Got a press release this morning from Zillow — well, Zillow’s PR agency — that the Zestimate is now the offer price from Zillow Offers. Rich Barton talked about it during the most recent earnings call, but a mere days afterwards, here it is:
“For 15 years, homeowners and home shoppers have come to rely on the Zestimate as an essential first step. This exciting advancement demonstrates the confidence we have in the Zestimate and the lengths we are willing to go to make selling your home truly seamless and easy,” said Zillow Chief Operating Officer Jeremy Wacksman. “This is a proud moment for Zillow’s tech team and speaks to the advancements they’ve made in machine learning and AI technology. Zillow is transforming the way people sell and buy homes. Presenting the Zestimate as a cash offer to qualifying homes up front will save time, reduce friction and provide greater transparency – getting us closer to our vision of helping customers transact with the click of a button.”
Here’s the accompanying video that was released along with the announcement:
I realize that the ZDS brigade will immediately freak out, especially about “transaction with the click of a button.” That is, of course, nonsense… but unlike other moves that Zillow has made recently (ShowingTime?), this one has the potential to really change things.
If you are an agent or a consumer in one of the following markets, you’re going to have to rethink a lot of what you know about how homes are bought and sold:
Phoenix, Tucson, Ariz., Charlotte, N.C., Raleigh, N.C., Miami, Jacksonville, Fla., Orlando, Fla., Tampa, Fla., Portland, Ore., Denver, Colorado Springs, Colo., Fort Collins, Colo., Nashville, Tenn., San Diego, Los Angeles, Riverside, Calif., Sacramento, Calif, Dallas, Houston, San Antonio, Las Vegas, Atlanta, Minneapolis.
So let’s think through this together.
CMA That Means Something
In my August 2018 Red Dot on iBuyers, I wrote that one of the effects of market maker iBuyers is that they will begin to set the price of houses:
Any offer to purchase has to be higher than Opendoor’s; otherwise, the seller would simply take Opendoor’s offer. If the seller’s listing agent are looking at incoming offers and they’re all below or close to Opendoor’s all-cash, no-contingency, no-staging offer, fiduciary duty requires that she recommend to the client that he just take Opendoor’s offer.
And given the amount of its sales activity, the sales comps have to start reflecting Opendoor’s pricing on the sale side. If you are selling your home in a subdivision, and Opendoor is selling five houses with the same floorplan in the same community, it’s going to be difficult to convince buyers to pay significantly more than what Opendoor is asking.
It is true that because houses are not a commodity, there will be far greater variance compared to stocks, bonds, or pork bellies. But like all sales comps, within similar properties, it will be very difficult to price your home far above what an iBuyer has priced a home at.
As convenience drives volume, the impact of iBuyers gets greater. Over time, the Bid and Ask prices of iBuyers become one of the most important comps for all buyers and sellers.
In a market maker system, the market makers effectively set the price of houses. Variances will exist, of course, and market makers have to be nimble in adjusting their Bid and Ask prices based on what they see real-time, but it is not inconceivable that over time, the starting point of any pricing by the buyer, the seller, or their real estate agents, will be what the market maker’s Bid and Ask prices are on similar properties.
This move by Zillow is the first substantial step towards making that Bid and Ask system a reality.
This new Zestimate is like a CMA, but with real teeth behind it. A traditional CMA is just an opinion of value by a local expert — the real estate agent — who looks at comparable homes, what they sold for, and what they’re listed for. There is considerable expertise involved with constructing the CMA because the agent has to select the properties as comparables in the first place, but fact is, even with all the expertise in the world, a CMA is just an opinion.
A Zestimate that is an initial offer to purchase is not just an opinion; it’s a fact. The CMA might say a house is worth $350K; the Zestimate says someone will write a check for $340K. There’s a fundamental difference between the two valuations. Yes, the Zestimate-as-offer does specify that someone will need to come and inspect the home, verify things, etc. but the psychology is completely different between an opinion of value and an offer subject to inspection.
Going forward, any CMA where the Zestimate functions as an offer price that does not take the Zestimate into account is automatically suspect. If I’m a seller or a buyer looking in that market maker area, why would I trust any opinion of value that does not take into account an open offer from Zillow to purchase a house for $X?
The Zestimate’s Inaccuracy No Longer Matters
A common complaint abut the Zestimate from the industry ever since it was introduced is that the Zestimate is inaccurate. There have been revolts about it, and memes about it. Jay Thompson, when he used to work at Zillow, would constantly be posting on social media, “It’s called a Zestimate, not a Zappraisal.” Zillow executives used to get on stages and talk about how the Zestimate is a conversation starter for Premier Agents who get a lead, and to use the fact that the Zestimate is inaccurate to their advantage as local experts to real CMAs.
None of that matters anymore. Because the Zestimate, inaccurate or not, is now an offer to write a check for that amount. Plus, as the press release says, the Zestimate is far more accurate than it was a few years ago:
Today, the Zestimate is published for nearly 100 million homes with a nationwide median error rate for on-market homes of 1.9%. To determine the Zestimate, Zillow uses data from public records, feeds from multiple listing services and brokerages as well as artificial intelligence, including advanced technologies such as computer vision and a deep-learning neural network to incorporate data from photographs.
The ultimate proof of faith in the Zestimate is that someone is willing to write a check on that number. Well, here it is. Zillow is willing to back up its 1.9% median error rate with a check.
In comparison, let’s ask: Would the local expert agent creating a CMA be willing to stand behind that estimate of value with a checkbook?
This move does change things. Because consumers do what’s best for them, what is in their own best interests. I think based on that simple fact, we can expect a few foreseeable developments.
The Guaranteed Price Listing Agreement
Off the top of my head, seems to me that the market will have to adapt by incorporating some notion of a guaranteed floor price that is equal to the Zestimate into the listing agreement.
We have long had “guaranteed sale” gimmicks in the industry where an agent would say, “List with me, and I’ll sell your house within X days, or buy the house from you!” The problem with those gimmicks was in the details. For example, the “guaranteed sale” would include constant price reductions that the seller would have to agree to, or the deal is off. The purchase price was far closer to what a cash investor/flipper would pay than what the market would pay. And so on.
With the Zestimate-as-bid-price in effect, there is a real price floor: what Zillow would pay for the house.
As a rational seller, if I was in an eligible market, and my home was eligible, I think I would demand that the agent guarantee that my house would sell for at least the Zestimate. Why wouldn’t I?
It’s a bit like trading in your car. I don’t know if you’ve done that recently, but Sunny and I have. In the past, it would be a lot of Kelly Blue Book, driving around to dealerships, and so on. Now? It’s submit to Carvana, submit to Carmax, get offers, then drive to the dealership: can you beat this price? If the answer is no, then the car is sold to Carvana. There is no scenario under which we would trade in or sell that car for less than what Carvana would offer.
Similarly, if there is a Zestimate on my house, and it’s an Offer Price, there is no scenario under which I would sell my house for less than that number. Which means… the listing agent is going to have to guarantee that sale price if he wants the listing at all. None of the gimmicks and shenanigans of the old “guaranteed sale” programs; just a straight up, “If I can’t sell your house for more than the Zestimate, then I will buy it for the Zestimate” guarantee.
In the current crazed seller’s market, that seems like a no-brainer. If an agent cannot actually get more than what Zillow Offers would pay — and depending on who you ask, like Glenn Sanford of eXp, substantially more — with multiple bids within days of listing the property on the market, then something is wrong with that agent.
In a more balanced and/or buyer’s market… that is going to become a bit trickier.
Nonetheless, this is in effect the listing agent having to stand behind the CMA with a checkbook… if he wants the listing. Whole different calculations are going to have to happen.
New Business Model?
Relatedly, I wonder if a new type of business model is possible… and maybe even likely. That is the listing commission as a percentage of gain, not as a percentage of the sale price.
Today, a listing agent lists a $300K house for 6%. Get $330K for the house after it’s all said and done, and the commission is 6% of $330K, or $19,800.
Tomorrow, the $300K house has a Zestimate of $300K on it. The seller has no incentive to pay you to sell that house for $300K. Instead, it becomes, “I’ll pay you a percentage of every dollar over $300K you get me.” The percentage would have to be far higher than 6% for the agent to be interested… so maybe it’s a bit like lawyers and their 40% contingency fee scenario. 40% of the $30K gain is $12K; it’s less than the $19,800 in the current model, but it’s still a pretty good payday and one that the agent can justify to everybody, because it’s based on gains over and above the market floor.
Plus for FSBO, Minus for Investor
I also think that the new Zestimate-as-bid-price is a boon for FSBOs. You can do a whole CMA rigmarole if you want to, or you can just take the Zestimate and put that as your list price.
The buyer then has a choice: pay more than the Zestimate, or pay a lot more than the Zestimate. There is no scenario where he can pay less, since the seller can just sell to Zillow.
That would help the FSBO with negotiations, with setting the list price, etc.
On the flipside, I think this hurts investors/flippers. There is a Zestimate-as-bid-price. Even if the home you’re looking to buy is not eligible for Zestimate-as-bid-price, the consumer psychology will be that if Zillow says his home is worth $300K, and Zillow writes checks against that estimate, he wouldn’t want to sell to an investor offering 20% less. I mean, it’s possible in edge case scenarios that someone is super desperate, or the house is super rundown, and he would sell to a flipper… but I think most owners would psychologically think of the Zestimate as the floor price, in much the same way that they think of the Carvana offer as the floor price.
That applies to the investor-flipper backed pseudo “iBuyer” programs that brokers and agents are running today, such as the programs from Realogy and eXp and others. If their offers are below the Zestimate, the likelihood of being accepted has plummeted. And based on what I know so far, there is no way their offers can be at or above the Zestimate.
Every Other iBuyer Is Going to Have to Play the Game
It is simply logical that Opendoor and Redfin are going to have to publish an estimate that is also the bid price for the home. Zillow has done it, which means they have to do the same if they’re going to be competitive. Redfin has that estimate; Opendoor does not as yet. That will need to change, I think, to remain competitive.
Let me finish with a few known unknowns — things that we don’t know, and we know that we don’t know. These are not foreseeable outcomes; rather they are issues I have questions on.
Doesn’t the MLS now have to request that Zillow send over Zestimates in some fashion so that their CMA tools can take them into account?
If there is a huge gap between the List Price and the Zestimate, does the MLS have to do some kind of a data compliance check on that to see why there is such a discrepancy?
This new Zestimate is no longer a Zestimate. To flip what Jay Thompson used to say on its head, it’s now a Zappraisal, not a Zestimate, since Zillow is willing to write checks on the valuation. (Yes, yes, there is still the requirement that someone come out to the house and verify its conditions, etc. just like selling to Carvana means a physical inspection of the vehicle, etc., but the consumer psychology will be fundamentally different.)
So one, what do appraiser do now to add value? If I’m a lender, and I know that Zillow is willing to write checks on its Zestimate… what more do I need to approve a loan that I’d need an appraiser to do?
And two, assuming there is some kind of value there, at a minimum, don’t appraisers need to take Zestimates into account going forward to do an appraisal?
The guaranteed price listing seems like a foreseeable outcome. What I don’t know is how brokerages would react to that. Larger brokerages, who have capital, like Compass and Realogy and eXp, can simply launch programs to let their agents do guaranteed price listings. What about the small boutiques? What do they have to do if they want to remain competitive?
I think it will be a few months or years before we see how things shake out. But this move by Zillow is not just a small step forward, but a potential game changing event. It was inevitable when Opendoor started the iBuyer industry, but here it is today.
The big picture remains the same: certainty, speed, convenience. Consumers want them. We as an industry have to provide them to the best of our abilities. They want to be able to count on us like one, two, three. Provide that, and we should be able to count on them like four, three, two. Zillow has taken a step; now we see how everyone else reacts.