having to actually buy houses. After four years and billions of dollars invested into iBuying, it’s a significant adjustment to the core business model.

Opendoor: Down, But Not Out

This week Opendoor announced it was laying off 35 percent of its workforce, or around 600 people. The move, designed to give Opendoor more runway, increases its chances of survival, but comes at a competitive cost -- and is far from the largest layoff the industry will see in 2020.

A Tactical Retreat is Not a Defeat

The biggest mistake anyone can make is confusing this move with the failure of the iBuyer business model. Pausing new home purchases, controlling costs, and reducing headcount are all sensible strategies in the current environment. Common advice to business leaders during uncertain situations is simple: conserve cash.

The strategies taken by iBuyers are signs of a smart business trying to survive a market downturn. Blindly pushing ahead, regardless of a rapidly changing environment, is not a smart strategy. And a tactical retreat to reassess the situation and reallocate resources is not a defeat.

The Biggest Layoffs Have Yet to Come

Massive layoffs are occurring across the real estate industry. The ones that involve full time employees generate press: Opendoor, Redfin, and Compass. But those pale in comparison to the largest “workforce reduction” that will occur in slow-motion over the next six months -- real estate agents.

Real estate agents are independent contractors that work for themselves. They don’t issue a press release when they’re out of work; they simply disappear from the workforce.

In 2019, there were about 1.3 million real estate agents in the U.S., supported by about $70 billion in commissions (that’s $54,000 per agent). If the total number of transactions in 2020 drops as expected -- perhaps up to 50 percent -- there’s $35 billion less in commissions to support those agents. During the financial crisis of 2008, the industry lost about 25 percent -- or 300,000 -- active agents.

Just because Opendoor, Redfin, and Compass are announcing layoffs is not a repudiation of their business models; it’s a reflection of their employment models. Layoffs will hit the traditional industry just as hard; it just won’t be in a press release.

Deep Pockets Win

While Opendoor claims it is well capitalized and in a healthy financial position, it’s not in a healthy enough position to completely avoid layoffs (as is the case with arch-competitor Zillow, which outlined cost-cutting measures that didn't include layoffs). 

Opendoor’s move buys it time to weather the storm, but at the expense of weakening the business. Saying goodbye to 35 percent of a well-oiled team puts it at an executional disadvantage to pre-covid Opendoor. And to Zillow.

In my Inman presentation from February 2019, I said that companies with deep pockets will win. Opendoor’s deep pockets allow it to weather the current storm and remain intact (albeit smaller). Zillow’s deeper pockets allow it to weather the storm and keep the team together, giving it a potential advantage in the coming recovery.

Survival of the Fittest: The Real Estate Pandemic Survival Guide

My recent presentations usually start with this message: The industry is moving slowly, but it’s never moved this fast. That has never been more true than today.

International and historical data shows that as the pandemic spreads and more stringent lockdown measures are put in place, the volume of real estate transactions will drop significantly -- up to 90 percent. While the drop is temporary, only the most agile and resilient businesses will survive.

Transaction Volumes Will Drop

The available data from China, South Korea, and Italy shows that the current pandemic will likely cause a temporary, but dramatic, drop in overall real estate transactions.

The following chart shows property transactions in China during the early stages of the outbreak. Transactions dropped significantly -- nearly 100 percent -- during a number of weeks during the crisis, and are now growing again (but still down over 50 percent from last year).

There are similar results in Italy, with a top portal telling me that they expect transaction volumes to be down 20–40 percent in February and 70–90 percent in March. Another source cites that visits to apartments for sale in early March were down more than 50 percent compared to a year ago.

In South Korea, national deal volume was down 80 percent in the first nine days of March, and down 90 percent in the nation’s capital of Seoul.

Zillow’s recent research on pandemics shows a similar trend from Hong Kong during the SARS outbreak in 2003: Transaction volumes fell by 33-72% as customers avoided human contact (“avoidance behavior” like avoiding travel, restaurants, and public gatherings). After the epidemic was over, transactions snapped back to normal.

The drop in transactions is immediate and severe, but appears to be temporary. The data suggests that it may take up to six months (or more) for transaction volumes to return to normal levels.

Virtual Tours Won’t Save Your Business

It’s likely that we’ll see plummeting transaction volumes in other international markets as the pandemic spreads. There will be more than a predisposition for social distancing; it will be a temporary halt to a large portion of the real estate market (as evidenced by the data above).

Virtual tours won’t stop the decline; they are no replacement for an actual in-home visit. If transaction volumes drop by 80 percent or more -- driven by market uncertainty, quarantines, travel restrictions, and shelter in place orders -- no amount of virtual tours or clever online outreach will make up for that decline.

Long Term Consumer Behavior Changes

The pandemic may very well leave behind a number of long-lasting changes that impact the world of real estate in its recovery.

Social distancing may lead to the accelerated adoption of services that facilitate streamlined real estate transactions. Once more consumers experience the benefits of selling a home without dozens of open home visitors, iBuyers may see increased adoption. Once home buyers experience a closing with an online notary, more will expect it next time.

New products and services, including iBuying, online notaries, and virtual tours may become a new customer requirement in a world of increased social distancing. It’s an evolution of consumer needs, not a solution to a pandemic. And those individuals and firms that best meet changing consumer needs generally win.

Survival of the Fittest

Using the data above as a reference, it appears likely that the current pandemic will cause a significant drop in transaction volumes for a period of time, after which activity will resume and approach normal -- but only after many months.

The most important strategy for businesses and agents alike becomes quite simple: make sure you’re around for the rebound.

It’s nearly impossible to pivot to a new businesses model during an economy-shuttering pandemic. Virtual tours won’t save your business when transaction volumes drop 80 percent. The alternative strategy is to weather the storm -- cryogenically freeze yourself -- ready to emerge when the recovery begins.

All real estate businesses will be moving quickly to adapt to the changing environment. It’s those that are able to move the fastest, adapt gracefully, and have the strongest foundation and balance sheet (survival of the richest) that will survive and thrive in the recovery.

The Real Estate Pandemic Survival Guide

With the evidence and hypothesis outlined above, I conclude with the following Real Estate Pandemic Survival Guide.

Step 1: Be Around for the Recovery. There is a temporary period of pain to get through. You must survive. Lower your expenses and conserve cash to give yourself the longest runway possible. Virtual tours won’t save your business.

Step 2: There is No Step 2. Survival is everything.

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The industry -- and the world -- is moving incredibly fast, and I find it difficult to keep up with all of the changes.

Like many of you, I'm working outside of my comfort zone (and in my house surrounded by my family). I have less time to collect data, analyze evidence, and present thoughtful insights -- and I'm doing my best.

I am prioritizing releasing new data and insights as quickly as possible, to help guide us all through these uncertain times. Expect more in the weeks and months ahead.

iBuyers Pause Purchases During Pandemic

The world moves fast. In the past 24 hours, both Opendoor and Redfin announced a temporary halt to their home buying operations.

Pausing Home Purchases

The current pandemic is truly a Black Swan event, and more significant and complex than a housing market correction. The iBuyer model was designed with counter-measures to counteract a correction, including raising fees, slowing purchases, and anticipating a slowdown before it hit.

The current situation is more extreme and uncertain. There are extensive public health considerations at play and varying degrees of lockdown and shelter in place orders, which may make all real estate transactions untenable for a period of time.

Redfin pausing its home buying activity is notable, but not nearly as big of a deal as Opendoor’s announcement. Redfin has many other sources of revenue; Opendoor does not. Opendoor was purchasing about 40 times the number of homes as Redfin.

While iBuying has certain advantages in a world of social distancing, those advantages don’t carry over to a pandemic or mass quarantine.

A Temporary Drop in Transactions

The data available shows that the current pandemic will likely cause a temporary, but dramatic, drop in overall real estate transactions.

The following two charts show property transactions in China during the early stages of the pandemic. Transactions dropped significantly -- 80 to 90 percent -- during a number of weeks during the crisis, but are now growing again.

Zillow’s recent research on pandemics shows a similar trend from Hong Kong during the SARS outbreak in 2003: Transaction volumes fell by 33-72% as customers avoided human contact (“avoidance behavior” like avoiding travel, restaurants, and public gatherings). After the epidemic was over, transactions snapped back to normal. 

The drop in transactions is immediate and severe, but appears to be temporary.

Opendoor's Glide Slope

By temporarily pausing the purchase of homes, Opendoor has shut off its only source of revenue; there’s no iBuying without buying. The effect is akin to an airliner losing both engines while in flight.

With no revenue -- Opendoor’s engines -- the company will glide until it either manages to once again generate revenue, or it runs out of money. Opendoor is not alone in this predicament; many businesses across a number of industries face the same challenge.

Opendoor won’t sit still. There are many smart people at the organization that are likely working around the clock to pivot, adjust, and invent new ways of doing business in this rapidly changing environment. When you have a business with over 1,000 employees on the payroll, waiting and hoping isn’t an option.

Unintended Advantages: iBuying in a World of Social Distancing

It’s unlikely a global pandemic is what Opendoor and Zillow had in mind when they launched iBuyer businesses. The core benefits of the model -- speed and certainty -- were meant to improve upon a notoriously long and sometimes painful process. But the iBuyer business model is uniquely positioned to thrive in a world of social distancing, where people are putting a premium on the ability to conduct business while limiting direct human contact.

Unintended Advantages

While iBuying launched with specific consumer benefits in mind, it’s becoming evident that the model has several unintended advantages in a world of social distancing. At its core, the model allows consumers to sell and buy homes with limited human interaction -- a fact that had niche appeal in a normal market, but may become more popular in today’s uncertain market.

Today, those advantages include:

• No Open Homes: Homeowners have the advantage of selling their homes directly to an iBuyer, without needing to hold open homes with dozens of people walking through their house.

• Self-Guided Home Tours: Prospective home buyers can tour homes owned by iBuyers on their own, without an agent present, and outside of a crowded open home.

• No In-House Repairs: Selling to an iBuyer removes the necessity of homeowners having external contractors in a house to conduct pre-sale repairs.

Most importantly, selling a home to an iBuyer provides certainty in a time of uncertainty -- and we are definitely in a time of uncertainty. The advantage of selling a home instantly has never been demonstrated in a more dramatic fashion.

Tracking Fee Changes

Since the day Opendoor launched in 2014, people have wondered how the model fares in a down market. One argument in favor of the iBuying model is that in times of uncertainty, consumers would be willing to pay a higher fee for the certainty that an iBuyer provides.

The data is still coming in, but a quick sample of several dozen iBuyer offers from last week (March 9–13) across 14 markets shows no change in the average fee charged to consumers.

It is likely a fee increase will come, to account for the higher risk and uncertainty in the market (iBuyers generally charge a higher fee when there is more market risk). But for the moment, fees remain low, likely in an effort to keep up purchase volumes so as not to exhaust inventory.

Declining Purchase Activity

In the weeks ahead it will be worth paying attention to overall iBuyer volumes.

There are already early signs of a slowdown in the Phoenix market, the birthplace and epicenter of iBuying. Whether driven by inventory shortages, global market uncertainty, or iBuyers mitigating their risk, significantly less homes are being bought each month in Phoenix.

Total iBuyer purchases in Phoenix for February are down 30 percent year-on-year; Zillow in particular is down 63 percent from the same time last year.

Compared to the previous month, January, purchase volumes are down from 368 to 315, or 14 percent. At the same time, iBuyer home inventories are at an all-time low: at current monthly sales rates, Opendoor has two months of inventory and Zillow just one month. The iBuyers are clearing their inventory quickly by selling almost two homes for each home they purchase.

Implications for iBuyers and the Industry

In the months ahead, I would expect iBuyers to react appropriately to a slowing and uncertain market:

• Raise fees to account for increased market risk and houses potentially taking longer to sell, driven by less overall consumer demand.

• Reduce inventory, by purchasing less homes each month (Phoenix as an example) and continuing to clear existing inventory with appropriate price reductions.

The current state of the market will finally shine a light on how the iBuyer business model reacts to slowing consumer demand. On the one hand, the iBuyer proposition becomes stronger for consumers looking for certainty and to limit direct human interaction. But on the other hand, iBuyers are at-risk in a market slowdown by holding hundreds or thousands of unoccupied homes on their balance sheets.

The Zillow Revenue Growth Fallacy

Conventional wisdom is that revenue growth is good, and is an important benchmark to measure a company’s success. But total revenue and revenue growth are misleading metrics for iBuying; they’re simply a proxy for how much capital the company has available to purchase houses. 

To increase revenue, Uber needs people to request rides, Airbnb needs travelers to book stays, and Netflix needs consumers to subscribe. iBuyers simply need to buy more houses, and the more houses they buy, the more houses they sell. 

It takes no great skill to enter a market with a lot of money and start buying houses. But it takes a great deal of skill to resell those houses and generate a profit.

Zillow is currently losing money on each house it buys and resells. Overall losses in its Homes segment (Zillow Offers) are mounting: a $100 million net loss in Q4 2019, and a $312 million net loss in 2019.

Looking at the unit economics of each home, which includes the purchase price, sale price, agent commissions, interest expense, holding and renovation costs, Zillow lost over $6,000 per home it purchased and resold. That number has fluctuated over the year, but is rising.

(What's driving the loss? Since Q1, the average holding cost per home is up $1,000 and the average interest expense per home is up $1,000 -- both signs that it's taking longer to resell homes.)

After all business expenses are factored in: sales and marketing, technology development, employee salaries, office space -- everything -- Zillow is losing $56,000 for each home it purchases and resells.

Zillow’s entry into the iBuyer market is still in the early stages. The fact that the business is unprofitable should come as no surprise. The hope -- and it is really just hope at this stage -- is that profitability will come with scale and adjacent revenue streams like title insurance and mortgage.

What’s unclear is not Zillow’s strategy nor rationale for being an iBuyer. Rather, it is why Wall Street, or any other investor or media outlet, is rewarding Zillow for “beating” its revenue guidance. Not only is Zillow able to generate revenue at will by buying more houses, it loses more money with each house it buys. In effect, Zillow is being rewarded for losing more money than originally planned.

The Real Story: Premier Agent Growth

What Zillow should be rewarded for is bringing its Premier Agent Program back to growth. After a precipitous decline in 2018 and all growth grinding to a halt earlier this year, the program is back to growth mode -- albeit small. 

Time will tell if Premier Agent growth will continue as Zillow continues to roll out its flex program, but the early signs are encouraging.

Choose Your Data Carefully

Zillow is investing heavily to grow a new business line, and its ability to sustain losses is reflective of how big it sees the opportunity. My hope -- and it is really just hope at this stage -- is that more sophisticated industry observers will stop putting so much emphasis on pure revenue growth as a metric for success.

Do iBuyers Like Opendoor and Zillow Make Fair Market Offers?

This research study addresses a fundamental question in real estate: Do iBuyers like Opendoor and Zillow make fair market offers on the homes they purchase? This has been a point of contention since the iBuyer business model launched, with opponents claiming that iBuyers purchase houses at well below market value, while iBuyers claim they provide consumers fair market offers.

To provide a definitive answer, this comprehensive study is both deep -- reviewing over 20,000 iBuyer transactions -- and broad -- utilizing multiple methodologies to draw insights from the data. The evidence suggests a clear answer to an often confusing question.

Methodology and data

This study uses three methodologies to establish an evidence-based view of iBuyer offers relative to market value:

1. Purchase Price-to-AVM

2. Price Appreciation

3. Rejected Offer vs. Market Sale

The data consists of over 20,000 iBuyer transactions conducted in 2018 and 2019 where an iBuyer purchased and then resold a property. The transaction data is sourced from public records, which are the legally required disclosures on any property transaction. Multiple sources were used to establish consistency, and thanks go to Remine and ATTOM Data for making their unique expertise and data sets available.

The data used is not merely a sample; it is comprehensive, covering over 95 percent of relevant iBuyer transactions. The study includes over 60 different legal buying entities that iBuyers use to purchase homes. While all major iBuyers were tracked, this analysis focuses on the leading two: Opendoor and Zillow, which account for 86 percent of total iBuyer volume.

Method #1: Purchase Price-to-AVM

Purchase Price-to-AVM is a straightforward comparison of the price an iBuyer pays for a house and what an AVM (automated valuation model) determines a house is worth at the time of purchase. This study uses the First American AVM.

A review of the transactions undertaken by Opendoor and Zillow between January and September 2019 reveal a median Purchase Price-to-AVM of 98.6 percent, or $3,800 on a $270,000 home.

(For those interested, transactions in 2018 reveal similar results +/- 0.1 percent. I am focusing on 2019 because in a rapidly changing industry, the most recent transactions best reflect the current practices of each business. Zillow was in start-up mode in 2018.)

The Purchase Price-to-AVM also varies by market, with consumers getting offers closest to AVM in the three Florida markets of Tampa, Orlando, and Jacksonville.

While an AVM is not a definitive proxy for true market value, like a Zestimate, it is a data point and does provide helpful context in determining the fair market value of a house. The outliers are most likely problems with the AVM, rather than an iBuyer purposely over- or under-paying for a house by a significant margin.

Method #2: Price Appreciation

Price appreciation is the difference between what an iBuyer buys and subsequently resells a house for. Each of these “flips” occurs within a short time frame (typically 90 days). The difference between these two numbers reveals clues around the market value for a house.

A review of the transactions where Zillow and Opendoor purchased and then resold a house in 2019 reveals a median price appreciation of 3.3 percent, or $8,900 on a $270,000 house.

In 2019, the average annual home price growth is 3.8 percent, according to Black Knight. Assuming an average holding period of 90 days, that’s 0.9 percent of price appreciation that naturally occurs in the market. Subtracting this from the 3.3 percent median price appreciation leaves 2.4 percent associated with the purchase and resale of the house.

The remaining 2.4 percent price appreciation delta is not solely a discount to market value; it must also account for the improvements made to each home. It’s reasonable for iBuyers to command a premium on the houses they own and resell, in the same way a certified pre-owned car commands a premium. These houses have been through a rigorous repair process with new carpets and paint, and refurbished up to a generally high standard.

Zillow’s per home renovation and repair costs are $12,000 (source: Zillow’s third quarter 2019 shareholder letter). Opendoor’s average average repair cost is between 2–2.5 percent of a home’s value. In each case, a significant amount of money is being invested into each home before resale, which should theoretically and practically lead to a higher home resale value.

Therefore, if we subtract the price appreciation that naturally occurs in the market (0.9 percent) and assume that half of the remaining price appreciation delta is a relative discount to market value when an iBuyer purchases a house, and the other half reflects a resale premium, the actual discount to market value is 1.2 percent (half of 2.4 percent), or $3,200 -- very similar to the 1.4 percent discount derived from the Purchase Price-to-AVM methodology above.

Price appreciation over time

Price appreciation is a fluid metric, and is changing over time and by market. On a yearly basis, the median price appreciation delta has dropped from 5.2 percent in 2018 to 3.3 percent in 2019. And it’s not simply a factor of iBuyers moving into more expensive markets; in absolute dollar value, the median price appreciation dropped from $12,300 in 2018 to $8,500 in 2019.

The trend continues in 2019. On a monthly basis, median price appreciation has dropped a full percentage point between January and September of 2019.

The resulting trend is clear: iBuyers are making less and less money on the “flip” of a house.

There are a number of reasons for this trend. The iBuyers have always publicly stated that they aim to offer consumers a fair deal, with no desire to buy low and sell high. The iBuyers are attempting to make offers as close to market value as possible, and are improving over time.

The change also reflects increased competition in the space. With Zillow launching its home-buying program in 2018, competition is heating up in a major way. Both Opendoor and Zillow are attempting to grab market share as fast as possible, and one way to do that is by offering more attractive offers to consumers. 

Median price appreciation varies by market, and could be an artifact of overall market appreciation, iBuyer market maturity, or local competitive pressures.

Method #3: Rejected Offer vs. Market Sale

Many consumers request an iBuyer offer, but not all accept it. Of those that request an offer, reject it, and then go on to sell their home traditionally, it is possible to track the difference between the original iBuyer offer and the eventual sale price.

A recent Zillow study looked at 3,200 homes where a seller declined a Zillow Offer and then went on to sell traditionally within 120 days. On average, Zillow was offering 99.8 percent of the eventual sale price -- an implied discount of 0.2 percent.

The Zillow statistic has not been verified by an independent third-party and its comprehensiveness is unclear. Even so, it is a useful data point in this analysis. Opendoor declined to discuss its metric for this study.

Summary of evidence

The evidence in this research study strongly suggests that iBuyers are offering close to fair market value for the homes they purchase. Multiple methodologies based on independent, third-party data suggest a discount to market value of around 1.3 percent -- or $3,500 on a $270,000 house.

It is important to remember that this is the median. In any statistical study, there will be outliers, examples of homes where the discount to market value is higher or lower.

Total cost to the consumer

Whether iBuyers make fair market offers on houses is a different question than if iBuyers make fair offers to consumers. To answer the latter question -- which is not the focus of this study -- all of the associated costs and fees need to be included.

The average iBuyer fee is around 7.5 percent -- 1.5 percent higher than a typical real estate commission. However, the average holding costs for three months (which can range from 1–2.5 percent of a home’s value) shift from the consumer to the iBuyer, making the true cost difference negligible.

Which leaves the discount to market of 1.3 percent, or $3,500 on a $270,000 house, as the primary monetary difference between an iBuyer and a traditional market sale. Ultimately, it is up to consumers to decide whether that discount -- in exchange for convenience, speed, and certainty -- is worth it.

Strategic implications for the industry

So what is revealed about a business that buys and resells houses, but doesn’t make money on the flip? Buying houses is a means to an end. But what is the end, and how will iBuyers make money?

The answer is that it’s not about the house, it’s about the transaction. And iBuyers can make money through ancillary services like mortgage and title, and in Zillow’s case, seller leads. This should concern any mortgage and title incumbent; iBuyers are your new competition. And to maximize consumer adoption of these new services, iBuyers must control the transaction, and the expert advisor in the transaction: the real estate agent.

The results of this study -- that iBuyers are buying homes at close to market value -- is seemingly positive for consumers. But long term, to fulfill their strategies and build a viable business that makes money, iBuyers will need to operate walled gardens under their control: Sell to an iBuyer, buy an iBuyer home, finance with an iBuyer Mortgage, and use an iBuyer Agent. And this exclusive, closed ecosystem will likely have a significant impact on the real estate industry going forward.

Download this research study as a lovely, nine-page PDF.

Transparency And Deception In Real Estate Tech Fundraising

Transparency is the cornerstone of any successful, trustworthy business. But not all real estate tech companies practice transparency; the most egregious example occurs in fundraising. The lines between raising equity and securing debt have been blurred, and numbers are being inflated in an effort to mislead the public. If a business model relies on deception, it’s a bad business model.

Equity vs. Debt

A company raises equity and secures debt.

When a company raises equity funding, it sells investors stock in exchange for capital; investors are buying part of the company at an agreed-upon valuation. When a company secures debt, it is granted a line of credit to access funds when needed, or is given a loan -- both of which need to be paid back, with interest.

With the rise of iBuyers and similar models that involve a strong financial component, such as purchasing homes directly from homeowners, debt requirements are skyrocketing. Many real estate tech companies, some of which are barely a year old, are securing hundreds of millions of dollars in debt.

Debt is not equity

As far back as I can recall, when a company announced that it had raised money, it was talking about equity investment. An investor had reviewed the business pitch, decided the model and the team were winners, and invested money into the venture in exchange for stock.

At some point, things changed. When raising money, it is becoming increasingly common for real estate tech companies to combine equity and debt together into a larger, more impressive sounding number.

Because companies are using debt to finance the purchase of homes, the amounts are absurdly large. In fact, the companies that combine equity and debt are, on average, artificially inflating the amounts raised by 11 times!

This is a deceptive practice meant to trick the public into thinking a company has raised more money than it actually has, and is bigger and more successful than someone may otherwise think.

Debt is not equity. If I get a $500,000 mortgage to purchase a new home, have I “raised $500k to reinvent the home buying process for my family,” or have I simply secured a loan (which must be repaid)?

Best (and worst) practices

Some companies unapologetically combine equity and debt numbers and refuse to reveal the breakdown. Others combine equity and debt as a headline number, but eventually reveal the breakdown later in a press release. Artificially inflating the headline number is still deceptive, but at least they’re not brazenly hiding the truth.

The best practice -- and the most transparent -- is talking about equity as equity, debt as debt, and not inflating the headline number by combining the two.

Transparency in action

Full credit to the two biggest iBuyers, Opendoor and Zillow, for providing full transparency around capital raises. As a public company, Zillow really has no choice other than to play by the rules. Opendoor, as a private company, is not forced to offer the same level of disclosure, but nonetheless chooses to in a commendable effort of transparency.

Ribbon and Knock are two of the worst offenders, with the following big-money, attention-grabbing headlines: “One-year-old Ribbon raises $225M to remove the biggest stress of home buying,” and “Knock Raises $400M To Simplify Home Buying.” Unfortunately, each raise includes massive amounts of debt and neither company reveals the actual numbers (in Knock’s case, public filings later revealed the equity component was $26 million).

EasyKnock, Nested, Flyhomes, Homeward, and Perch are all guilty of combining equity and debt into large headline numbers, and then go on to clarify the figures in the body of the announcement -- but the damage has already been done.

Offerpad used to break out equity and debt, but is now combining both into a large, headline figure and not providing the details. Like the others, the results are impressive headlines that confuse and mislead the public -- especially when compared against peers, like Opendoor, that aren’t inflating their numbers.

Comparing apples and oranges

The issue becomes clear when making comparisons -- often while someone is attempting to make a decision. Whether it’s a prospective customer, a potential employee, or a curious journalist, misleading headlines create unfair and inaccurate comparisons.

For instance, if one compares the headline numbers from Opendoor’s $300 million raise with Knock’s $400 million raise, Knock may appear to be the fundraising winner. However, in reality, Opendoor raised over ten times the amount of equity than Knock: $300 million vs. $26 million! And in total, Opendoor is even further ahead.

Getting noticed

I imagine a number of companies -- many of them run by friends and colleagues -- undertake this practice to appear larger than they actually are. But I also imagine that in real estate, a factor even more important than fundraising prowess is trust. And trust comes through transparency. If your business model relies on deception, it’s a bad business model.

How serious are Zillow and Redfin about iBuying?

In the past year, two of the U.S.'s leading portals, Zillow and Redfin, have launched iBuyer businesses. Zillow's entry was, in part, a response to an existential threat to its business model, and much of the value it may derive is not from buying and selling houses at all, but by generating valuable seller leads (watch my video presentation). Which begs the question: How serious is Zillow about being an iBuyer?

Opendoor's 3x advantage

The best way to compare seriousness is actual market traction and purchase volumes -- putting your money where your mouth is.

In the first seven months of 2019, Opendoor continues to be the clear leader in the iBuyer space as measured by home purchase volume. Opendoor has purchased nearly 10,000 homes, around three times the volume of Zillow.

On average, Opendoor is purchasing around 1,400 homes per month (as an aside, a recent Opendoor commercial stated the company buys a home every 34 minutes -- or around 1,300 per month). Again, this number is about three times the volume of Zillow for the first seven months of 2019.

However, Opendoor's volume advantage is eroding over time as Zillow's activity accelerates. In January, Opendoor purchased 4.7x the volume of Zillow, but that is down to 2.4x in July. Zillow is closing the gap (especially in the last three months).

The magic number in all of this appears to be 3x: year-to-date in 2019, Opendoor is about 3x ahead of Zillow in terms of home purchases. But Zillow is catching up.

Available firepower to purchase homes

Another way to judge a company's level of seriousness about iBuying is how much debt it has available to purchase homes. Each of the major iBuyers has secured massive amounts of debt, but some have secured more than others.

Once again, the magic 3x number appears: Opendoor has three times the debt available to purchase homes compared to Zillow. So it is no surprise that it is purchasing three times the volume of homes.

What about Redfin?

Readers may notice Redfin in distant fourth place in many of the charts, which, again, is an indicator of seriousness about iBuying.

Opendoor has 30x the debt available and has purchased nearly 40x the homes compared to Redfin in 2019. On average, Opendoor is purchasing around 1,400 homes per month, compared to Redfin's 36 homes per month. Redfin is an iBuyer in the same way I'm a basketball player. Both statements are technically true, but neither of us are anywhere close to the big leagues.

Differing strategies and motivations

Opendoor's entire business model revolves around buying and selling as many homes as possible. At scale, it becomes a powerful business. Zillow, on the other hand, may want to moderate its home purchases to achieve a scale where it maximizes seller leads. As I've said before, Zillow has the potential to make more money with less risk by monetizing seller leads.

Zillow's purchase rate (the amount of homes it buys compared to the total number of offer requests it receives) has consistently hovered around 2 percent.

Zillow is expanding fast to catch up to Opendoor, but it may have different motivations in doing so. Zillow's buying activity in Phoenix, for example, has plateaued since January of 2019. Is it taking a well-earned breather, or is 100 homes a month all it wants (or needs) to buy?

The evidence suggests that Zillow is serious about being an iBuyer and a major player in the space. But its motivations, and the question of why it wants to be an iBuyer, may differ significantly from other iBuyers.

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Check out the part of my Inman Connect presentation where I talk about Zillow's pivot to iBuying, and the value of seller leads.

Realtor.com’s slow descent to irrelevancy

With the rise of iBuyers as a powerful new starting point in the consumer journey, realtor.com is yielding the strategic advantage to arch-rival Zillow. Lacking an iBuyer strategy for the past year, realtor.com has fallen further behind in terms of delivering value to consumers and agents. Multiple options to enter the space are available, but the clock is ticking for realtor.com to execute strongly and maintain relevance in a rapidly evolving industry.

Power at the top of the funnel

One of the topics I discussed in my recent Inman Connect presentation was the power companies have at the start of the consumer journey. Real estate portals around the world derive and maintain their dominant positions because they are a consumer's first stop in the home buying and selling process.

In the days before the internet, real estate agents were the starting point. With the launch of Zillow and its Zestimate, portals became the popular starting point for consumers. Opendoor and iBuyers shifted the dynamic by offering instant offers on homes, attracting consumers. Today, a number of iBuyer aggregators and real estate agents are fighting to attract consumers by incorporating instant offer services. I explain further in the quick video clip below.

In some markets, up to 40 percent of serious home sellers are requesting an instant offer before listing their home! Instant offers are becoming the new Zestimate -- the new, natural starting point for determining a home’s value. And because of this, they are also an existential threat to portals.

The value of seller leads

The iBuyer business model generates a ton of high-intent seller leads: consumers who are interested in moving and request an offer, but don’t sell their home to an iBuyer. In the last three months alone, Zillow generated 69,000 offer requests but only bought 1,500 homes. The remaining leads can be distributed to real estate agents -- a valuable source of new business.

Today, Zillow Offers is active in 11 markets. Once it expands to 20 markets, Zillow could generate close to 500,000 seller leads annually -- a number that will increase as its national roll-out continues.

Zillow and realtor.com’s traditional lead generation businesses are built around buyer leads. iBuying has become the holy grail of seller leads: popular with consumers, valuable to agents, and of generally high quality. Over time, these leads will become a valuable source of new business for real estate agents, and an additional revenue driver for Zillow.

Using rough estimates, it's clear that the profit potential of seller leads far outweighs that of buying and selling actual homes, with considerably less risk for Zillow.

Real estate agents partnering with Zillow receive valuable buyer and seller leads. The same partnership with realtor.com yields only buyer leads.

Strategic advantage: Zillow

Each day, Zillow continues building its sustainable competitive advantage by strengthening its leadership position in consumer’s minds as the place to go for an instant offer. Simultaneously, Zillow generates tens-of-thousands of valuable seller leads for its agent customers each month -- a service which realtor.com does not provide.

For a real estate portal’s two most important audiences -- consumers and agents -- Zillow is highly differentiated while realtor.com lags behind.

Realtor.com needs to provide an iBuyer service -- but does not need to buy and sell houses directly -- to compete with Zillow. The logical entry point is a partnership with a national iBuyer (and that iBuyer, by the way, needs an inexpensive source of leads just as much as realtor.com needs an iBuyer service).

Until realtor.com unveils a coherent iBuyer strategy, it will remain at a growing disadvantage to Zillow, and risks further irrelevancy in the evolving battle for consumer eyeballs.

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Check out my entire Inman Connect presentation, "iBuying Disrupted: Battle of the Behemoths."

My "iBuying Disrupted" Presentation

"Only Mike would start a 9 a.m. presentation talking about EBITDA and GAAP financials." – Anonymous Zillow executive

Two weeks ago I had the pleasure of speaking at Inman Connect Las Vegas -- one of the world's premier real estate conferences. My talk, "iBuying Disrupted: Battle of the Behemoths," was followed on stage by Rich Barton, CEO of Zillow, Glenn Kelman, CEO of Redfin, and Eric Wu, CEO of Opendoor. What a lineup!

Watch the video

At the Inman Connect Las Vegas 2019 conference, Mike DelPrete, an entrepreneur, analyst and real estate industry strategic adviser, took to the stage to explain the seismic shifts shaking up the residential real estate market.

Some of my favorite lines from the presentation:

“There’s a new competitive advantage in town: sustained unprofitability.”

"Red is the new black."

"Agents are the ultimate iBuyer aggregator."

“iBuying is the new Zestimate."

“Companies and agents that win will be the those that empower consumers to make the choice that’s right for them.”

In addition to the video of my presentation, you can also download a copy of my my presentation slides. I'd love to hear your feedback!

4 strategies for agents to stay relevant in the age of iBuyers

New content alert! I'm trying something new: crisp, strategic "quick hits" that offer actionable suggestions. I usually publish evidence-based industry insights, while my consulting work focuses on hands-on strategy and guidance. This is meant to bridge the gap between the two -- let me know what you think!

iBuyers are a rising force in real estate. Companies like Opendoor, Offerpad, and Zillow are collectively spending billions to offer consumers a new way to buy and sell homes. As iBuyers expand nationally, more and more real estate agents and brokers are being faced with a key strategic question: How do we stay relevant in the age of iBuyers?

As overall iBuyer activity exceeds 1,000 home purchases and sales per month in just one market -- Phoenix -- it’s a trend that can't be ignored.

I’ve conducted deep analysis on iBuyers for the past four years, culminating in the recently released iBuyer Report. Based on that background and my work in the industry, I offer four key strategies agents and brokers should consider when evaluating their response to iBuyers:

Be a trusted advisor. The role of a real estate agent has always been to help guide consumers through the home buying and selling process. An instant, cash offer on a house simply represents a new path to the same end. This doesn’t mean there isn’t a role for an agent; it’s simply another path that needs navigating. And the agent is uniquely placed to be that expert advisor.

Solicit multiple offers. As a trusted advisor who represents the home owner’s best interests, an agent is well-suited to solicit multiple offers on a home from multiple iBuyers, and to present those offers alongside a traditional market sale. The iBuyers’ online processes make it easy to receive multiple offers; the agent can do the work and provide guidance. Each major iBuyer offers partnership programs that pay a referral fee for a successful transaction.

Don’t ignore them. iBuyers are spending millions of dollars each month on direct-to-consumer advertising (TV, radio, and digital). Agents and brokers can’t (and shouldn’t) compete with that spend, and they can’t ignore the fact that consumers are being educated -- on a massive scale -- about iBuyers. Ignoring them won’t make them go away. (In the past two months alone, I’ve been quoted in the New York Times, the Wall Street Journal, and Marketplace -- all doing stories about iBuyers.)

Highlight the power of personal relationships. Real estate agents are people, and iBuyers are corporations. If you’re an agent, highlight the personal relationship you bring to the process. The power of human psychology is incredibly strong in real estate; brokers and agents should use it to their advantage.

iBuyers represent a significant shift in the real estate landscape, but it’s not a zero-sum game. Real estate agents and brokerages can employ specific strategies to stay relevant, highlight their strengths, and maintain their position as a trusted advisor in the center of the transaction.

iBuying is Zestimate 2.0

When Zillow launched in 2006, its Zestimate was its claim to fame.

The Zestimate was a lead generation tool that attracted consumers by giving them a starting point for determining what their home -- or any home -- is worth. It was online, it was fast, and it was easy.

Flash forward more than a decade later, and online valuation tools are a commodity. There are dozens of web sites that will determine a home's estimated value. Zillow’s unique advantage has diminished.

Zillow's strategic necessity

I believe Zillow's guiding strategic principle is that it must be consumers' first destination in the home buying and selling process. Zillow's sustainable competitive advantage lies in its massive audience and strong position at the start of the consumer journey.

In the past, other listing portal competitors were relatively undifferentiated. Zillow has been the clear market leader, and there was no credible threat that could unseat it from its powerful position.

However, the entry of iBuyers with a service that made instant offers on a home – online – was novel and compelling, just like the Zestimate in 2006. Suddenly, more and more consumers were beginning their home selling process not on Zillow, but on other web sites like Opendoor and Offerpad. This was a key existential threat for Zillow.

The iBuyer business model is Zestimate 2.0 – the natural starting point for determining your home’s value. What’s more accurate than an actual offer on your home?

Mass-market appeal

Opendoor's long-term vision is that every home owner will request an instant offer before selling their home. It's a natural starting point: It's easy, it provides value, and there's no commitment. What better way to value your home than an actual offer?

While Zillow only purchases around three percent of the offer requests it receives (that number is higher for the other iBuyers), a very large number of consumers are requesting offers each month. In established markets like Phoenix, anywhere from 25–35 percent of active home sellers request an instant offer before selling their home. The numbers are BIG.

Given the growing mass market appeal of an instant offer (tens of thousands of requests each month) and the simplicity of the process, it's no surprise that Zillow launched its own iBuyer service.

Strategic implications

If you're in the business of providing consumers an estimate of the value of their home, the bar has just been set higher. The inherit power and appeal of the iBuyer model is quite clear:

• Instant offers are simple, easy, and quick. All online.

• Instant offers are at the start of the funnel -- they attract consumers at the start of the home buying or selling journey.

• It's a novel concept that satisfies a consumer need, hence the high proportion of consumers requesting offers.

In other words, iBuying is the new Zestimate.

Zillow's New Strategy: Insights, Implications, and Analysis

Last week, Zillow announced a major strategic shift: Along with a new CEO, it made clear that its top focus is its Zillow Offers iBuyer business.

Today's email covers the highlights of that announcement. Additionally, next week I'll be holding a 60-minute webinar that dives deep into the strategy, numbers, and implications of Zillow's latest move.

Premier agent growth grinds to a halt

The most striking statistic from Zillow's results is the lack of projected growth in its flagship, billion-dollar premier agent program (which accounts for 67 percent of its revenue). Guidance for the first quarter of 2019 is only 1.5 percent -- a steep decline from past quarters.

And on a full-year basis, Zillow projects its premier agent program will grow at 2 percent -- a flattening from past, double-digit growth.

Both of these projections come on the back of difficulties rolling out new premier agent products focused on lead quality over quantity.

But what's most striking is the suddenness of the decline. Going from double-digit to flat growth in the span of a year is significant. More than rollout issues, I believe Zillow has reached the upper limit of what it can charge agents for leads. Which is what's driving such a significant shift in strategy.

Expensive homes and a longer hold time

Last week I wrote about Zillow's unsold inventory in its Offers program, and the significance of longer hold times. The latest data highlights the same challenge.

The homes Zillow sells are less expensive: an average sale price of $292,000. However, the houses it holds in inventory are considerable more expensive, with an average value of $320,000.

This data point matches up exactly with the latest data from Phoenix, which shows a considerably higher average purchase price for Zillow compared to the other iBuyers.

The more expensive the home, the higher proportion of unsold inventory. It takes longer to sell more expensive homes, and it looks like Zillow is more than dabbling in the expensive end of the market. This is a key metric to watch!

Profit projections

Zillow released a detailed financial breakdown for its Offers business, including initial profit margins on its sold homes. Adjusted EBITDA, which backs out a number of costs including stock-based compensation, shows a per-home profit margin of 0.6 percent, lower than the stated goal of 2–3 percent.

(As a form of employee compensation, I believe stock-based compensation should be included in a true EBITDA calculation, so I've provided both options above.)

It's still early days, but this benchmarks current performance compared to where the business needs and wants to go in the future.

Strategic implications

I believe Zillow's guiding strategic principle is that it must be consumers' first destination in the home buying and selling process. Zillow's sustainable competitive advantage lies in its massive audience and strong position at the start of the consumer journey.

Think of this latest move as "Zestimate 2.0." The original Zestimate gave consumers a fun and helpful starting point when thinking about moving or buying a house. Now that online valuations are a commodity, Zillow needs to up the game: Instead of an estimate of value, how about an actual offer on your house? It's a compelling consumer proposition -- even if it simply serves the same purpose as the original Zestimate (attracting consumers at the start of the journey).

There's a whole lot more to discuss! If you want to listen and watch as I dive deep into the subject, register for next week's webinar.

Zillow Offers' most important metric

Later today, Zillow will announce its fourth quarter and full year 2018 results. Its activity as an iBuyer continues, and it recently overtook Offerpad to become the second-largest iBuyer in Phoenix. But my attention is focused on one key metric: Zillow's ability to quickly sell houses.

Why it matters: Zillow's goal is to hold houses for an average of 90 days. Any successful iBuyer needs to hold houses for as little time as possible, otherwise unsold inventory builds up, finance costs rise, and the whole model starts to blow up.

Overall activity grows; #2 in Phoenix

Zillow's overall iBuyer activity continues to grow, both nationally and in Phoenix (its biggest market). Based on the total number of homes purchased and sold, Zillow overtook Offerpad to claim the #2 spot in Phoenix for the month of January. Zillow is -- for the moment -- the second-largest iBuyer in the important Phoenix market.

Buying more than it's selling

While Zillow's overall activity continues to rise, its purchases are quickly outpacing sales. This is to be expected in the early months of a new market, but it's now eight months since launch. This is creating a growing inventory of unsold homes: around 350 in Phoenix as of February 12th.

It's natural for iBuyers to buy more houses than they sell when entering a new market. But over time, this Buy:Sell ratio is a critical metric for any iBuyer. Houses must be sold for the business to work!

Expensive homes, longer hold time

There are early signs that Zillow may be having difficulty selling houses. For iBuyers, time is money. The faster they can turn around and sell a house, the better.

The magic number for total holding time is around three months; Opendoor and Offerpad hold for between 80-100 days. Zillow currently has around 350 unsold houses in its inventory in Phoenix. Of those, it appears that around 110 homes have been owned for more than three months.

Part of the reason Zillow appears to have longer holding times may be the price of the homes it is purchasing. On average, it is buying more expensive homes than the other iBuyers in Phoenix.

Nationally, Zillow has purchased over 700 homes with an unsold inventory of over 500 homes.

The more expensive the home, the higher proportion of unsold inventory. It takes longer to sell more expensive homes, and it looks like Zillow is more than dabbling in the expensive end of the market.

Strategic implications

The key metric to watch is how well Zillow can sell its houses. Buying is relatively straight-forward; only once a house is sold is the entire business model complete.

To succeed as an iBuyer and appropriately manage its risk, Zillow needs to hold its houses for a minimum amount of time (on par with the other iBuyers), and avoid building up a large inventory of unsold homes.

It's still early days and Zillow has been quite aggressive in growing as fast as possible. But with its one year anniversary four months away, the pressure is on to demonstrate a consistent ability to buy -- and sell -- houses.

My Inman Connect Presentation

Earlier this month I had the pleasure of presenting at Inman Connect in New York City. My session, "iBuying Goes Mainstream: How Big Can it Get?" covered a range of topics, from the evolving role of portals to the latest iBuyer analysis.

My key points are outlined below. Watch the video of my presentation and download a copy of my presentation slides.

Growing iBuyer traction

The rise of iBuyers continues. During my presentation, I shared some of the latest national data available; a "sneak peak" at my upcoming iBuyer Report.

Opendoor in particular continues its strong growth in terms of houses bought and sold, clearly accelerating in 2018. Overall, iBuyers are small but growing: around 5 percent of the market in Phoenix.

The consumer journey

If you're an Inman subscriber, you can read the provocatively titled writeup of my presentation, "Opendoor's 'nightmare': KW agents backed by their own iBuyer." To quote:

 His point is that Opendoor, a tech-powered homebuying and selling startup with $1 billion in venture capital, is vulnerable to competition from companies that already connect with consumers on a massive scale at the beginning of their home-buying or selling journey.

Who wins?

The best new business models are exponentially better than the status quo, and the biggest companies are exponentially outspending their competitors.

Whether it's materially better efficiency with models like Redfin and Purplebricks, or Opendoor raising (and spending) 10 times the capital than its nearest competitors, the stakes are big. The trends that are impacting the industry are not incremental.

My presentation

You can watch the video of my presentation, and download a copy of my my presentation slides. I'd love to hear your feedback!

Zillow's billion dollar seller lead opportunity

Last week, Zillow announced its latest financial results, and the stock dropped 25 percent (losing $2 billion in value). But the story everyone is missing is the Zillow Offers iBuying business, and the huge potential of seller leads.

Why it matters: Last week I was quoted on MarketWatch saying, “If you’re thinking about Zillow doing iBuying and you’re not thinking about seller leads, you’re thinking about it the wrong way.” Seller leads are the real billion dollar opportunity.

Slowing premier agent growth

Here's the reason why Zillow's stock tanked 25 percent last week, in one chart:

Zillow's premier agent program accounts for over 70 percent of its revenue, or nearly $1 billion. Growth is slowing down. I'm not sure why this surprised anyone on Wall Street; I've been writing about it since early this year (Zillow's revenue growth slows and Zillow's strategic shift to iBuying and mortgages). I believe it's the primary reason Zillow has aggressively expanded into adjacent businesses.

The value of seller leads

Zillow's iBuyer business continues to grow, and the latest results crystalize the opportunity in seller leads.

Zillow says that since launch, nearly 20,000 homeowners have taken direct action on its platform to sell their home. Of those, it has purchased just about 1 percent of homes (around 200). That leaves about 19,800 leads who remain interested in selling their homes.

If Zillow simply sold those leads at $100 a pop, they're worth nearly $2 million.

But the real opportunity is giving those leads to premier agents in exchange for an industry-standard referral fee, about 1 percent, if the property sells (similar to the Opcity business model).

Here's the kicker: Zillow claims about 45 percent of consumers that go through the Zillow Offers funnel end up listing their home. That's a high conversion rate reflective of a high intent to sell; about 10 times higher than Opcity's conversion rate.

Assuming a 1 percent referral fee, a $250,000 home, and a conversion rate of 45 percent, those 19,800 leads are worth $22 million in revenue to Zillow, almost all profit.

Compare that to the estimated profit of its iBuyer business (1.5 percent net profit), which, on 200 houses, is $750,000. The value of the seller leads is worth almost 30 times the profit from flipping houses!

Total addressable market

Zillow says that based on its current purchase criteria, if Zillow Offers were available in the top 200 metro areas in the U.S., sellers of nearly half of the homes sold in 2017 across the entire nation would have been eligible to receive offers from it to buy their home directly. That equates to around 2.75 million homes annually.

Last quarter, Zillow said that it received offer requests from around 15 percent of the total for-sale stock in the Phoenix market. Interestingly, that number increased to 25 percent in September and 35 percent in October. That's a reflection of the strong lead generation power of Zillow Offers across its various web properties.

Based on these numbers, if Zillow goes national (200 metro areas) and sees 35 percent of the for-sale stock, it would receive 962,500 offer requests each year.

The billion dollar opportunity

Taking the latest numbers, which have been validated to the tune of 20,000 offer requests over five months in two markets, the total opportunity becomes clear with a national rollout.

Seller leads can be a billion dollar business for Zillow if you believe the current numbers. Even if a national conversion rate is lower, or the % of for-sale stock fluctuates, it's still worth several hundred million dollars in revenue annually.

Should Zillow even buy houses?

Given the value of the seller leads, should Zillow even be in the business of buying houses? Yes, if it wants a credible product for consumers. The real question is: What proportion of houses should Zillow actually buy?

Zillow's "big picture" is 5 percent national market share, which equates to buying around 10 percent of all offer requests (it is currently buying around 1 percent of offer requests). At a 1.5 percent net margin, that's around $1 billion in profit.

But to reach that scale, Zillow would need to spend $68 billion to purchase 275,000 houses annually. Assuming an average holding time of 90 days, it would need a credit line of $17 billion to fund the effort. Big numbers.

A more realistic target would be to only purchase around 1 percent of requests. Nationally, that would be 27,500 homes, which is only around double what Opendoor is currently doing, so it's feasible.

In any case, the point is clear: Zillow doesn't need to actually buy and sell a lot of houses for this model to generate significant profits for the company in a national rollout.

Strategic implications

Zillow is a lead generation machine, and its recent foray into iBuying is no exception. 

If you're in the industry and your value proposition to agents is seller lead generation, there's a new game in town. Zillow will be able to generate a massive volume of seller leads with higher intent than almost any other source. If successful, this will have significant implications across the industry.

Further analysis

If you're looking to dive deeper into the world of iBuyers, consider the following:

• iBuyer Business Model Overview and Analysis: all of my free research and reports on the iBuyer space.

• iBuyer Intelligence Briefing (Recording): a 60-minute conference call I conducted on the latest iBuyer news, key insights, and strategic implications for the real estate industry.

• Phoenix iBuyer Report: the only source for accurate, timely iBuyer market data for Phoenix. Available as a monthly subscription.

Opendoor's pivot to agents

According to a report on Inman, Opendoor is launching a new preferred agent partnership program where it is co-listing a growing portion of its for sale properties with partner agents.

Why it matters: This is a significant pivot for Opendoor, aligning it closer to agents in a major way. It signals that working with the traditional industry -- rather than trying to disrupt it -- is an important part of its growth strategy.

Working with agents

Opendoor's new preferred agent partnership program brings the company much closer to agents. As opposed to the company's hallmark of buying and selling direct to consumers, with a do-it-yourself open home model, this latest move represents a big pivot.

Before this program was announced, the way Opendoor sold its homes was fairly uniform: it would list direct without an agent, offer self-guided tours, brand everything Opendoor, and not pay seller agent fees since it was selling direct. But things have changed:

An unknown question is how Opendoor is compensating co-listing agents. There are three possibilities, listed in order of likelihood:

• The agent receives a referral fee (likely 1 percent) for representing Opendoor.

• The agent receives a fixed fee ($1,000) for representing Opendoor.

• The agent receives no direct compensation, but benefits from potential leads while hosting open homes.

Why the pivot?

This is a big move for Opendoor, and it would only make a change if there was a business benefit.

Opendoor is moving towards an agent-centric model, where it's co-listing and co-branding with a traditional real estate agent (and the traditional process it is aiming to disrupt). That's a non-trivial shift. And assuming Opendoor is compensating co-listing agents as outlined above, there's a significant economic shift as well.

Opendoor is in the business of buying and selling houses. So any pivot must enhance that capability, leading to two possible reasons for the change:

• Sell more houses, faster.

• Attract more agents representing sellers (buy more houses).

For a co-listing arrangement to make business sense, it must enable Opendoor to buy or sell more houses. Either its existing process isn't quite where Opendoor wants it to be, or there's an external reason to cozy up to agents...

The Zillow factor

There's one other factor to consider, and that's the relatively recent arrival of Zillow to the iBuyer game. As a reminder, Zillow's angle is to include agents in each step of the process, using its premier agent network to represent all sides of the transaction.

Opendoor's latest move puts it squarely at parity with Zillow in terms of agent involvement and the value proposition for agents.

Now, if you're an agent, the benefits of working with Opendoor are the same as working with Zillow. For Opendoor to make this degree of change, and give up image and economic value in order to appeal to agents, it must really want to work with agents!

Strategic implications

There's a long history of would-be real estate disruptors that attempted to disintermediate the traditional industry, only to change their minds and pivot back.

It's hard to go against real estate agents. There's just so many of them, and psychologically consumers want to keep using them. Many disruptors start with anti-agent tendencies but eventually come back to the fold. It's easier and more profitable to work with the industry than against it.

This is not a full-scale retreat on Opendoor's part; far from it. But it's the strongest signal yet of the importance of agents to its current growth strategy.

Zillow, Opendoor, and controlling the consumer journey

Last week I conducted the iBuyer Intelligence Briefing -- a conference call on the latest iBuyer news, trends, and insights -- with listeners from around the world.

After the call, one particular question lingered: Which part of the industry controls the starting point of the real estate transaction, portals or iBuyers? Who has the advantage, and what are the implications for iBuyers?

Zillow's lead generation machine

Zillow announced its Zillow Offers program in Phoenix earlier this year, and started buying houses in May. It is heavily promoting the program across its site. While looking in the Phoenix market, a prominent message is displayed on all active for sale listings.

And if a visitor looks at an off-market listing (like their own home), this is the call-out at the top of the listing.

In its latest quarterly results, Zillow revealed how effective the promotion was: "Since launch, we have received more than 10,000 offer requests from potential sellers." And: "...in Phoenix, for example, we are seeing about 15% of all dollar value that's being sold in Phoenix any given month." That translates to about 1,600 offer requests per month.

Opendoor is on record saying that more than "one in two sellers who received an Opendoor offer" will accept it. It's currently buying around 300 houses per month in Phoenix, so that's about 600 offers made per month.

There's a difference between an offer being requested, and an offer being made. What's clear, though, is that Zillow is generating a massive amount of offer requests each month, at volumes that rival (and exceed) Opendoor.

Most importantly, Zillow's leads are coming with zero incremental customer acquisition cost, while Opendoor and other iBuyers must advertise directly to consumers to generate leads.

The Zillow effect

The ultimate question is whether Zillow's entry into the market is having an effect on Opendoor. Is Zillow soaking up demand from consumers, to the detriment of Opendoor?

The chart above shows a clear picture: the number of homes that Opendoor is purchasing in Phoenix has plateaued. But there are two possible explanations for what's going on:

• Zillow is having an effect on Opendoor's traction in Phoenix by soaking up consumer demand.

• Opendoor is slowing its buying activity for other reasons (we've seen this before).

It's too early to say if Zillow is having a direct effect on Opendoor's business in Phoenix. Opendoor may slow its buying activity for a variety of other reasons, namely a potential market slowdown.

But what's clear is the leading position Zillow holds in the consumer journey and its massive reach give it a competitive advantage in acquiring customers -- which has long-term consequences.

Strategic implications

Back in February, I wrote the following: "The most logical response from a major player such as Realogy or Keller Williams would be to launch their own iBuyer program." Which is exactly what happened last week. More competition is coming to the market.

As incumbents, portals, and other new entrants enter the iBuyer market, they have the potential to soak up consumer demand and adversely effect Opendoor's business.

But for Zillow in particular, the evidence is clear: Real estate portals are in pole position to capture consumer demand for iBuying services, because they are at the start of the consumer journey. Will other global portals follow Zillow's lead?