
Zillow surprises investors by buying up homes - BukhariH
https://techcrunch.com/2018/04/14/zillow-surprises-investors-by-buying-up-homes/
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cs702
Buying 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.

~~~
mjfern
Or Zillow has access or insight to data that general property investors do
not, thus driving abnormal returns.

~~~
caseysoftware
That'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
What 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.

~~~
avemg
What's FSOB? Was it just a typo of FSBO (as in for sale by owner)?

~~~
ssharp
Yes, corrected.

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starchild_3001
How 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
It'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.

~~~
freehunter
Really 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
> 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.

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leothelocust
I 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
It’s rarely a good idea to compete against your customers

~~~
malloci
Isn't Amazon's marketplace similar in that regard? They compete with other
sellers using Amazon's platform all the time.

Ethically, it seems a bit fuzzy for me given that one of Zillow's big features
is there zEstimate. How can they demonstrably prove they aren't tweaking that
somehow for their own gain?

~~~
jacobkranz
I'd argue that Amazon's customers are the buyers of the products, not the
sellers using Amazon's platform.

~~~
bunderbunder
I'd argue that Amazon has many different groups of customers.

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danielvf
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, 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.

~~~
jldugger
> 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
And 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.

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matte_black
So what does it mean for me if I buy a home straight from Zillow? Better
price?

~~~
Finnucane
Likely 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.

~~~
prepend
The problem seems to be that any homeowner getting an offer from Zillow would
immediately know they had mispriced their listing and not accept.

Unless Zillow has some new efficiency that no one else has (super contractors
that can fix up cheaper than other investors, low cost capital) I don’t know
how they will be able to outbid the market consistently as there aren’t enough
dumb sellers with dumb agents out there.

But maybe I’m missing a way how they could use analysis to identify “bargains”
without the seller getting clued in and upping their price.

~~~
pyoung
I mentioned this elsewhere, but 'closing certainty' is a real concern in the
real estate market, to the point where many sellers will take a lower offer
price in favor of a cash buyer.

~~~
matte_black
I never understood why though, in the worst case doesn’t their house just take
a bit longer to sell if a deal falls through? Aren’t there backup offers in
play? Is taking a lower offer really better than just waiting a bit more for
the higher offer?

~~~
krallja
Here’s an example reason why someone might take an earlier offer: A new job
starts July Nth. It’s now mid-April. The family needs to be moved before July.
They don’t have a lot of months left to close a deal.

~~~
matte_black
But how often is a seller so motivated?

Could Zillow use some combination of data from data brokers to find out how
motivated a seller really is and then take them for as low as they can go?

For instance you’re selling a home and I see your job has changed on LinkedIn
and your home hasn’t sold yet.

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ericb
If 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.

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dang
Discussed a few days ago:
[https://news.ycombinator.com/item?id=16825539](https://news.ycombinator.com/item?id=16825539).

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kul
Isn’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?

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purplezooey
Nobody wants to tackle the elephant in the room in real estate: we need to
build a lot more. that's really hard.

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natch
Competition with its own customers too. Isn’t this a conflict of interest?

~~~
gm-conspiracy
As 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/)

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simonebrunozzi
This 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)

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knodi
Zillow 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).

~~~
freehunter
I'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.

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reilly3000
Next 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.

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fallingfrog
Definitely not another housing bubble. No way.

~~~
downrightmike
The real question is who will be holding the bag after midterm elections.

