[VIP] Q4/2019 iBuyer Comparison: Phoenix Market – Zillow, Opendoor, Offerpad

In the next couple of weeks, we’ll get earnings releases from Zillow. I wish we get earnings reports from Opendoor and Offerpad, but… hey, we can only look at what we can look at.

So I completed my analysis of Q4 iBuyer numbers out of Phoenix, where I have the best dataset. Let’s see what Q4 had for us.

The Comparison

First, here’s the Google Sheets spreadsheet.

The first thing that is obvious is that Q4 is the slow season in real estate. Not a lot of families want to be moving during the holidays after all. So all three major iBuyer companies sold fewer homes in Q4 vs. Q3.

All of the caveats from the Q2 and Q3 Comparisons apply here. Please read those posts for said caveats and assumptions and such.

The Takeaways

Because of seasonality, there’s not a whole lot to make of the lower sales numbers. But there are some interesting data points here.

First, Zillow is going to post monster numbers for Q4, at least on a growth basis of its Homes division. I’m calculating YOY growth of over 200% in units sold and revenue from its Instant Offers business from Phoenix. Now, they might post similarly monster losses as well, as they did in Q3, but the raw numbers I have suggests huge growth in sales.

Second, it looks like gross margins for the Instant Offers business pre-renovation and pre-interest stabilized in 2019 to around 740 bps. I’d be shocked if that led to a net post-interest profit for Zillow but stabilization on a gross basis is good. Having said that, YOY, gross margins dropped almost 19%. Why? We’ll come back to this.

Third, I continue to be surprised at the gap between Zillow, Opendoor and Offerpad in terms of consumer impact. Using my data on holding costs, etc., I’m showing that the chance a seller would benefit more by selling to an Ibuyer vs. listing with a traditional real estate agent is more than double if he sells to Zillow vs. Opendoor. That likelihood is 5x more when comparing Zillow to Offerpad.

When you look at all of the differences, what is really starting to solidify for me is the idea that Zillow really is competing on price when it comes to sellers. Look at the Avg. Sales to Purchase stat: Zillow is consistently lower than Opendoor or Offerpad. Look at the stat I have called “Win %” (not in the spreadsheet above) which looks at how many Positive Transactions (sold for more than purchased) vs. Negative Transactions (sold for less than purchased) for the three companies:

• Zillow: 64.4%
• Opendoor: 83.4%
• Offerpad: 94.1%

Zillow’s Win % ranged between 89% and 93%, until Q2/2019 when it dropped to 68%, then to 63% in Q3, and now 64.4% in Q4. Opendoor’s Win % stayed relatively flat around 83%, while Offerpad has never dropped below 90%. Three straight quarters suggests something other than incompetence or algorithm mistakes; it suggests that this is by design.

I think what’s happening here is that Zillow gets much closer to “market value” than the other two, which means that sometimes, they just make the wrong bet. They skate way closer to the line, if you will, so more of their deals end up negative.

In the Q3 Comparison, I speculated that Zillow’s consistently lower margins, profit/loss, Win %, etc. might be a signal of strength:

Said systemic issue is not necessarily a negative one for Zillow. In fact, I think it’s a signal of real strength. Zillow can afford to make far less money, can afford to leave more on the table, than do Opendoor and Offerpad, because it effectively has no marketing costs for its iBuyer program. It generates far more requests for offers from its website than it can service; Opendoor and Offerpad have to do far more marketing and pay more to generate offers in the first place.

With the Q4 numbers in, I’m really beginning to believe that Zillow is doing this on purpose. They can afford the losses. They can afford to lose on a third of their deals… which means that the consumer definitely wins in those cases. It’s not clear that Opendoor and Offerpad can.

In the long run, sellers will start to become aware of the difference as well as friends tell friends, neighbors tell neighbors, etc.

But… Opendoor Continues to Dominate

Having said that, it’s interesting to me that Opendoor has opened up a bigger lead over Zillow in Phoenix in terms of actual market share. Here’s how many homes Opendoor has sold for each one Zillow has sold from Q2 to Q4:

• Q2: 1.7
• Q3: 2.2
• Q4: 2.6

The gap is widening, despite Zillow’s advantage with the website, despite Zillow’s CAC advantage, despite Zillow’s willingness to take greater risks in pricing. So as much as Zillow has grown, Opendoor has grown faster.

That’s surprising to me. Like, really surprising. Because it really does feel like Zillow has the accelerator jammed to the floor with Offers, but Opendoor keeps pulling away while offering a more expensive product with no marketing advantages. I don’t have an explanation for it.

Well, I have a theory. Less than a theory. A hypothesis. Pure speculation, really.

It might be that Zillow is doing its thing in a different property bracket: $300K houses vs. $250K houses. Maybe in the Phoenix market, there just are simply more of the latter than the former. So even with 200% growth by Zillow YOY, Opendoor is simply going to keep buying and selling more houses because there is more inventory of the $250K house vs. $300K house.

Interestingly, Zillow says the median home price in Phoenix is $260K while Redfin says it’s $272K. Meanwhile, RE/MAX National Housing Report (quoted by AZBigMedia) says the median price is $283,500. It’s interesting in the sense that Zillow is buying above-median properties, while Opendoor and Offerpad are buying at-or-below-median properties… depending on whose housing report you use.

So the question is, how long does that continue? Do the two biggest players kinda sorta tacitly-without-talking decide to divide the market between them? Opendoor goes for at-or-below median houses, while Zillow plays in the above-median bracket? Or do they go head-to-head at some point and really see who’s boss?

We will see what Zillow has to say about Q4 in a week or two. I can’t wait.

In the meantime, in honor of the Superbowl Halftime show and the least 50-year old looking 50-year old woman in the world… know that while love don’t cost a thing, houses do. And these three companies are spending and making an amazing amount of money on this new transformational thing: market making in real estate.

-rsh