Zillow Offers vs. Full Service Agent

Okay, so I got into a discussion on Facebook with Glenn Sanford of eXp on the difference to the seller between selling to Zillow Offers vs. listing with a traditional agent (Full Service Agent, as per Glenn). I thought it was an interesting little intellectual exchange, but then Inman picked it up as an actual story. Plus, the little spreadsheet I embedded in the FB discussion has been getting a ton of requests to access it, so I thought, let’s just publish it for everyone to see.

I think the numbers show that homeowners are better off strictly financially selling through a Full Service Agent (FSA) vs. selling to an iBuyer. We’ll be using Zillow because they’re the only ones to publish their unit economics for Q4/2020; I assume Opendoor will also report those when they do finally report.

However, if we’re going to understand what’s really going on, we’re going to have assess the difference dispassionately, without an agenda. We’re all entitled to our own opinions, but we’re not entitled to our own facts. My interest in this particular topic goes way back. This post, Homeowners Net More Selling to Zillow Than With a REALTOR, was written back in February of 2019. But my math/logic was a bit off on the 2019 post. I think it’s more correct today, as I’ll explain.

Glenn’s Argument and Numbers

First, what Glenn concludes after crunching some numbers, is:

However, as a consumer, and maybe I’m missing something however much of that profit came from Zillow Offers and if I did my math correctly (and I’m pretty decent at math), sellers who went with Zillow offers lost an average of 6% vs using a full service real estate agent with their real estate transaction. This is based on an average profit of $19,260/home profit + 3.8% additional selling costs not including interest expenses (which on average probably amounted to another $3000 – $4000) based on an average priced home of $280,000. If we compare that to a full service agent that means that consumers paid in general 11.5% in commissions and expenses to Zillow vs an average of 5.4% when an agent lists and sells a home.

I know Zillow and OpenDoor have pushed brokerages like ours to come up with comparable offerings however I’m still not seeing how consumers are served when on average they will receive between $15,000 – $20,000 less net or 5 – 7.5% less from the total value of their home and in all likelihood 15 – 25% less based on the value of their equity in their home (assuming they have a loan). This is also why our Express Offers program that is like Zillow Offers has agents involved to explain the differences to consumers so they are fully informed of the full expense of going the iBuyer route. There is a very small percentage of the market that should go the iBuyer route however often home sellers get caught up in the excitement and the convenience of selling to an OpenDoor or Zillow that they don’t truly consider the full cost and implications. For the average seller the difference could represent over 6 months of full time employment and be the difference between sending their kids to college or having money set aside for a rainy day or retirement.

For home owners who have a mortgage this means consumers have generally 13% less downpayment for their next home and as a result assuming they aren’t putting more down they are limiting the future home they can buy based on the size of their downpayment so that translates into 13% less home. Ultimately this means that going with Zillow Offers as a consumer means Zillow wins while the consumer… (well you can figure that one out).

He includes a Google Sheet spreadsheet showing his work, which you can view here. I will duplicate it as an embed as well.

My Edits

I thought that Glenn’s logic was a bit off, and therefore, the numbers were a bit off. Not dramatically, as it turns out, but it was a bit off nonetheless. So here are my edits:

My reasoning is simple: if a seller sells his home to an iBuyer, Zillow included, then he has sold the home. There is no further cost of ownership. Holding Cost and Interest Expense go to zero.

In addition, all iBuyers are explicit that the homeowner does not have to do any renovations. They don’t even have to clean the house in many cases. The iBuyer will do that after the purchase. That’s a big part of the value proposition. Now, the iBuyer might change the offer price based on what they think the cost of renovations and cleanup may be, but the seller has no renovation costs.

The one change between my 2019 analysis and today’s analysis is my understanding (which may be wrong, and if so, I’d appreciate correction) of how Zillow’s unit economics works. As I understand it today, the Home Acquisition Cost is net of all fees and concessions. That is, the initial “purchase price” might have been higher, then Zillow nets out the Seller Fee (~7% last I checked) and any concessions (likely equal to the renovation costs and possibly a bit of the holding cost, etc.), then writes a check to the seller equal to the Home Acquisition Cost.

So if a house is “sold” to Zillow for $300K, Zillow would net out (round numbers) $20K for the Seller Fee, and maybe another $10K for renovation seller concessions, and write a check for $270K to the homeowner, and that is the Home Acquisition Cost.

Again, if I have that wrong, please let me know.

Timing

The analysis can’t stop there, however. Because the $326,872 was what Zillow sold the average home for in Q4/2020. But the $286,168 is not the average acquisition cost in Q4/2020, since it is clear that some of those homes were acquired prior to Q4 as the footnotes to the financials make clear.

“(1) Amount excludes expenses incurred during the period that are not related to homes sold during the period.
(2) Holding costs and interest expense include $1.4 million and $0.6 million, respectively, of costs incurred in prior periods associated with homes sold in the fourth quarter of 2020 and $4.4 million and $5.1 million, respectively, of costs incurred in prior periods associated with homes sold in the fourth quarter of 2019.”

So at least some of these homes sold in Q4 were acquired in Q3 or earlier. Why is this relevant?

Because home prices have been zooming like a rocket in 2020. Phoenix, one of the oldest iBuyer markets, experienced an 18% YOY increase in median price. Atlanta, another major iBuyer market, went up 15% YOY. That’s over 1% per month.

So a homeowner who sold to Zillow in Q3 for $280K would not have gotten $326K in Q3; he would have gotten maybe $310K because home prices rose by 3-5% in the intervening three months. If the homeowner had waited until Q4 sometime to sell his house with a FSA, then yes, he would have gotten the $326K price. But then he’s also looking at additional months of holding costs and interest payments. What’s more, he’s also looking at the next home he wants to buy having gone up the 3-5% in price in the intervening months as well.

Isn’t that kind of a wash?

Also, Allen Parker, Zillow’s CFO, said during the earnings call:

But there are two other factors that I’d like to call out. And Rich has touched on some of those. So, the HPA trends and sales velocity performed a lot stronger than our underwriting assumptions and contributed to a pretty significant portion of the 500 basis points improvement that you see in our acquisition costs, where our acquisition costs as a percentage of the average sale price went from 91.1% to 85.9%. [Emphasis added]

The financialese basically means Zillow bought homes for $X, expecting to sell in 90 days, but sold them so quickly that they had a windfall. One implication is that Glenn’s basing his analysis on Zillow’s profits in Q4 is a bit off; most of that came from lower holding periods.

Risk, Annoyance and Flexibility Premiums

Finally, it doesn’t get reflected in the numbers, but we do have to at least consider the two premiums associated with selling traditionally: risk and annoyance.

If a homeowner sells to Zillow, there is zero risk: he’s getting paid cash by a multibillion dollar company who doesn’t need the home to appraise, doesn’t need permission from a bank, and isn’t going to get hit by a truck two days before closing. If he sells to a normal family buyer… there is always the risk that something goes sideways.

If a homeowner sells to Zillow, there is zero annoyance. No showings, no piling kids and the dogs into the minivan to vacate the premises, no staging and living in a staged house, no keeping everything sparkling clean, etc. etc. With COVID, this “annoyance” factor goes way, way up.

If a homeowner sells to Zillow, he can coordinate the closing date for a move-up/move-down. There is no scrambling to figure out where to live for the 2 weeks between selling one home and closing on the next home. That’s a huge part of the value proposition of iBuyers.

And all three are in this testimonial video (admittedly biased, since it was released by Zillow, but still more than the other side of the argument):

The weakest part of the argument against iBuyer on the part of the FSA are these three items. Yes, the homeowner could have gotten $14K more… after a couple of months(?)… as long as the buyer qualifies and the home appraises and all that… after the whole process of staging, marketing, touring, and so on….

A stronger argument by the industry would be something that acknowledges all three premiums: “You’ll make more, because you’re willing to tolerate the risk, the annoyance, and the inflexibility.” It’s the same sort of argument as we could make to someone who wants to FSBO: “Yeah, you’ll save commissions if you’re willing to take on all of the work required to sell your house, and take on all the risks.”

What We All Could Use

You know what we all could use? A real academic-level study on the difference between the four dominant models today: selling FSBO, selling traditionally with a FSA, selling to a market maker like Zillow and Opendoor, or going the bridge loan model like Knock and Flyhomes. Such a study would take all costs into account, including opportunity cost, and evaluate how they all stack up.

I think what we’ll find is that it will fit with the basic understanding of economics: the greater the risk, the greater the return. FSBO > FSA > Bridge Loan > Market Maker in terms of return and risk.

Now that would be something really worth sinking our teeth into.

-rsh