iBuyer and the Issue of Concessions

In a couple of recent VIP posts, I looked through limited number of iBuyer transactions of both Opendoor and Zillow. I then took the most interesting conclusion one can draw from those numbers and put it on Facebook, in the Inman Coast to Coast group, comprised of thousands of professional REALTORS. While some responses were amusing, many were raising an excellent common point: that iBuyers routinely ask for and get significant seller concessions during the post-contract inspection period. The thinking appears to be that iBuyers rely on these major seller concessions for repairs and whatever else as a source of revenue. It makes sense, it’s logical, and a number of the agents posting in Inman have personal experience with iBuyer offers.

There is, however, something about this I can’t wrap my head around. So in the spirit of joint inquiry to get closer to the truth, let me lay out the reasoning I used in drawing my conclusions and see where I’m missing something, if I am. I’m going to use one transaction as an example to illustrate the issue.

The Story of One Transaction

Take Property 102 from the Zillow dataset I posted in the Zillow Offers analysis post. Here’s what we have:

• Originally listed with a broker on 10/2/18 for $389,900.
• Sold on 1/14/19 to Zillow for $345,000.
• Listed by Zillow’s listing agent on 1/27/19 for $353,900.
• Sold on 3/29/19 for $350,000.

Zillow has revealed that it charges a Seller Fee averaging 7%, so that’s $24,150. The seller’s net, then, is $320,850 ($345,000 purchase price by Zillow, less the Seller Fee).

If the homeowner turned down the offer, I reason that he would not have been able to sell the home for more than what Zillow was able to sell it for almost three months later, because the market is the market and the ultimate buyer would presumably be represented by a REALTOR as was the case with Zillow’s sale. (The initial $389,900 listing price was obviously way overpriced, which could have been a strategic choice.) So I assume that the homeowner would have been able to get $350,000, less Commissions (6%) which comes to $21,000. His net going the traditional route would have ben $329,000, or $8,150 more than what he actually did (selling to Zillow).

What is entirely missing from the above, which I noted, are repair costs, renovation costs, maintenance costs, holding costs, etc. It may be possible to get those costs… but I’m not sure how without either Zillow or the homeowner agreeing to divulge that information.

But let’s talk about the repair costs and renovation costs and the issue of Seller Concessions.

Seller Concessions

As many have pointed out, and which I knew from talking to Sunny, seller concessions would not appear in MLS Sold records. They do not appear in public records data either (usually). You would need the actual closing statements to get that information.

As Brad Nix, an experienced (and very smart!) REALTOR from Atlanta points out:

Plus repairs and refurbishments are line item deductions on closing statements as Seller Concessions and do not adjust the sales price.

Whereas a market sale typically reduces the sales price to account for condition.

Now, Property 102 was listed with a REALTOR before being sold to Zillow. We don’t know if the homeowner terminated that listing and went direct to Zillow, or if he asked his REALTOR to get a Zillow Offer, or what. We do know that Zillow strongly recommends that the seller hire an agent:

Does Zillow represent me in the transaction, or do I still need an agent?

Zillow does not represent you, but we can connect you with an agent if you decide to accept our offer. If you do not accept our offer, we can refer you to one of our local partner agents who advertises on Zillow, and they can provide a valuation and advice on selling your home. We strongly encourage all buyers and sellers to use a professional real estate agent. We believe an agent provides essential expertise, ultimately resulting in the best outcome for consumers. Zillow Offers is no different.

So I think it’s safe to assume that the seller is represented by and advised by a REALTOR, whether his original or a new one.

We also know that Zillow says that its initial offer is based on algorithms and “images submitted by the seller” and will be revised after an in-person evaluation:

Will the cost of repairs be factored into the offer?

All buyers take the home’s condition into account when calculating an offer. When Zillow offers to buy your home, our initial offer will cover our best estimate of the work required in order to resell the house in move-in-ready condition, based on the information and images you’ve provided.

The cost of previously unknown or undisclosed repairs discovered at the time of the evaluation would be deducted from the initial offer, and the sale contract would reflect the lower price. [Emphasis added]

Two separate issues emerge here.

One, we do not know whether Zillow actually lowers the purchase price of the property based on the evaluation, or if it is accounted for as a seller concession. The former would show up in public records and in MLS Sold data; the latter would not, and only be reflected in the closing statements. Let’s say it’s the latter, and move on to the second issue.

Two, and this is the key issue, if Zillow’s evaluation uncovers previously unknown or undisclosed repair needs, then presumably, any other home buyer would uncover the same during the home inspection process. (Unless the buyer decides to waive inspection and take the house “as-is”?)

Seller Concessions End Up Being the Same?

As I see it, if Zillow requests concessions of $10K, any other buyer competently represented would request the same. I further assume that the seller’s agent would negotiate such concessions, whether against Zillow or against a normal buyer: “Sure, we’ll give you $10K for the roof, but we’re not doing anything about the paint.”

Unless the claim by some of the agents who have experiences with an iBuyer offer is that iBuyers make concession demands that a normal buyer would not make, or somehow get the seller to cave into demands that he wouldn’t cave into with a normal buyer, I’m not sure how the issue of seller concessions wouldn’t be the same in both cases.

Furthermore, Zillow’s final sale price of $350K assumes at least some level of light renovations (carpet, paint, etc.) between the time of purchase and time of listing the property. I have to think that the seller will either have to make the repairs to get that $350K price, or make concessions to the buyer so he can make the repairs… which might be that $5K difference between Zillow’s purchase price and Zillow’s sale price.

The point is, in a situation where both the seller and the buyer are represented by a REALTOR, who has access to all of the data, I don’t see how seller concessions would not end up being the same (or pretty much the same) whether we’re talking about Zillow as the buyer or Mr. Jones as the buyer. I don’t see how the net to the seller would not end up being the same whether we’re talking about line-item seller concessions (Zillow) or reduction in the sale price (Mr. Jones).

What am I missing here with this reasoning?

Unrepresented Sellers?

Maybe the issue is that if a homeowner goes direct to Zillow, gets an offer, and ignores Zillow’s strong recommendation to use an agent to advise him on the Zillow Offer… and therefore fails to negotiate the unreasonable seller concession demands from Zillow?

If so, maybe that should be spelled out by agents who all claim that Zillow and Opendoor and other iBuyers are pulling the wool over the consumer’s eyes, and taking advantage of dumbasses who don’t know any better. I don’t see it that way. If the seller chooses not to be represented, even after being told by the potential buyer (Zillow) to get representation, that’s… a choice that he is free to make. It’s his property; it’s his money. I don’t see anybody being taken advantage of here — merely a rational choice by a homeowner to take the easy path.

Back to the Seller Net

Anyhow, unless I’m educated as to what I might be missing when it comes to seller concessions, it seems to me that comparing possible net proceeds to the seller more or less requires eliminating seller concessions as a factor. This is difficult, since it is counterfactual: the seller sold to Zillow and made seller concessions. He didn’t sell to Mr. Jones without making those concessions, but I am assuming that he would have had to make the same concessions if he did sell to Mr. Jones. That’s a counterfactual assumption, and I’m not 100% comfortable with it, but I’m also not uncomfortable with that assumption.

From that standpoint, the only real factor we miss from the seller net comparison is the holding costs to the seller, whether mortgage interest payments, property taxes, utilities, etc. etc. from the additional months on market he would have needed to do a market sale. And that data is simply unavailable without the homeowner volunteering his personal financial information.

Anyhow, that’s it for now. I’d appreciate any insights or takes or data or whatever you have on this topic. I have no emotional investment here; I’m happy to be dead wrong. Assumptions make an ass out of me and so on. I just want to get as close to the truth as possible. Any assistance you can provide would be appreciated, truly.

-rsh