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I don't think Levine successfully disputes the importance of adverse selection here. Sure, if you make a million low-ball offers, a handful will be accepted for

I don't think Levine successfully disputes the importance of adverse selection here. Sure, if you make a million low-ball offers, a handful will be accepted for God knows what reason. That doesn't mean that adverse selection isn't a serious danger when you attempt to scale up, as Zillow did. I mean, why did Zillow go straight from making profitable purchases of few houses to losing money on tons? If there's some sweet spot in the middle that would have allowed them to scale up profitably, would it really be that hard to land on that spot? I think it's obvious that homeowners know much more about the houses and neighborhoods they live in than Zillow, and this creates a big risk for Zillow.

perl4ever 5y ago
I think he was saying that while no doubt it occurs on a case by case basis, it appears to be relatively insignificant either way. When they were paying less than market price, they still made a lot per deal, and when they were paying more than market price, adverse selection hardly pushed them over the edge. If you make "a million high ball offers" then the fact that some of them are particularly bad deals isn't the core problem. I'm not 100% confident of this but it seems like the picture that is being painted. And also, that it is particularly hard to hit the spot in between - I don't know if he's correct about that.
- civilized 5y ago
  I won't say he's definitely wrong but it seems odd to argue that Zillow has so much market knowledge and money as to render adverse selection irrelevant, and yet they just couldn't resist making tons of unprofitable offers out of sheer impatience to scale up. What happened to all that market knowledge? There's got to be more to it than this.
  - nostrademons 5y ago
    This is where we get into internal incentives and theory of a firm. My first project at a FANG made something like $42M for the company its first year, about $100M in total. There were 3 engineers working on it, and it cost the company maybe $500K in total. Great return on investment, right? Except my Director wasn't in charge of making money, his job was to increase user happiness, typically measured as the proportion of interactions that were "successful". And this project didn't do this - since it encouraged browsing behavior (poking around without a goal), it actually decreased "successful" interactions. So the project was canceled and threatened with unlaunching about 18 months in. I was like "Well can I buy it off you? $42M might be rounding error for you, but I'd love to have a business with a $42M ARR." But ultimately this was a no-go as well, because it used company infrastructure, user data, sale relationships, etc and negotiating that contract (along with all the legal and reputational risks to the parent company) would've cost a bunch more than $42M. Ultimately he was like "Well, if it's making that much money, maybe it should be transferred over to department that's actually in charge of making money", and that's where it landed for the next few years, until $100M became rounding error in the company's annual revenue and it wasn't worth that executive's time to sponsor it. Projects have to move the needle for the executive that sponsors them, otherwise it's not worth their attention. Zillow made about $2.7B in 2019, with 47% gross margins. If Zillow Offers was profitable but could only flip say 1000 houses/year at a profit of $50K/house, that's only $50M, basically 2% of their existing revenue. It just doesn't move the needle for the shareholders, which means it won't move the needle for the CEO, which means it's not worth his attention. They needed it to be a substantial fraction of sales in the U.S. - if it had made a profit of $100K on $3M homes/year, that's a $3B business, more than double Zillow's existing revenue, at potentially higher margins.
    - dmurray 5y ago
      This doesn't sound right. 2% of the firm's revenue in its first year, combined with a plausible growth trajectory to 5x or 50x that, is great! I don't doubt that your €42m project got shut down, and that your employer might well have been right to do it. But this particular Zillow project wasn't shut down because it didn't move the needle - if anything, it was shut down because it did.
      - nostrademons 5y ago
        It sounds like the problem with Zillow Offers is that it didn't have the plausible growth trajectory to 5x or 50x that. It could be a profitable $50M business or an unprofitable $1B business, but not a profitable $1B business. The earnings call shutting it down mentioned that the company wasn't getting the economies of scale that they thought they would be getting.
emodendroket 5y ago
> I think it's obvious that homeowners know much more about the houses and neighborhoods they live in than Zillow, and this creates a big risk for Zillow. I really question the idea that most people have any idea what their home is worth without relying on... Services like Zillow. Especially if they've lived there a while.
- damanamathos 5y ago
  Most people don't know what their home is worth, and if you get two appraisers or realtors to give you an estimate they'll likely be quite different. Similarly, if you think a house is worth $500k but you list it for $600k, you don't know if someone will decide they love that house and they're willing to pay that amount or not. That's one reason Opendoor tends to list houses at a fair premium to what they paid, as sometimes someone decides it is worth it and they make 20%+ on homes like that.
  - emodendroket 5y ago
    Yeah, and by the same token, you don't know if the buyer offering the top amount is really going to pull through, giving an offer from OpenDoor a certain appeal.
- civilized 5y ago
  Zillow just has Zillow. The homeowner has Zillow, local realtors, inspections, personal experience of the house...
  - emodendroket 5y ago
    The local Realtors are ultimately just going off sales data, and inspections rarely happen before an agreement is made in principle to buy.
    - dllthomas 5y ago
      > inspections rarely happen before an agreement is made in principle to buy That depends on the market.

perl4ever 5y ago

I think he was saying that while no doubt it occurs on a case by case basis, it appears to be relatively insignificant either way. When they were paying less than market price, they still made a lot per deal, and when they were paying more than market price, adverse selection hardly pushed them over the edge. If you make "a million high ball offers" then the fact that some of them are particularly bad deals isn't the core problem. I'm not 100% confident of this but it seems like the picture that is being painted. And also, that it is particularly hard to hit the spot in between - I don't know if he's correct about that.

civilized 5y ago
I won't say he's definitely wrong but it seems odd to argue that Zillow has so much market knowledge and money as to render adverse selection irrelevant, and yet they just couldn't resist making tons of unprofitable offers out of sheer impatience to scale up. What happened to all that market knowledge? There's got to be more to it than this.
- nostrademons 5y ago
  This is where we get into internal incentives and theory of a firm. My first project at a FANG made something like $42M for the company its first year, about $100M in total. There were 3 engineers working on it, and it cost the company maybe $500K in total. Great return on investment, right? Except my Director wasn't in charge of making money, his job was to increase user happiness, typically measured as the proportion of interactions that were "successful". And this project didn't do this - since it encouraged browsing behavior (poking around without a goal), it actually decreased "successful" interactions. So the project was canceled and threatened with unlaunching about 18 months in. I was like "Well can I buy it off you? $42M might be rounding error for you, but I'd love to have a business with a $42M ARR." But ultimately this was a no-go as well, because it used company infrastructure, user data, sale relationships, etc and negotiating that contract (along with all the legal and reputational risks to the parent company) would've cost a bunch more than $42M. Ultimately he was like "Well, if it's making that much money, maybe it should be transferred over to department that's actually in charge of making money", and that's where it landed for the next few years, until $100M became rounding error in the company's annual revenue and it wasn't worth that executive's time to sponsor it. Projects have to move the needle for the executive that sponsors them, otherwise it's not worth their attention. Zillow made about $2.7B in 2019, with 47% gross margins. If Zillow Offers was profitable but could only flip say 1000 houses/year at a profit of $50K/house, that's only $50M, basically 2% of their existing revenue. It just doesn't move the needle for the shareholders, which means it won't move the needle for the CEO, which means it's not worth his attention. They needed it to be a substantial fraction of sales in the U.S. - if it had made a profit of $100K on $3M homes/year, that's a $3B business, more than double Zillow's existing revenue, at potentially higher margins.
  - dmurray 5y ago
    This doesn't sound right. 2% of the firm's revenue in its first year, combined with a plausible growth trajectory to 5x or 50x that, is great! I don't doubt that your €42m project got shut down, and that your employer might well have been right to do it. But this particular Zillow project wasn't shut down because it didn't move the needle - if anything, it was shut down because it did.
    - nostrademons 5y ago
      It sounds like the problem with Zillow Offers is that it didn't have the plausible growth trajectory to 5x or 50x that. It could be a profitable $50M business or an unprofitable $1B business, but not a profitable $1B business. The earnings call shutting it down mentioned that the company wasn't getting the economies of scale that they thought they would be getting.

emodendroket 5y ago

> I think it's obvious that homeowners know much more about the houses and neighborhoods they live in than Zillow, and this creates a big risk for Zillow. I really question the idea that most people have any idea what their home is worth without relying on... Services like Zillow. Especially if they've lived there a while.

damanamathos 5y ago
Most people don't know what their home is worth, and if you get two appraisers or realtors to give you an estimate they'll likely be quite different. Similarly, if you think a house is worth $500k but you list it for $600k, you don't know if someone will decide they love that house and they're willing to pay that amount or not. That's one reason Opendoor tends to list houses at a fair premium to what they paid, as sometimes someone decides it is worth it and they make 20%+ on homes like that.
- emodendroket 5y ago
  Yeah, and by the same token, you don't know if the buyer offering the top amount is really going to pull through, giving an offer from OpenDoor a certain appeal.
civilized 5y ago
Zillow just has Zillow. The homeowner has Zillow, local realtors, inspections, personal experience of the house...
- emodendroket 5y ago
  The local Realtors are ultimately just going off sales data, and inspections rarely happen before an agreement is made in principle to buy.
  - dllthomas 5y ago
    > inspections rarely happen before an agreement is made in principle to buy That depends on the market.