Example of Zillow Offers

Hat tip to RK for sending in this article – an excerpt:

I asked a realtor there that I know to do a CMA on the property. When she was done, her number came out to $460,000. Zillow’s offer was $440,000. This is where things got interesting. Their pitch is that with Zillow’s service, you would be provided with a dedicated selling advisor, the ability to sell without showings, the buyer would make repairs, and you get to choose your closing date. Zillow then proceeds to inform you, the client, that “all you receive” in a traditional sale is a dedicated selling advisor. When you continue to scroll down, Zillow quotes the average realtor’s commission at 6% and then says their Zillow Service Charge is 12.9%. To their credit, they don’t hide the fact that you will pay substantially more money using their service. At the bottom of the email, it estimated my net proceeds would be $383,240 using Zillow, and if I used a realtor proceeds would be roughly $413,600.

Read full article here:

Link to Full Story

Zestimate Manipulation

We ended up with 12 offers on my listing in Rancho Penasquitos, with SIX of them over $900,000.  Donna and I did some expert maneuvering to coach the buyer-agents higher on price, and we may have gotten an assist from Zillow too.

This was their zestimate before the listing hit the market:

This was their zestimate after the listing went on the MLS for $869,000.  Zillow has no shame – they just hit the number. At least Redfin tries to hide it by changing their estimate to within 1%:

Then we RAISED our list price to $899,000 because we were getting such good action, and Zillow rasied their zestimate right back up:

They have no qualms about manipulating the zestimates right before your eyes.

Think of what they will do to you when they try to buy your house.

Zillow Offers in San Diego

Link to UT

It’s conclusive – the Zillow Offers program is only good for sellers who want/need BOTH quick cash and max convenience, because the cost is heavy.

TIPS TO HOME SELLERS:

  1. Don’t find yourself in a position where you NEED to cash out in a week.
  2. If you want max convenience, hire me and we’ll handle everything.
  3. Don’t get suckered by the bait-and-switch.

The word on the street is that they are pushing down the zestimates to help convince sellers to take less – and they have already bought 31 properties in San Diego.  Keep a record of your zestimates!

Zillow will likely be successful, however, because they don’t mind spending $100 million per year on advertising to promote their brand – and it works.

They give you just enough sexy to suck you in:

ibuyer Example

The ibuyer’s quote will be a curiosity, but unless it is close to the homeowner’s expected value, then selling on the open market will seem like a better option for those who want max money.

Would a homeowner who has found another house to buy be an exception?  Rather than trying to convince a seller to take an offer that would be contingent upon them selling their current home, they could sell their house instead to an ibuyer in order to purchase the next home non-contingent.

I just had a case like this, so we tried it out.

The house that needed to be sold was in Los Angeles, and the homeowners were confident about its value being in the low-$900,000s – or at least $900,000.  Though it was an older home, it had been updated – and they felt that if it went on the open market that it would sell within two weeks.

The zestimate was $875,000, and when I ran the comps, most were under $900,000.

They pursued a reseller called Fast Offer, and I ran it through my source.

Their guy quoted $830,000, and because they would likely get beat up again once the reseller did a home inspection, they figured their net would be $820,000-ish…..which was insulting!

My automated source processed the address and asked three yes-or-no questions (with my answers):

  1. Have you seen the inside of the property? Yes
  2. Is it a fixer? No
  3. Would you consider a discounted, quick, no-hassle cash offer based on condition? Yes

Their response was immediate:

The home doesn’t qualify.

The ibuyers have to be looking for realistic homeowners with houses that can be flipped easily and for a decent profit.  They only have to ask the second question to gauge their chances – unless the homeowner admits that they own a fixer, it’s probable that they would hold out for a retail price…..or higher!

We did discuss that the $820,000 could have been close to the amount that an open-market sale would net. But in this case, the people gave up on buying the next house, rather than be ‘lowballed’ in their mind. Homeowners aren’t going to give it away!

The Compass Bridge Loan will be a better solution – and should be available this month!

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Wow – this has to be the lowest jumbo rates with no points ever!

Jim’s ibuyer Program

We saw an example yesterday of a seller who didn’t have a problem finding a cash buyer who was willing to pay 10% below their original list price.

For the homeowners who are fascinated by the idea of selling quick and easy and might take a discount for such a convenience, I can now offer an ibuyer option as well as my retail estimate of value.

The ibuyer quote is from an independent third-party, not from me or Compass, and frankly, I think you should sell using my traditional method because I think you’ll come out ahead in the end.  But if you can’t wait, I’ll set you up with an ibuyer who can cash you out right away.

I’m not crazy about the idea, but I think it is inevitable that every realtor will have to offer every option as part of their fiduciary duty to the seller.

I still think it is a conflict of interest for the agent to offer to sell the property traditionally AND make an offer to purchase with their own money.

Cost of iBuyers

If you’re interested, I can deliver a cash offer to you today!

Here’s research on the costs:

But what, exactly, do iBuyers bring to the table for home sellers? And, can this business model survive the housing market downturn so many are predicting?

That’s what Collateral Analytics sought to answer in a recent paper on the topic, which offered a deep dive into the strength of the iBuying concept.

First introduced in Phoenix by Opendoor in 2014, the iBuying concept offers home sellers the opportunity to sell and close on their home within days, hassle-free. The iBuyer then completes any necessary repairs and lists the home for sale.

“For motivated sellers who want a predictable sale date and need to move, perhaps a long distance from the current location, there is no question that iBuyers have provided a welcome alternative to traditional brokerage,” Collateral Analytics pointed out.

But all that convenience comes at a cost. The paper dissected the math behind the model, estimating that sellers end up paying between 13% to 15% more when they work with an iBuyer. This covers a difference in fees that ranges from 2% to 5% greater than a traditional real estate agency, plus an allowance for repairs and another 3% to 5% to cover the iBuyer’s liquidity risks and carrying costs.

The paper also noted that the iBuying model makes these companies susceptible to a number of risks, including the need to safeguard vacant homes and the possibility that the automated valuation models they rely on will overvalue a property, resulting in a loss.

They could also face troubles if home prices decline.

“A downturn in home prices, not forecast by the iBuyer market analysts, could be devastating as they ramp up their business platforms, particularly if the cost of capital increases,” the paper stated. “At the same time, downturns are precisely when the most sellers would want this option.”

While Collateral Analytics lists several companies that are investing big in the iBuyer model – including Opendoor, OfferPad, Zillow Offers, Redfin, Realogy CataLIST, Perch and Keller Offers from Keller Williams – it also states that only the most efficient firms with enough capital and market share are likely to survive.

And of course, this all depends on how appealing the concept turns out to be, mainly, how many home sellers are willing to pay for convenience.

“For some sellers, needing to move or requiring quick extraction of equity, this is certainly worthwhile,” the paper stated, “but what percentage of the market will want this service remains to be seen.”

https://www.housingwire.com/articles/49809-with-ibuyers-sellers-pay-a-price-for-convenience

House Buy-Backs

The big money and heavy competition is causing ibuyers to juice their offerings.

Opendoor will buy your house for cash, they will buy your next house, they have rebates, and now they will even buy your house back within 90 days if you don’t like it.

Our belief is that everyone should love the home they just purchased, and we are going to stand behind that. Opendoor guarantees buyers will love the experience and purchase the home of their dreams at the best price, or we will buy the home back within 90 days. This guarantee extends to qualifying homes in Phoenix, Dallas-Fort Worth, and Raleigh-Durham.

There are conditions, of course.  This is the most intriguing (bold added):

In the case of a Third Party Home, we require a copy of a licensed general inspection report, and reserve the right not to offer the guarantee if there is any material defect identified in the report (e.g., foundation issues, roof damage, inoperable HVAC systems, unpermitted additions) or if Opendoor determines the purchase price is materially above the fair market value of the home.  We will contact you within 24 hours of receipt of the report if this is the case.

They don’t have experienced, professional agents to represent you.  Nope, just ‘tour assistants’ who open the door – so how will you know if you paid fair market value?

People will believe what they want to believe, and the company will help sway your opinion by having comments like this on their website:

A really good price, and a really good deal?

There will be buyers who jump at that!

These companies don’t want to get realtors involved, and the excuse is always because we cost too much.

But these disrupters don’t want the customer to know too much – either buyer or seller – so they can skim a few more bucks off them.  It has the potential of creating an artificial market, where the companies tell you what the houses are worth – and you better like it!

https://www.opendoor.com/w/blog/opendoor-launches-new-buyer-service

Zillow, iBuying, and the Future

The path forward is becoming more clear. Zillow is rapidly expanding their ibuying enterprise, and because they are so well-known, they have a shot at a major disruption.

In the video below, Mike describes how homeowners who used to rely on their zestimate for a home valuation are now getting a written quote from ibuyers – for free.  In Phoenix, the center of the ibuying universe, 40% of homeowners get a quote from an ibuyer before selling their home.

In effect, ibuying is the new zestimate, and more tangible because if you like the number, you could sell your house instantly.

Sure, Zillow is losing money, but their first-year volume is remarkable:

Since launching Zillow Offers in April 2018, more than 170,000 homeowners have requested an offer through the program. In the second quarter alone, there were 70,000 requests.

Zillow reported that it made $1,578 on each home it sold in the second quarter before interest expenses are calculated. After interest expenses, the company, on average, lost $2,916 per home. Barton believes that, eventually, the company will earn 400-500 basis points of return before interest expenses on homes it sells.

It’s an improvement, however, over the company’s first-quarter numbers, where it lost, on average, $3,268 per home it sold, after interest expenses.

“Over time, our unit economics should benefit more from other adjacent services, like mortgage origination, title and escrow,” Barton said in a letter to shareholders. “We expect to be able to leverage these services to support Zillow Offers and improve the consumer’s overall transaction experience, while also generating cost savings for Zillow and our customers.”

They are the only real estate company that has been willing to spend $100 million per year in advertising, and it’s what made them who they are today.  It won’t matter if they charge 7% to 13% for their service, all that matters is that they advertise it – which may not be that costly.

Because many or most homeowners have saved their home on Zillow (giving up their email address), they will get regular solicitations to sell their house to Zillow.

Look how easy it is – one click and you get a cash offer…….just like 500+ others near you:

If you have 18 minutes to spare, Mike’s presentation below is a full examination:

Mike mentions that he thinks the companies who position themselves at the start of the consumer journey will win. Stay tuned for a Compass announcement shortly!

Boomers Helping Kids

We were talking with some friends last night about how much financial support is going towards kids, and how it will affect real estate in the future.

On one hand, it’s the Bank of Mom and Dad, and helping to keep the market afloat when funding home purchases at these lofty prices for those kids with regular jobs.

However, for those kids who never get to the point of financial stabilization, the selling of the parents home will become the lottery ticket to solve their money issues.

I suggested that this is where the ibuyers could do the most harm by taking advantage of people who want and need a quick sale and who aren’t that familiar with the values.

When we were in Las Vegas for that one-day vacation, I saw more than one ibuyer ad on TV, and they were very enticing.  The kids who have been strapped for years and then inherit their parents’ house might jump at the chance to get their hands on quick money – and likely leave some on the table.

Will anyone step up to protect the unsuspecting?  A new challenge/opportunity for realtors!

Link to Article

The Future of ibuyer

There was a good summary of the ibuyer business published yesterday:

https://www.curbed.com/2019/3/21/18252048/real-estate-house-flipping-zillow-ibuyer-opendoor

An excerpt:

But as more players jump into the space and markets are saturated with various competing platforms, profit margins that are already paper thin get squeezed even more. Zillow says it’s making $1,723 per home flip at a minuscule 0.6 percent profit, which leads one to wonder if this space is really worth getting into if you don’t have multiple modes of monetization.

That’s where the concept of a one-stop shop for home buying and selling becomes especially attractive. If one company can seamlessly integrate each individual component of the real estate transaction—buying, renovating, insuring, and selling—and optimize operational efficiencies along the way, there’s a path to becoming the truly dominant real estate company.

Being the one-stop shop has been the goal of most large real estate operations, where the owners can make profits on every related service – escrow, title, loans, etc.  It’s why these outside companies all jumped in to the ibuyer space – the cumulative profits look very enticing, and making as little as $1,723 per home flip doesn’t look bad as long as they get the other fee income too.

I think they will be able to dominate in the homogenized lower-priced tract neighborhoods where there isn’t much variance in values. They can make their own market too, because a first-time homebuyer won’t balk over paying a few extra thousand in price to get an easy entry into a renovated home.  If great salespeople are employed, the ibuyers could make a killing.

It will also enable the ibuyers to dabble in the higher-priced areas, where losses can pile up quicker.  No need to risk big money when there is no pressure on them to buy anything.  I would expect their purchase quotes in the higher-end areas will be well under retail, to give them plenty of cushion.

How will sellers, buyers, and realtors react?

Sellers usually have a price in mind, and tend to be a little uncomfortable with interviewing several candidates/options. If ibuyers advertise effectively and get the first call, then all they have to do is get close to the seller’s price-in-mind, and convenience will be what decides it.

If a realtor gets the first call, and comes in with seller’s price-in-mind or higher, they will get the listing.  Realtors will feel the need to quote higher-than-ever list prices.

Sellers who want quick money and convenience won’t worry about leaving a little money on the table, and take the ibuyer deal.  Those sellers who want top dollar will list with a realtor.

With everything being high-priced, buyers will probably gravitate to the homes in top condition, and just pay what it takes.  Hopefully we won’t run out of buyers.

Crafty agents might offer third-party reviews of the options.  Sellers will already be getting biased opinions from ibuyers and realtors, and they could use a consultant to help sort out the best option.  But sellers would have to be deliberate and analytical to resist winging it themselves.

The Big Question?  With sellers having more equity than ever, will they mind leaving some on the table?

The successful ibuyers doing volume could smooth out any bumpy markets, because they will be determining the home values to suit their bottom line. If they can’t sell, they can always rent instead.

We’ll have even fewer motivated sellers!

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