Mike has been the leading resource on the ibuyer industry, and he sees it the same way I do – Zillow wants (and needs) to commit fully to their ibuyer program because advertising income from agents is starting to lag, which could be a major shift in the real-estate-selling business. He is having a seminar for those who might be interested.
From Mike:
Zillow, the world’s largest real estate portal in terms of revenue, recently underwent a major shift in strategy. In effect, its advertising revenue stream has run out of runway; while still a billion-dollar business, growth has stopped. Thus, it is reorienting towards iBuying and its Zillow Offers program.
In the world of grand strategy, the move is a rare, bet-the-company moment focused on one thing: the battle for the start of the consumer journey. Designed as a maneuver to simultaneously disarm competitors and strengthen its already powerful position, it’s either a masterstroke or a mistake. But in either case, Zillow is clearly “all in” on the gold rush that is iBuying.
Zillow has set lofty goals: buying 60,000 houses per year and $20 billion in revenue. The stock price is up and the company is valued $2 billion higher than it was pre-announcement. This is big.
This Friday I’ll run through all of the major points from this move, complete with charts, data, and insights. I’ll look at the numbers that matter, the metrics to keep an eye on, and what it all means for the larger ecosystem. I’ll also answer your questions! Read more details and register.
Who should attend the webinar?
Zillow’s competitors and potential competitors (portals and iBuyers).
Real estate incumbents looking to formulate their iBuyer strategy.
International real estate portals looking to learn from Zillow’s move.
Investors interested in iBuying and what the market impact will be.
Start-ups with a desire to understand the new landscape, and how they fit in.
Rich Barton
When the announcement was first made two weeks ago, Zillow stock went from 34 to 44, but it is back down to 38 today (LINK).
Buying 60,000 houses a year isn’t the game-changer by itself. What matters is what their nationwide advertising does to the seller’s psyche – and will agents keep spending big money to get connected to the sellers who want more $$ than Zillow is willing to pay.
Zillow must believe that flipping homes is their future:
On average, a customer asks Zillow for an offer on their home every five minutes, said Barton, signaling there’s ample consumer demand for a simplified home-selling process.
“It’s like advertising free beer at a college party,” he said.
They’re finding out that flipping isn’t as easy as it looks though. In addition, realtors aren’t spending like they used to:
In August, the company said that it was taking longer than anticipated to sell the homes it acquires. Three months later, it reported that some advertising customers were pulling their business because they disliked changes to the platform. Shares in the company, which peaked at $65.21 in June, plummeted to a low of $27 in November.
Agents may have told Zillow that they were pulling their business because of changes in the platform, but that won’t be the end of it. As the number of home sales decline nationally, realtors will slow or stop spending money – starting with the very expensive Zillow ads.
Zillow still says they love realtors, but we’ll see about that. Once their advertising income declines, and the homes they bought start piling up, it is inevitable that they will think they don’t need agents any more.
Hat tip to SM for sending in this detailed article about Zillow’s contest to improve the zestimate. No surprise that the winner was a group of analyzers who blended the algorithms to move the needle a couple of ticks. If they would have asked me, I’d say score each agent, and factor in +/- 5% based on who is selling the house – your agent makes that much of a difference!
In Seattle, the typical Zestimate is off by 4.7 percent, which amounts to $35,000 on the median home. Data scientists from around the world competed to improve the algorithm and expect to get the median error rate down to about 4 percent.
On Wednesday, the Seattle-based company awarded a $1 million prize to the winners of a public contest to improve its algorithm. The winning team, three guys from Raleigh, Toronto and Morocco who teamed up despite never having met in person, came up with a way to beat Zillow’s own data scientists to a better estimate.
The contest started a year and a half ago with 3,800 teams from 91 countries and was narrowed down to 100 finalists last year. The teams were given seven years’ worth of data on a sample of millions of homes across the country, and were tested to see how closely their estimated values for each home matched up with the actual sale prices of homes that sold in the ensuing months.
Jordan Meyer, the American on the winning team, reduced his workload at his day job as CTO of an analytics company and poured about six hours a day into the contest, communicating with his teammates, Moroccan computer science professor Chahhou Mohamed and Canadian artificial intelligence startup founder Nima Shahbazi, on the messaging application Slack.
Meyer started by finding every data source he could — the exact longitude and latitude of houses could be used to determine the proximity to streets and therefore determine noise near the house. Slight differences in distance from a body of water could influence a home price by thousands of dollars. In the end each home had hundreds of different data points.
But the strategy that set them apart was trying wildly different algorithms and merging the ones that worked together to get the best blended average.
“It was extremely hard,” Meyer said in an interview. He called the process “relentless experimentation” and echoed Shahbazi, who said in a statement: “For every idea that worked, there were a hundred that didn’t work. But we kept going.”
Zillow has slowly improved its Zestimate from a median error rate of 14 percent when it started in 2006 to 5.7 percent when the contest began in mid-2017. It’s now down to 4.5 percent nationally (it’s higher in some cities and lower in others), and once the winners’ tweaks to the algorithm are incorporated, the company expects the error rate to dip to about 4 percent.
Everyone is getting into the home-buying business. First it was the well-funded disrupters like OpenDoor and Offerpad, and then Zillow, Redfin, Knock and others jumped in – which caused Coldwell Banker, Keller Williams to also announce their programs (plus Compass and others won’t be far behind).
What will the real estate world be like if sellers have multiple choices of cash buyers? Which ibuyer will have the advantage? Zillow is already in the driver’s seat, and they include the additional service of offering a third-party realtor’s opinion too.
From Mike DelPrete – an excerpt:
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.
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.
They aren’t in San Diego yet, but it’s coming. Read Mike’s full article here:
After using Zillow for years, consumers probably start to cozy up to the zestimates, just out of familiarity and convenience.
Those who are new to the game – and believe Zillow to be an authority – are going to think the zestimate is a neutral opinion of actual value. But the zestimate is simply based on the list price, and not some fancy algorithm.
Ryan at the sacramentoappraisalblog.com ran a post that showed how a zestimate fluctuated during the time the house was on the market.
The zestimate nearly matched the list price, then went down with the first price reduction. Then once it sold, it really went nuts.
Hat tip to Eddie89 for sending in this article on the prospects of Zillow’s ibuyer program, which looked a little sketchy to me too until it was divulged that these ibuyers are primarily in it to make the fee income, and if they can make a profit by selling the houses for more it will be icing on the cake:
Steve Eisman, an investor known for his correct bet against subprime mortgages a decade ago, told Bloomberg News that he’s taken a position against Zillow Group Inc. ZG, -7.08% calling its new venture into selling houses “a terrible business.”
That Zillow venture, then called “Instant Offers,” was announced in April, to mixed analyst reviews. “We are big fans of this pivot,” said Stephens’ John Campbell at the time. A few weeks later, RBC Capital downgraded the stock, saying the shift into what is now called Zillow Offers set the company up for a “transition year” even as the stock remained overvalued.
In response to a request for comment on Eisman’s remarks, a Zillow spokeswoman emailed, “we think Zillow Offers is an attractive service for sellers in all types of housing markets. In a slower market, our offer might seem even more attractive to a seller.” Zillow shares, which had been up more than 50% for the year to date, tumbled nearly 7% after Eisman’s appearance.
If Steve wants another reason, he should consider how realtors react to change in the market. Yesterday, I saw an agent in a private realtor Facebook group ask for alternatives to the Zillow advertising he has been doing, which is exceedingly expensive. Historically, the minute the market turns, realtors stop spending money, and I think that time is here.
This might be the greatest sucker play in the history of housing. The I-news featured a story about the first five Zillow buys in Phoenix, and as you can see above, they are planning to lose money on all of them.
The reporter also interviewed one of the homeowners who sold. She said that her offer from Zillow was higher than the other ibuyers (Opendoor and Offerpad). What a great way to enter an already-competitive market. Make headlines about offering the most money, and don’t look like you’re gouging the homeowners – heck, they look like Robin Hood!
The publicity should fuel a surge of interest in homeowners wanting to sell to Zillow, and the story mentions that they are expanding their staff to 50 people in Phoenix to handle the ‘stronger-than-expected’ demand.
It could just be a ploy to load up their Premier Agents with listings, and/or to gain advantage over the other ibuyers.
Will they eventually resort to flat-out lying to people like all the rest of the real estate advertisers these days? Here’s an example, where they say they will pay ‘fair market value’ (how do you know if it never hits the open market), and no mention that their fees are 6% to 13% – but at least they tell you that they will hammer you for repairs once the deal is in play:
Zillow’s panel of economists is forecasting the next recession, with 66% of them predicting it will start between 4Q19 and 1Q21:
Experts in housing are predicting a recession starting in 2020, according to Zillow’s 2018 Q2 Home Price Expectations Survey; however, they anticipate monetary policy—not the housing market—as primarily responsible for the swing.
Panelists were also asked to project the pace of growth in the Zillow Home Value Index over the next five years. The average of all expectations among the 114 experts offering a prediction was for home values to end 2018 up 5.5 percent over the end of 2017, a slowdown from current annual growth of 8 percent. On average, panelists said they expected home value growth to slow further in coming years – to 4.1 percent by the end of next year, 2.9 percent in 2020, 2.6 percent in 2021 and 2.8 percent by 2022.
Last week I mentioned the problems with agents selling houses before inputting their listing onto the MLS (link here). Agents are so accustomed to doing it that there isn’t much hope it will change, at least not until an outsider puts an end to it (district attorney or disrupter).
The listings that are first exposed as ‘Coming Soon’ suffer a similar fate.
Zillow has legitimized the practice with their whole-hearted endorsement, yet the listings are vague and unclear, except for the On Market date. But even that doesn’t have any rules, and agents regularly ignore their own declaration and never put them on the open market at all (probably because they found a buyer from their Coming Soon campaign), or delay for a few extra days in hopes of a big pay off.
For these agents, the MLS-input is a last resort.
Rarely do the listing agents who offer a property as ‘coming-soon’ have a specific strategy, and they tend to be vague about showings and offers.
What can be done?
If the ‘Coming Soon’ had more parameters, it would help. Rather than just a future on-market date, let’s add two other questions:
1) Are you showing the home before the on-market date?
2) Are you entertaining offers before the on-market date?
Just those two questions would not only give buyers and their agents direction on what to expect, but also it would create some accountability. Because there are no rules currently, it’s anything goes, which isn’t good for buyers or sellers.
Are there clues for detecting the listing agents who do this stuff? The trail of evidence starts with their photos of the front exteriors of their listings – it is against the MLS rules to include a photo with your for-sale sign, so those who insist get their sign fuzzed out by the MLS police:
Obviously, the photo-taking happens before MLS-input, so if they already have the sign in the yard for their photo, you know they have been shopping for buyers for days, if not weeks, prior to MLS-input.
But most agents are happy to tell you that they will not only conduct a ‘Coming-Soon’ campaign, but they also have a their database of ready buyers, and an office full of productive agents who have their buyers too – all of which will be exhausted before they put your home on the MLS.
What is best for the sellers – and buyers too – is for everyone to engage at the same time, via the MLS, for maximum urgency.
They paid $410,000 and are listing for $425,000? Are they expecting a bidding war? By the way, OpenDoor has 300 listings in Phoenix already!
Hat tip to daytrip for sending this in – an excerpt:
Noel Levine, a freelance IT consultant and self-described geek, said he looked into other online services like OfferPad and OpenDoor, which the new Zillow program competes against. He was thinking about listing the house with a broker when he saw an article about the Zillow Instant Offers expansion in the local newspaper. Zillow was able to accommodate the quick turnaround. The deal started with a request for an offer on May 3 and closed 15 days later, at a purchase price of $410,000.
“So in two weeks I went from having a house to put on the market to being out of the house with money in the bank,” Levine wrote in a thank you note to Zillow that he shared with GeekWire. “It spared me from having to go thru the trials and tribulations of wondering how many showings it was getting, then wondering if I should accept an offer, to dealing with the inspection deductions to worrying about what could go wrong with the closing.”
The home is now listed on Zillow with a priced at $425,000 (the Zestimate is $414,233). It boasts “real wood flooring, travertine tile, and stacked stone accents,” according to the listing. The company bets that buyers will love the “cozy gas fireplace” and “master retreat.”
