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Zillow surprises investors by buying up homes
- cs702 8y agoBuying homes for subsequent resale is a capital-intensive, old-economy, bricks-and-mortar business. Zillow will borrow money to buy the homes, which means that (a) the clock will start ticking the instant each new home is purchased, and (b) this endeavor can be profitable only if proceeds from resales/rentals are sufficiently high to cover cumulative debt service costs -- in addition to all property taxes and ongoing maintenance expenditures associated with home ownership. Why would a heretofore capital-light SaaS business like Zillow want to do this? The only sensible explanation I can think of is that Zillow's current business is no longer growing quickly, i.e., Zillow is now a boring, mature company. The stock dropped 7% on the news last Friday.
- nol13 8y agoBecause they think they have some competitive advantage in the space?
- vincentmarle 8y agoImproving liquidity in the market, aka being a market maker, can provide an interesting advantage.
- ethbro 8y agoAgreed. The surprisingly bespoke nature of home translations definitely provides an opportunity for this to be a win/win. Zillow wins by buying an asset it has more information on the true market value of, then providing an easier, economies of scale on the associated services (inspection, legal, repair, etc), then being able to offer a standardized product to home buyers. Buyers win from taking a lot of the uncertainty out of a transaction. And from possibly lower fees if Zillow decides to rebate a portion. Let's not forget there's a standard 6% commission in US real estate transactions... most retail would kill to start with a 3% margin. If Zillow has high confidence a home is underpriced, it makes sense to time arb that into profit when it can match with a buyer.
- tonyedgecombe 8y agoLet's not forget there's a standard 6% commission in US real estate transactions I never really understood this, the last time I sold a house in the UK the fee was 1.5% and only on my side, the buyer pays nothing.
- aidaman 8y agoWelcome to the US.
- oh_sigh 8y agoYou don't need to pay it, but people feel that it is worth it/ You can definitely get a broker who works by the hour for you.
- zirpderp 8y agoor flat fee - which will crush every realtor going fwd.
- gm-conspiracy 8y agoDid you know that "realtor" is a registered trademark?
- Declanomous 8y agoWhat is the generic mark? Real estate agent?
- mbesto 8y ago1) The 6% commission is negotiable. 2) In the UK, the buyer pays stamp duty (tax) on the purchase.[0] 3) You can put a bid on a property in the UK and it's non-binding (until exchange)[1] In other words - very different markets with very different dynamics. [0] - I forget the percent, but it's material. This effectively disincentives people from buying, making the market less liquid. [1] - This is frankly ridiculous. (I've bought and sold in both US&UK markets)
- raintrees 8y agoReal Estate is one of the older investment games in town - It is what I am basing my retirement on. I wonder how this will impact disclosure rules versus sales advertising? Existing model to use, or adopt another industry's? Will this cause fears of LIBOR-style manipulation? This will be interesting to watch... edit: p.s. Maybe another chance to make a Carfax-like system for homes? In the US market, I find there is not a lot of opacity, especially when one gets into larger/commercial deals.
- subpixel 8y agoI think you mean not a lot of transparency.
- gm-conspiracy 8y agoWhat do you envision for this Carfax-like system for real estate? What info would be available that you could not see via Zillow or the MLS listing?
- dawhizkid 8y agoI suspect part of the reason is that SV "unicorn" Opendoor (https://www.opendoor.com/ https://www.opendoor.com/) is doing this and it wants a piece of the pie. Question I have is if whatever "pie" Opendoor is grabbing is actually sustainable in a recession/down market...seems like the worse case scenario is that they are left holding a bunch of illiquid inventory of declining value they can't get rid of.
- rejschaap 8y agoIt is interesting they even choose the same cities to start in.
- dawhizkid 8y agoVegas makes sense...the best markets for something like this are ones where there's a good amount of inventory, median prices are not very high, avg time on market is on higher side (giving a reason for sellers to use Opendoor to trade value for liquidity) and there's a good balance between buyers/sellers.
- subpixel 8y agoThe risk is in sitting on a lot of properties and getting overextended during a downturn. I think that can be mitigated because Zillow/Opendoor's model is not to buy and hold, but to: 1. buy at a discount (essentially a fee for the service of selling your house with a click) 2. sell at a markup (we're talking a small one in most cases, but the fact is in a good market you can reliably print small amounts of money with some paint, some minimal landscaping, and new kitchen appliances. Zillow will not be using a high-interest loan for the purchase or repair, so they will not be sweating like your typical flipper on TV.) Assume for the sake of argument that Zillow has data to decide where these bets are safest based on comparables and key economic indicators. And they will say no to sellers as often as the data suggests they should. I don't think this has much to do with finding super-profitable deals with data, but with reliably shaving points off a large pipeline of deals. If it doesn't work in a healthy economy, they stand to lose the difference between the discounted price they paid for a house and the market value they can sell it for. In a recession, they can probably stay afloat by renting properties they can't sell at a decent price.
- mjfern 8y agoOr Zillow has access or insight to data that general property investors do not, thus driving abnormal returns.
- caseysoftware 8y agoThat's my guess also. If they have details on the specific aspects in the specific markets that drives prices, being able to "jump on a deal" could work out well. The question becomes if there are enough opportunities like that to move the needle for them. If I had to guess, I would have guessed moving into Lending Tree's matchmaking area would be easier and have a better ROI.
- ssharp 8y agoWhat specific details would they have that other's don't. I don't know how prevalent FSBO is on Zillow in some markets, but in mine it's extremely limited. I'd be shocked if it made up 5% of the residential market, probably closer to 1%. The rest of the listings are from MLS systems and they pull housing data from county systems. For that, I'd assume there is a data broker and Zillow isn't integrating with thousands of counties. If that's the case, then both the MLS and county data can be had by anyone. With that information, you'd get lot details, house details, listing history, county tax valuations and sales history. What other data do you need? A lot of house flippers are agents because they get the MLS listings ahead of the public and can move faster on them. I don't know when Zillow gets their MLS data, but listings almost always hit Realtor.com a day before they hit Zillow, so I don't see that as an advantage either.
- justonepost 8y agoWhat's peculiar is that they don't use OPM for this. There are literally a million of these flippers out there. Why not just work with them to buy it and sell it, and Zillow gets a percentage for providing the lead? It's like zero risk for Zillow, all upside. They must be making a lot of money from this if they're going it alone. The 7% drop is probably not because of riks here but because it signals lack of growth.
- chrischen 8y agoAll businesses can be framed as “old economy” but cheaper. Lyft is just “taxis” done better. An algorithmic hedge fund is just old-style investing automated.
- matte_black 8y agoSo what does it mean for me if I buy a home straight from Zillow? Better price?
- swlkr 8y agoIt would be worth it for convenient financing options/on click, even if the price isn’t lower
- matte_black 8y agoNo advantage though for a cash buyer?
- pyoung 8y agoRight, but if the point is to increase liquidity, the low hanging fruit is mortgage backed purchases. Homeowners will often take a smaller offer price in favor of cash because the closing process is easier/more certain. So Zillow might be trying to arbitrage that price difference between cash and mortgage purchases. And if they can find a way to scoop up part of the loan origination fees and the broker fees in the process, than I guess there could be some compelling revenues there.
- smt88 8y agoI'm betting you won't have to pay a commission to an agent
- matte_black 8y agoWhich should mean a reduced price of at least 3%, since it’s the seller who pays the commission and factors it into the home price.
- Finnucane 8y agoLikely you'd get the same deal as any other real estate developer in the flipping business would give you. They'd be looking for undervalued properties that can be fixed up and resold at a profit. Which means they're on the open market and you're bidding against other purchasers, like normal.
- leothelocust 8y agoI get the feeling a company like this would only make this kind of leap because they have the data to show it will pay off. I.e. they can formulate algorithms to make the best purchases and the most profit. I foresee big gains from this
- yodon 8y agoIt’s rarely a good idea to compete against your customers
- smt88 8y agoZillow has captured the user base so effectively that the customers will have no choice but to continue paying. See also: Amazon
- AznHisoka 8y agoWhy? BlackRock offers solutions to other asset management firms to make investment decisions. They use the same solution in their asset management division.
- caminante 8y agoIsn't there a firewall between the units?
- superquest 8y agoIn this case it seems the customers are unlikely to revolt. Most won't even notice, right?
- paxys 8y agoEvery big company does this in some way. The only smart move in business is to be where the money is.
- caminante 8y agoGreat point. For now, it is limited to AZ and NV and for wholesale purchases only. But it seems like a conflict of interest that's hard to prove isn't being abused.
- lovetrump 8y agoLet's start buying when the bubble is at it's biggest?
- starchild_3001 8y agoHow can zestimate be trusted if zillow is in the business of buying and selling homes? There's a reason why banks separate advisory business from the trading business.
- loeg 8y agoIt's already pretty inaccurate today (overestimates by about 10%[0]), so there's not much change there. ;-) [0]: Very rough estimate, may be market-specific.
- deleted 8y ago[deleted]
- freehunter 8y agoReally it's only inaccurate because the price of housing isn't static and certainly isn't objective. Zillow works based on how similar houses near yours have sold, which could be low because the seller wasn't driving a hard price and the buyer was a good negotiator. It could be higher because the seller was firm on the price and the buyer didn't know any better. Not to mention, Zillow doesn't know if you recently renovated your kitchen. They don't know if you have unrepaired water damage. It's all a guess. That being said, I wouldn't say 10% is a super high overestimation. On my street are two identical houses and one sold for $150k while the other sold for $180k, even though they're literally identical other than the color of the siding. The number that really matters is the appraised value. Zillow had my house at $110k when I bought it and the buyers were asking $140k. It was a surprise when the appraisal came back at $145k. If Zillow was right, the bank would never have given a loan for $30k over the value of the house. But there was no way for Zillow to know the amount of work the previous owners put into the interior of the house.
- loeg 8y ago> Really it's only inaccurate because the price of housing isn't static and certainly isn't objective. If it was static, an estimation tool wouldn't be useful. And it's not just "the price of housing isn't static and certainly isn't objective." After all, Redfin faces exactly the same difficulties. Somehow Redfin uses more or less the same data and comes up with estimates that are much closer to the prices houses actually sell for (in this area). The median house sold in my area cost ~$660k last year (zip code 98117). 10% overestimation is a (much) larger absolute error than $15-30k. And there is plenty of sale volume in this area of similar houses -- the average/median of which are far below Zillow's estimates. I wouldn't say appraised value is what matters. What matters at the end of the day is what buyers are willing and able to pay. Appraised value is both a factor in that as well as a result of that.
- ericb 8y agoIf you read the Redfin 10k, they were doing this already as a service called "Redfin Now." I think it is interesting that two large data-driven pricing services are both pursuing this strategy. If you have better data, it might be possible to make money just on your pricing edge.
- natch 8y agoCompetition with its own customers too. Isn’t this a conflict of interest?
- gm-conspiracy 8y agoAs long as this is disclosed, it should be okay. https://www.trulia.com/blog/what-is-dual-agency/ https://www.trulia.com/blog/what-is-dual-agency/
- knodi 8y agoZillow is not to be trusted they have power to manipulate the market prices with their zestimate. Not only that but they're ridiculous leads pricing they charge the agents ($250 for every time you fill out the contact me).
- briandear 8y agoAnyone using the Zestimate as a valuation tool is an idiot. It’s helpful for just comparisons, but frequently wrong when it comes to actual transactions.
- freehunter 8y agoI'm not sure Zestimate actually manipulates the market. Banks don't care about Zestimates when they're handing out loans, they care about appraised value. Zestimates don't recoup the losses on a foreclosure.
- kul 8y agoIsn’t this announcement to mess with Opendoor’s current fundraise? Similar to Microsoft announcing vaporware back in the day or Uber trying to interfere with Lyft’s fundraises?
- fallingfrog 8y agoDefinitely not another housing bubble. No way.
- downrightmike 8y agoThe real question is who will be holding the bag after midterm elections.
- reilly3000 8y agoNext week: Yelp to open chain of restaurant, citing vast knowledge of what makes for a satisfying dining experience. Spokespeople ensure their users that the impartiality of their algorithms will continue. This story brought to you from Google News Reporting.
- dang 8y agoDiscussed a few days ago: https://news.ycombinator.com/item?id=16825539 https://news.ycombinator.com/item?id=16825539.
- danielvf 8y agoZillow has such reach that they can low-ball every offer so that 99% of people won't take it - but as long as 1% of people do, and Zillow can avoid terrible houses, then Zillow will be buying properties at a huge discount from the market, plus collecting a substantial fee. Thus, they can sell at market rates and make a big profit per house. The key advantage here is that they can make these low offers to a much bigger audience than anyone else can do. This should allow them to be either be more profitable per house than anyone else, do more volume than anyone else, or hit any mix of these two better than anyone else. Of course, they can shoot themselves in the foot pretty well if they: - Try to go for volume over profitability, and then catch a downturn. - Do a bad job of running repairs. - Don't do a good job of catching houses that are much worse than they appear. However, there's no physical reason this can't be extremely profitable. They have the data to see their current home investors making money. If they feel they can identify the most profitable attributes of these flips, then they can route all the extra profitable ones to themselves. The only losers here are the existing people in Zillows home flipping program. They are almost guaranteed to now be getting the second best homes, once Zillow has skimmed off the profitable ones.
- x1798DE 8y agoWhy are they in a unique position with respect to reach? I would think that it would be hard to scale across so many jurisdictions when you need to hire licensed contractors to do repairs and have lawyers allowed to practice real estate law across many states. Maybe that's not a big part of the cost?
- jldugger 8y ago> Zillow has such reach that they can low-ball every offer so that 99% of people won't take it - but as long as 1% of people do It'd be pretty inconsistent to put in a lowball offer when your company publishes an estimated value for every home in the market.
- danielvf 8y agoAnd yet Zillow has been already been doing these low offers successfully, but with only third parties making the lowball offers. Sometimes people just want sell now.
- simonebrunozzi 8y agoThis move is very interesting. I have been studying this part of the business quite a lot lately. A few considerations: 1) It seems to me that Opendoor, Unison, etc, and now Zillow, are trying to capture "pre-foreclosure" opportunities before they hit the market. Think about this: why would you want to sell your house quickly, and leaving money on the table, if not because you're short on cash and you know you will soon lose your house? 2) Secondarily, especially in the case of Opendoor, some homeowners might want to simply avoid the complex and time-consuming task of "changing homes" (fixing small details, picking the agent and listing it, staging it, handling the delicate balance between selling the current one and securing the next one, etc). Opendoor promises to vastly simplify this part, which I think is good. 3) I believe that some of these assumptions are specific of the current market situation, where in most "hot" real estate areas (SF, LA, Seattle, NY, Honolulu) prices are wild, the appetite for real estate has never been stronger, and at the same time there's still many opportunities to make a quick buck by flipping, accessing certain information earlier, etc. I am not completely sure what will happen when/if the market corrects (might also depend on the size of the correction). 4) In the US the whole process of buying homes, financing them, and potentially use LLCs/Trusts/etc to handle various real estate properties as investment is still very fragmented, and still very dependent on which State you live in and in which State the property resides. There are essentially thousands of different combinations and configurations, and the optimal answer to each can also vary over the years, following updates to the legal code or to tax rules. All in all, I think that Zillow is trying to carve out another piece of the market, and not necessarily because their current market is showing signs of slowing down (even if that has discussed just recently [0]). Heck, it might even be that Opendoor's outstanding fundraising results might have triggered the decision to go against them. 5) Long term, I think most real estate assets will become fully digital, and handled exactly like a small piece of software - that is, for everything that pertains property and ownership, taxation, transactions, etc. Of course, fixing a leaking pipe will still require a physical intervention :) For background: I'm co-founder/CEO of a startup which will provide a software platform to digitize real estate assets, and legally transact on properties using APIs. We leverage the Ethereum Blockchain as a global land registry where these transactions are recorded. (I don't intend to use this comment to publicize it, hence no link). [0]: https://mailchi.mp/12c664b1b53c/realtorcom https://mailchi.mp/12c664b1b53c/realtorcom
- purplezooey 8y agoNobody wants to tackle the elephant in the room in real estate: we need to build a lot more. that's really hard.