Somebody Call 911: Thoughts on the Opendoor + Zillow Partnership

I was at Inman doing the #lobbycon thing when Opendoor and Zillow both released their 2Q/2022 earnings. So I saw the news about the multi-year exclusive partnership on the iPhone, then couldn’t really look into it until the weekend.

While there are other interesting tidbits in both earnings reports and the discussions from the management teams, this deal between the two is the big news from 2Q. And there are other very knowledgeable analysts on both companies from a financial perspective. I don’t know that I could add much value to what someone like Tyler Okland at Datadoor.io has to say on Opendoor’s financials. I do think, however, that I have a perspective on the deal between the two giants of proptech.

That perspective has me reaching for the phone to dial 911 to report a robbery.

This deal makes me wonder what in the world is going on over there at Opendoor. What are they seeing that we’re not seeing? What are they worried about that we perhaps should be more worried about?

As the self-confessed second biggest bull on Opendoor and iBuying (I used to be #1, but then Tyler Okland appeared on the scene), who is currently long OPEN, I freely admit my biases. Nonetheless, let’s get into it and you tell me what I’m missing and where I’m going astray here.

The Deal Terms, Broadly

It goes without saying that I don’t have the actual partnership agreement in front of me. I’m going based solely on public information here. As far as I can tell, the deal looks like the following.

Remember that little button on Zillow if you went to a Sold Property (that is, a house that is not currently on the market) that said, “Sell to Zillow”? Those were the halcyon days of Zillow Offers, of course. Well, that button will make a comeback but say “Sell to Opendoor” instead. So Opendoor gets access to Zillow’s massive web traffic: some 234 million monthly average uniques.

In exchange, Zillow gets:

• A flood of seller leads, which Zillow had to give up when they shut down Zillow Offers;
• The opportunity to persuade the seller to not sell to Opendoor (!);
• The ability to, quoting Rich Barton here, “create a suite of seller services over time to complement Opendoor’s cash offer program” whatever that means;
• If the seller persists in selling to Opendoor, then a referral payment from Opendoor;
• The opportunity to hijack the seller-as-buyer leads (most sellers also have to buy the next home);

What’s even more incredible is this passage from the Zillow earnings call:

Now I’ll get more specific on how we expect the customer experience to work as we roll out the partnership. We’ll offer customers the ability to get a cash offer on their home details page on Zillow which we know is a compelling call to action and provides us a high-intent seller signal. Once a customer shows interest in getting a cash offer, a licensed Zillow adviser will be available to talk each customer through a variety of selling options, including the cash offer from Opendoor.

For customers who choose to sell directly to Opendoor, Zillow will receive a referral fee.

For customers who decide they want to sell traditionally, we will connect to them with a Zillow Premier Agent partner.

For customers looking to sell their existing home and buy a new home, we will offer a package where they can buy their next home with the Zillow Premier Agent, finance with Zillow Home Loans and close with Zillow Closing Services while selling their existing home to Opendoor. Throughout this future customer experience, Zillow will be the primary — be in the primary advisory role, helping our customers choose the best option for them while growing our business in the capital-light manner we described when we exited being an iBuyer primary. Offering more products and services to more of our customers is a core tenet of our long-term strategy and this partnership is a significant step in that direction. [Emphasis added]

I have to admit, I was scratching my head reading these words. Many eyebrows were lifted. I admit to my surprised Pikachu face getting quite a workout.

Then I found out that on top of all that, Zillow gets stock warrants to purchase 6 million Opendoor shares at a floor of $15 and a ceiling of $30 based on a number of factors. There was no mention of Opendoor getting Zillow warrants. Wow.

The only deal I can think of that is as lopsided as this one is the one that Lando Calrissian struck with Darth Vader.

Allow me to explain.

Zillow, the Primary Advisor

The first lifting-of-the-eyebrow occurs with Barton’s reference to Zillow being the primary advisor to their customers.

As a general rule, if you’re trying to sell something to somebody, you don’t let some third party tell your story to the prospect. It isn’t as if Opendoor was lacking in staff or systems to get a request for an offer, then do a sales job on the consumer. (Was it? Are there some staffing changes at Opendoor coming?) What is the logic in allowing someone else to talk to your prospect first, before you get a chance to?

Especially when the only reason why the other guy gets a chance to talk to the prospect is because the prospect clicked a button on the other guy’s website that says, “Sell Your Home to Opendoor?”

And especially especially when that other guy has publicly said that you are an existential threat, as Zillow has.

And especially especially especially when that other guy was your fiercest competitor in your core business who abruptly exited saying that algorithms can’t price houses, which is kind of your core value proposition? Consider for a moment whether it is or is not embarrassing for Zillow and Rich Barton if Opendoor manages to make a killing using algorithms to price houses when Zillow said they could not. If Opendoor also flames out, then it’s a “algorithms can’t price houses” narrative, and Barton looks like a genius for pulling the plug at the first real sign of trouble. If Opendoor does not flame out, then it’s a “Zillow can’t price houses” narrative. You dig?

What we don’t know today is whether the partnership agreement specifies that this licensed Zillow advisor will be required to push Opendoor’s services, sing its praises, point out is benefits, and try really hard to get the consumer who did after all request an offer from Opendoor to follow through. Maybe there’s some language like that, or some requirement that yes, Zillow will be the primary advisor and Zillow agrees to primarily recommend selling to Opendoor, then secondarily recommend talking to a Zillow Premier Agent.

Before we continue… remind me what Zillow’s referral fees are from Premier Agents on a Flex program? Oh yeah, about 35% of GCI. What is Opendoor paying Zillow if the seller sells to them directly? I think I saw 2% cited somewhere.

So let me get this straight…. Someone goes on Zillow, checks out his Zestimate, then says, “You know, I want an instant offer from Opendoor” and so clicks that button and fills out some intake form, telling Opendoor about his house. (Go see the process on Opendoor.com; one assumes that will be integrated into Zillow since Barton talked about a “deep integration” into their system.) After that, someone from Zillow calls him and says, “I see you requested an offer from Opendoor, but I don’t know if that’s the right solution for your needs. Why don’t we explore all your options?”

If after that chat, the seller still insists on getting an offer from Opendoor… in which case Opendoor pays a referral fee to Zillow. Holy crap.

I don’t think I’m making this up. Here’s Barton during the Q&A:

Imagine this was a dating platform. Some gal swipes right on you, and you match. But instead of connecting the two of you, the platform connects her to the guy who was your main rival for dates for the past year, and he gets to talk to her first to make sure, double, triple sure that she does in fact want to go out on a date with you… instead of his many other friends who are taller and richer… and you get to pay him for that advanced screening if she insists on a date with you. Who would use that dating platform?

Incels would. Nobody else. Only incels.

Seller Leads

Another Pikachu-face moment occurred when Barton so clearly spells things out: “For customers who decide they want to sell traditionally, we will connect to them with a Zillow Premier Agent partner.”

True, in my head I (unfairly perhaps) heard that statement as “For customers we manage to talk into selling traditionally…,” but whatever. I started looking for some statement somewhere that if Zillow were to flip an Opendoor offer request to a traditional listing lead, that Opendoor would get paid a referral fee. I haven’t found that yet. Do a CTRL-F on Opendoor’s earnings transcript for “referral” and that search will result in zero results.

Could it be that Opendoor executives do not realize what they have just simply given away to Zillow with this?

The Holiest of the Holies in residential real estate is a live, high-intent seller lead. That was one strategic reason why I (and others like John Campbell of Stephens) thought Zillow Offers made so much f’ing sense. There is a video of Errol Samuelson, Zillow’s Chief Industry Development Officer, saying that 9 of 10 people who request a Zillow Offer do not go on to sell their homes to Zillow, but those 9 of 10 people become incredibly valuable seller leads to Premier Agents. I happen to know for a fact that there were some very large and powerful agent teams and very large and powerful brokerages who tolerated partnering with Zillow on Zillow Offers deals because they were going to get the seller leads from those who rejected the offer.

In fact, I wrote a few years ago when Zillow started Zillow Offers in earnest that one of its competitive advantages against Opendoor was the fact that Zillow could easily monetize seller leads from all of the rejections.

And Opendoor isn’t getting a referral back from Zillow on these seller leads? What in the actual hell? Every single real estate agent in North America would demand a referral fee to send such a real live high-intent listing lead to another agent. And the other agent would gladly, happily pay it.

Zillow used to talk about tens of thousands of requests for Offers every month, back when they were doing iBuying. So conservatively, let’s say 50K requests. 9 out of 10 say no thanks afterwards. 45K listing leads x $450K median price of homes x 3% listing commission x 35% referral fee for Premier Agents. That’s over $212 million a month. Say Premier Agents only manage to convert 10% of such high-intent sellers, so only $21 million a month.

You’re telling me that Opendoor couldn’t use say a 10% referral fee on that $21 million a month in passive-income revenue? Really?

Ancillary Services and Opendoor Complete

What really got the Pikachu face going, however, was the pretty clear signal that Zillow would get buyer leads, mortgage and closing services from this partnership. From the above quote, Zillow gets to “quarterback the process and introduce our customers who request an Opendoor cash offer, introduce them to Premier Agents, mortgages, Zillow closing service and a myriad of other things that we have our hands on.”

So um… does anybody remember Opendoor Complete? It was announced in November of 2021 to much fanfare:

With Opendoor Complete, we combine selling, buying, and closing into one simple transaction so customers can move seamlessly. We’ve created a new technology platform, including a consumer dashboard for tracking and managing your move, consolidated your Opendoor interactions to give you a single primary point of contact, and automated multiple steps in the process.

As recently as Q1, Eric Wu was telling us, “For home buyers, we hit all-time highs for purchase offers, driven by the adoption of Opendoor-backed Offers and Opendoor Complete.” Then in Q2, CTRL-F “Opendoor Complete” returns zero results.

Opendoor’s website still has a whole section for Opendoor Complete. Here’s how they describe how it works:

Does this still hold? Is this even a viable product now after the Zillow deal?

I think it is safe to assume that by the time the quarterback, Zillow, is done introducing the consumer who requested an Opendoor offer to Premier Agents, mortgage, Zillow Closing Services, and the “myriad other things” that they have their hands on, the seller who also needs to buy a home is likely to be represented by a Zillow Premier Agent, have a pre-approved mortgage from Zillow Home Loans, and have opened escrow with Zillow Closing Services.

What exactly is left for Opendoor’s “member of our team” or Opendoor’s “local experts” to do?

Will Opendoor simply be doing Opendoor-backed Offers, but with Zillow Premier Agents? I guess that’s not a terrible thing, and Opendoor today accepts pre-approval from any lender so why not from Zillow Home Loans, right?

Except… do note this from the Buy section of Opendoor’s site:

On homes Opendoor owns

Using an outside agent means more fees (for you and us). Working with an Opendoor Agent means fewer fees and saves us both money — so your offer stands out.

How this fascinating sentence will interact with all those sellers who now have a Zillow Premier Agent as their buyer agent will be interesting to watch in the months ahead.

The Mortgage Giveaway

Still, giving away the buy-side business to Zillow the Quarterback is less troubling for Opendoor partisans than giving away mortgage. Closing services hurts too, but it’s the mortgage that’s got me really wondering what is going on.

Back in 2016, I wrote one of my more important posts about Opendoor, titled, “Forest for the Trees: The Opendoor Edition.” One of my goals for writing that post was to reassure the real estate industry, which is prone to panic, that Opendoor really wasn’t after their piddly $70 billion or so in commissions. They were after, I thought, the $1.7 trillion or so in mortgages:

Like I said, I wish I had better numbers but… we could also just go look at the global headquarters of say Realogy and then look at the global HQ of Bank of America? Point is, real estate brokerage is big business, but mortgage banking is in a different class altogether. Let’s face it: the government didn’t go into a panic about global financial meltdown because some real estate brokerages were going to go belly-up, but because a few banks did.

Opendoor, I think, is aiming at a piece of that market rather than the few billion dollars in commission income from real estate brokerage.

A few years later in 2019, after Zillow had entered iBuying, I wrote a VIP post titled, “Zillow’s Possible Long Game: Mortgages and iBuyer” where I made that point again, but with more numbers suggesting that seller financing mortgages at scale was the ultimate payoff and goal for iBuying.

So when Opendoor gave Zillow the first shot at selling mortgages to all these people who raised their hands to get an offer from Opendoor… I frankly couldn’t believe it. I searched in vain for some mention of a referral payment, or some kind of a lead-generation payment from Zillow to Opendoor for gift-wrapping a mortgage prospect. Nothing of the sort could be found.

Market making was always and was designed to be a low margin business. Barton aimed at +/- 200 bps; Eric Wu has long said Opendoor is not trying to make money from the spread (though Q2 had him and Carrie Wheeler talking a whole lot about spreads…). The money was in revolutionizing mortgage.

Even in Q2, Eric Wu was talking up mortgage:

For homebuyers, we went live with our new Opendoor financing app in California, enabling our customers to get pre-qualified in less than 60 seconds.

With the adoption that suggests we will achieve our highest attach of financing within just a few months of going live.

Then later, while talking about Opendoor Exclusives, we get this:

We actually found that by providing these homes exclusively on Opendoor it drives us audience so it’s another way we’re using our unique supply to aggregate direct buyer demand. And this can have significant positive impact on economics, obviously, because with a direct demand funnel, we can lower the transaction costs through fees, close times, and increased services attach.

So we think the impact can be substantial over time. I wouldn’t say that to the third party question, how big can this get? I do view this as an important start of a fundamental shift in why and how direct buyers work with Opendoor, and it does unlock a tremendous amount of opportunity in the medium term for us.

How is Opendoor getting this increased services attach unless people come to Opendoor without going through the quarterback, Zillow, first? And if they do go through Zillow, how many of them will be unattached when looking at Opendoor Exclusives homes?

It may be that Opendoor decided to give away random seller mortgage opportunities, because they are looking at the larger seller-financing based opportunity. That would make me ecstatic as an Opendoor bull. It may also be that Opendoor thinks (or knows) that they will get consumers to switch mortgage providers when/if they come to Opendoor Exclusives. (Opendoor offers $1,000 and no lender fees if the buyer finances with Opendoor and buys an Opendoor-owned home.)

Nonetheless, at this stage without knowing more, the great mortgage giveaway is… just that: a giveaway to Zillow. Keep in mind that these opportunities to pre-sell mortgage exist for Zillow only because the consumer requested an offer from Opendoor. What a fantastic deal for Zillow.

Can Opendoor Even Take Advantage of the Leads?

So.

Opendoor inks one of the worst business deals of all time. They give away the crown jewels for nothing, but they do get more top of funnel traffic. 230 million MAUs are nothing to sneeze at, after all.

But I wonder if Opendoor can even take advantage of that traffic. Opendoor’s earnings call was filled with doom and gloom macroeconomic outlooks. (To be fair, every single earnings call in real estate this quarter sounded similarly gloomy macro outlooks.) The single most used word, I think, for both Opendoor and Zillow might have been “volatility.” For Opendoor, that means scaling way back on purchases and paying a lot less than they were before the sharp market contraction.

Eric Wu talked about how Opendoor has been increasing spreads (aka, paying less for properties) since May. Carrie Wheeler expanded on what Opendoor is doing:

Our performance for the second half of the year will reflect this transition in the housing market to lower transaction velocity, lower HPA and longer holding times beyond normal seasonal trends.

As discussed in our shareholder letter, we’ve taken and are continuing to take swift and decisive actions to one, adjust pricing to sell homes expeditiously and two, adjust new acquisition home pricing to reflect market conditions and enable those cohorts to perform in line with our target expectations.

One of those actions is “sustained higher spread levels for the new acquisitions we’re making” which is Wall Streetese for “We’re paying a lot less for houses, y’all.”

So some tens of millions of consumers will get to see “Sell to Opendoor” on Zillow. A lot of leads will be generated. The quarterback will step in, talk to all those consumers, tell them how Opendoor is paying less than ever before because the market sucks, and (maybe) encourage them to explore talking to a Premier Agent. Then those who make it through that gauntlet will be offered less than ever before?

I’m not entirely sure that Opendoor can even take advantage of the increased top of funnel. Especially when a big part of managing expenses is “ramping down third party capacity built into our operations.”

Perhaps the Zillow deal has been in the works for months, before the market changed, and Opendoor thinks there are long term benefits that far outweigh the short term. When things get more stable, then the Zillow deal will pay off handsomely for Opendoor. Maybe.

But this deal doesn’t look like Opendoor had much leverage; instead, it looks as if Zillow held all the cards and Opendoor had to agree to all of these extraordinary terms to get Zillow to play ball.

Where My Mind Goes

I ain’t gonna front: the one-sided nature of this partnership has me shook. This doesn’t feel like a partnership between two proptech giants, both of whom have leverage on each other, and force both sides to give up something. This feels more like the kind of “partnership” that a young startup makes with Big Daddy Zillow. Zillow gives up nothing, gains all kinds of opportunities, and then gets the icing on top of 6 million warrants.

As a result, my mind goes to wondering if there are some real operational or financial problems at Opendoor that are not evident today.

For instance, maybe Opendoor is finding that trying to run a mortgage operation is just too difficult, too expensive, too time-consuming, and the water is just too filled with sharks (Quicken Loans hasn’t gone anywhere, for example, nor have the big commercial banks). So giving that away isn’t the sacrifice I imagine it to be. Perhaps Opendoor has some internal data showing that title and escrow are actually losing propositions, so it’s no big deal to give that away to Zillow as well.

Or maybe there are internal metrics that are far, far worse than the macroeconomic data to date suggest. Maybe there’s something to the settlement with the FTC that makes it far more preferable to have Zillow try to talk a consumer out of selling their home to Opendoor first, because that provides even greater evidence that the consumer is making an informed choice to sell to Opendoor at whatever permanently-low price.

Or… there’s absolutely nothing going on, and I’m just a paranoid, paranoid man. Opendoor did the deal, because all they need to take things to the next level is 230 million MAUs laying eyes on “Sell to Opendoor!” and they don’t care about giving away everything they did give away. Zillow did the deal because, well, they’d be stupid not to say yes to such an extremely favorable deal.

Whatever the truth, I find it difficult to convict myself of overreaction. That’s how one-sided this partnership is. Maybe there’s no fire burning on the dance floor, but man… there’s some smoke in the air.

-rsh