[VIP] iBuyer Comparison: Zillow, Opendoor, Offerpad – PHX Q2/2019

Inman Las Vegas was last week, and while I heard quite a bit of interesting stuff, and had a number of interesting meetings (some of them with some of you), I’ve been far too busy to write. My apologies.

But I wanted to share something that I’ve been working on for a bit and see what you all think. This is a comparison of the three largest iBuyer companies: Zillow, Opendoor and Offerpad. The data is for Q2 of 2019, and comes from the oldest and most established iBuyer market of Phoenix.

As I think you will see, there are some numbers that just jump out at you. Let’s look at the numbers first, then engage in some speculation about what accounts for them.

The Comparison

First, here’s the Google Sheets spreadsheet. I believe you can click through and look at the numbers yourself.

Some caveats about the dataset.

First, it is missing some critical data. I’m trying to see what I can do in terms of filling in the missing pieces, but I thought better to share what I do have so far instead of waiting for the perfect dataset. The most important in some respects are Seller Concessions, Renovation Costs, and Holding Costs.

Zillow, as a public company, has reported its unit economics for Zillow Homes in the past, so I can’t wait to see what they report for Q2. I may republish this after that data.

Opendoor and Offerpad do not publish any such information. We’ll just have to make do with what we have.

But the key missing data might be Seller Concessions, which Opendoor says is about 2% in a Traditional Sale but none if selling to Opendoor. That directly contradicts anecdotal evidence and reports from real estate brokers and agents in the field who have worked with Opendoor, but again, it is what it is.

Second, I have done my best in terms of research, but there were a few properties for whom no information was available. I have left those out of the overall dataset. Some of the information may be incorrect; I’m working with data that is largely public and making reasonable assumptions about others, such as the seller fee. I simply chose to accept what the companies publicly say the average seller fee is: roughly around 7%. Again, some reports from real estate brokers and agents in the field suggest that the fee is often much higher — well over 10% in some cases.

What Do the Numbers Say?

The obvious takeaways are that Opendoor still remains the dominant player in Phoenix. But Zillow is growing its business in Phoenix rapidly; it has already overtaken Offerpad. It has grown its iBuyer sales more than 10x from 29 sold in Q3 of 2018 to 330 in Q2 of 2019. At this rate, it would not be surprising to see Zillow overtake Opendoor as the largest iBuyer in Phoenix by the end of the year.

The other obvious takeaway is that the numbers are sizable, but not yet hitting critical mass. Mike DelPrete, the guy who has done the most work on iBuyers to date, has said in February that iBuyers had 6% market share in Phoenix. I’m showing more like 3.9% market share in Q2, based on total sales of 29,685. Perhaps we can see more with more data across longer timeframes.

But the most remarkable difference is between Zillow and the other two iBuyers in terms of financial performance. Zillow’s average margin on trade of 1.2% is less than half of Opendoor’s, and less than a quarter of Offerpad’s. The average profit per trade is a surprising $2,381 for Zillow, $8,768 for Opendoor and an eye-popping $12,744 for Offerpad.

What explains such a gap between the three?

Keeping in mind that we don’t have all of the data, such as seller concession and holding costs, we could say that maybe Offerpad is better at the core operations of buying low and selling high. Offerpad has the lowest average purchase price at $245K, the lowest average sold price at $258K, and the lowest average DOM at 82. That might be part of the explanation. But it can’t be all of the explanation, since Opendoor’s DOM is longer than Zillow’s, but its average profit per trade is almost 4x that of Zillow’s.

The real answer appears to be in the Avg. Sale to Purchase ratio. Zillow’s is 101.4%, a mere 1.4% over the purchase price of the now-sold home. Opendoor’s is 104.4% while Offerpad is tops at 105.9%. What it signifies is that either (a) Zillow is paying as close to market price as possible for the properties it acquires, or (b) Zillow sucks at marketing and selling homes. But (b) is unlikely as an explanation, since Zillow utilizes top local REALTORS at every stage of its Offers process, including selling the home as a listing agent representing Zillow.

I am forced to conclude that Zillow is willing to pay market value for homes that it acquires, while Opendoor and Offerpad both leave a bit more breathing room. Neither are quite at the “70 cents on the dollar” approach of real estate investors and home flippers, but that’s without knowing what kinds of seller concessions are being demanded.

The data that hints at that truth comes from the Consumer Impact numbers, in which I ask what if the original seller who sold to these companies had chosen to list with a REALTOR instead. In all three cases, without taking holding costs into account, the average seller would come out ahead listing with a REALTOR, but the gap is significant.

Those who sold to Zillow would have come out $5,338 ahead had they chosen to list with a REALTOR instead, but at the cost of an additional 3.5 months of being on the market. Typical holding cost would include mortgage payments, taxes, utilities, insurance, HOA dues, etc. so even on fairly moderate assumptions (Maricopa County has low rates, around 0.8%, which means roughly $2,400 on a $310K house, or $200 per month), the $5,338 could get mostly wiped out by the additional 3.5 months of holding costs.

That’s not the case for those selling to Opendoor and Offerpad. We’re looking at an average expected gains from listing with a REALTOR of $11,506 for Opendoor and $14,434 for Offerpad, with a very similar 3.5 additional months of being on the market. Under most scenarios, the homeowner would have net more by listing with a REALTOR.

On the other hand, Opendoor is funny. 12% of sellers were better off selling to Opendoor than listing with a REALTOR, prior to taking any seller concessions, holding costs, and the like into account. (Only 6% of those who sold to Offerpad could confidently say the same, and almost 20% of those who sold to Zillow could say with confidence that they made out better going that route than by the traditional list-and-sell route.) The implication then is that for the other 88% who would have net more listing with a REALTOR instead, they would have made more than the $11,506 in average gains.

Possible Explanations

We can speculate as to why the gap exists and why it is so pronounced. I have a few speculative ideas.

A) Zillow is able to “buy market share” because it has the Premier Agent business that brings in north of $1 billion a year in revenues. It can afford to be generous, while Opendoor and Offerpad have to pay a lot more attention to sustainability.

B) Zillow is able to “buy marketshare” because it has the #1 web portal in real estate, driving its marketing costs down to near zero. Both Opendoor and Offerpad have to take marketing costs into account when it comes to actually selling the house they bought, which means they have to have higher gross margins.

C) Zillow has a new CEO who is also one of its largest shareholders who wants to dominate this new iBuyer business, and is willing to undercut the competition to do so. Zillow is already a public company which does not have the kind of pressure that a venture-backed company like Opendoor and Offerpad might have for a solid exit via IPO.

D) All of the Above.

Whatever the reason, or reasons, it seems clear that Zillow is aggressively going after this new business with all guns blazing. The numbers suggest as much.

Futurism for Fun and Profit

There are three semi-predictive speculations I can make based on this comparison.

First, Zillow will become the marketshare leader before too long everywhere where it is active. While I am looking for more data, especially in other markets, Phoenix is the oldest and most stable of the iBuyer markets. The fact that Zillow is showing the kind of growth it is showing, combined with statements from Rich Barton and others at Zillow, strongly suggests that it is not a question of if but of when it takes over as the leader.

Second, the gap between the gross margins (without holding costs, renovation costs, etc.) and the gap between the average seller gain suggests once again that it is a matter of time before Zillow takes over. While all companies need to make the public aware of this new never-before-seen business model, and all three will advertise and market their iBuyer services, the most powerful form of advertising is word of mouth and referral. Zillow has the strongest shot of having people who sold their homes to Zillow tell their friends and neighbors that it was totally worth it.

$5,338 for 3-and-a-half months of being on the market? Then take mortgage payments, taxes (at $200/mo), utilities (at another $200/mo or more), HOA dues, insurance payments and the like into account… and that might drop to maybe half that amount. Far more people would gladly leave a couple of grand on the table to avoid the hassle of the modern home selling process.

Far fewer people would gladly leave almost $10,000 or more on the table for that.

If Opendoor and Offerpad’s gross margin numbers were double or triple that of Zillow’s (because the gap is double or triple for the seller if they sell to Zillow vs. Opendoor vs. Offerpad), then perhaps that word of mouth disadvantage can be overcome with time. But the gross margin numbers are not double or triple that of Zillow’s: they’re 10.5% and 11.9% for Opendoor and Offerpad respectively, and 8.1% for Zillow. That doesn’t feel like a big enough gap to me.

Third, for the traditional listing agent, these numbers portend major changes ahead. At Inman last week, I spoke with a couple of Phoenix-area brokers and agents who were offering their own iBuyer programs as a way to defend against Zillow, Opendoor and Offerpad. But digging into the details a bit, it appears that all of these brokerage “iBuyer” programs are requiring 20-30% discount from market value, which is a far cry from the 1.2% to 5.9% that these three companies are seeking.

Dressing up investor programs or hard money lenders as “iBuyers” can only go so far before the numbers tell their own story. Just like those who sold to Opendoor and Offerpad will eventually realize that they would have made more selling to Zillow instead, consumers who sell to these brokerage-fronted investors-in-iBuyer-clothing will tell their friends about that.

Furthermore, Zillow’s numbers in particular should be alarming. Once again, paying $5K or so to save 3.5 months of being on the market is in fact something a lot of people would do. If that $5k is more like $3K… it’s going to become extremely popular indeed. And the fact that 1 in 5 people who sold to Zillow without question came out better than if they had listed with a REALTOR (because Zillow paid more for their houses than what the eventual buyer paid Zillow for the same house, with light renovations) means that they’ll be able to tell all of their friends and family about that.

We’re still looking at only about 4% of the market in Phoenix, at least for Q2. So there is time. The “buy box” is still relatively small, but… I will note that the highest purchase price for Zillow of the homes it sold in Q2 was $587K… which puts it well above the median price of the Phoenix metro area and edging into luxury territory.

I’ll have to do some more thinking about how traditional brokers and agents could deal with the coming changes, because… on these numbers, the changes are definitely coming.

-rsh