(Update: this whole post is now moot, glad I took the time)
Folks in my business tend to see Zillow and other techy real estate companies as anywhere from benign presence to the Anti-Christ. I land somewhere in the middle, as I have a healthy distrust of any giant company but can see how when they offer real value, it’s best to figure out how to work with them or they’ll eat your lunch. I have seen firsthand what kind of impact these tech companies (I will not refer to them as “disrupters,” as I’m not That Guy) can have on whole industries. The newspaper business, which was once upon a time a very good business to be in, is a prime example. I got to see that one melt into a puddle in real time. The movie business, and more specifically movie theater business, has faced enormous challenges in recent years. Now it’s the real estate iBuyers who have come along to inject fear into the hearts of those with MLS accounts. Nobody knows if this is Netflix completely subverting the video rental business or if it’s MySpace 2.0, and anyone who is capital-S Sure of either is likely a moron.
Zillow, which just announced they are suspending their home-buying operation for the rest of the year and subsequently saw their stock take a dive, are of course the 800-pound gorilla. Until relatively recently, they were making the bulk of their money selling leads to real estate agents through their Zillow Premier Agent program. To achieve the exalted status of “Premier Agent” (insert sound of trumpets blaring triumphantly) one has to go through a rigorous process in which they give Zillow money. I had my first opportunity to unlock this level shortly after getting licensed, prior to knowing a damn thing about selling real estate. Since then, I let calls coming from 206 go to voicemail.
Nowadays Until last week they’re they were building revenue via the tried-and-true method of flipping houses, but with a fancy algorithm and a few extras. Zillow bristles at the suggestion that they are flippers, but let’s call it what it is. Buy a house, put on a fresh coat of paint, sell it, and hopefully also package a mortgage and title service with it. Which brings us back to Zestimates. Those fun little numbers that every homeowner likes to get far too attached to serve as the backbone of their Zillow Offers program. This is how one could sell their house for cash to Zillow, with the Zestimate as a potential sale price (not accounting for the fees they tack on). Hand over the keys on a closing date of your choosing, and walk away. Home-selling made easy, right? Well…
Zillow is selling convenience here, and that comes at a cost. Not having to prep your home for sale or show it and then being able to pick your closing date are pretty enticing, as is avoiding contingent offers. Right now that convenience is costing sellers around 13%, compared to the typical 5-6% plus prep/repairs that one would expect to pay in a traditional arrangement. Yes, there have been plenty of sellers who saw a ridiculously-high Zestimate for their house, got on the blower to Zillow and then laughed all the way to the bank, but as the saying goes the plural of anecdote is not data.
I wanted to see how accurate the Zestimates are here in Portland, so like many others these days I decided to do my own research. Actual data-driven research with spreadsheets and everything, not “I read a thing on Facebook” or watching Dr. Firstname on YouTube. I’m never happier than when I’m hip-deep in Excel anyway. I had access to tax records from 113 Zillow sales from the past year, which represents about 70% of the total sales they’ve done in the Portland metro. Here is what I found. Drumroll please:
The average difference between what Zillow paid sellers for houses versus what they then sold it for on the open market was about 4%. This does not account for fees paid to Zillow by the sellers, which vary but it would be fair enough for this purpose to call them comparable to traditional realtor fees (and Zillow estimates them to be in that area, of around 5% on average). Expenses that Zillow would pay before selling those houses include maintenance, some repairs (although they typically deduct a repair cost from the price they pay the seller), tax, utilities, insurance, seller concessions, etc. Roll it all into a ball though and those who opted to sell to Zillow rather than on the open market paid somewhere near 4% for the convenience, on top of the standard commission that they would have paid a realtor. On a $600k house that’s another $24,000, and I’ll leave out of the equation the highly-debatable question of whether Zillow is maximizing the final sale price the way a traditional realtor could. Short answer is, in my opinion, they’re not.
Obviously there are going to be winners and losers among those 113 home sellers. Out of them, 22 sold a house that Zillow then took a loss on when it came time to resell. Lucky them! One former homeowner in Southeast Portland sold their house to Zillow for $74k more than what Zillow was able to sell it for. 91 of them though sold their house to Zillow for less than Zillow’s resale price. One seller in Hillsboro got $98k less than Zillow’s resale price, which represented a 30% return on investment for Zillow. Tough nut to swallow.
There are a lot of ifs in this coming argument, and you could probably drive a truck through the holes being made by all the assumptions. I’m still gonna do it, but take with a grain of salt. If we assume that the price Zillow paid for each house was the Zestimate and that they then sold these houses for 4% more than their purchase price, we can assume that their Zestimates are low on average by about 4%. They’re also incredibly volatile, as the highest return on investment recorded was 30%, while the lowest was -14%. Of course a bigger sample size will reduce that volatility- after all, I’m only looking at 113 transactions. Still, it lends credence to the notion that these Zestimates are for entertainment purposes only.
Zillow has publicly said that the goal isn’t to buy low and sell high (yeah, right), but to provide a competitive offer on both sides of the transaction, and then sell the ancillary pieces that surround the purchase, such as title, loans, and insurance. It’s a high-risk game as this model requires them to work on volume, and volume in this business means holding thousands of six-figure properties at any given time. Market corrects while you’re sitting on $1 billion in inventory? Oops. They may be finding out right about this very minute how risky that can be. All that being said, they’re clearly selling something that has value to consumers. Is that cost worth it to you? Hard to say, since every home sale is loaded with personal decisions that have to be measured against the business ones. I’m the type that likes to arm myself with data before making those decisions though, and not put too much stock in zilly buzzwords.
About me: I am a licensed Realtor in the state of Oregon. For business inquiries I can be emailed at eli.cotham@eleetere.com or found on the web at eliknowsrealestate.com.
