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Zillow Poised to Devour the iBuyer Market

Imagine you knew nothing about real estate. That you had never heard of an escrow, natural hazard disclosures or title insurance. In this world, what does a home transaction look like? Do you have to worry about mortgage rate increases, all cash offers or seller contingencies? Or, if your only frame of reference was the frictionless process in which we buy everything else in our daily lives, would you assume that you would be able to find a house that you like, enter your payment details and buy it.

This ignorant, idealized version of the home buying process seems like pure thought experiment but, in fact, it’s a lot closer than any of us ever imagined. The end-to-end customer experience for real estate transactions has seen billions of dollars poured into companies called iBuyers, who’s very business model is to buy houses instantly and sell them without the hassles that we have come to accept. This trend is still in the early stages and there are no signs of it slowing down.

The iBuyer business model is pretty straight forward, a real estate company uses data science and property data, both public and private, to create valuation models that identify home with high investment potential. They can then make an instant offer that provides liquidity to homeowners that doesn’t exist on the traditional real estate market. Typically, iBuyers charge a 7-10% fee compared to a standard 6% agent commission and will offer an 80-100% of the market value for a home. They might charge a higher fee for convenience but many sellers will be willing to pay for the benefit of being able to have a sale finalized within weeks or even days. You may take home a bit less than the traditional method but you can save time and all the headaches that come along with selling or buying a home.

One of my favorite industry experts, The Notorious Rob recently predicted that 60% of home sales (not transactions) will be iBuyers by 2025. Quick math, 5.3 million homes sold in 2018 would mean that, if the sales stay steady, 3.18 million homes sold in 2025 via iBuyers. That’s uber growth, no pun intended. In 2018, iBuyers represented around 0.2 percent of the national market share of home purchases and up to 5% in the markets they operated in.

There are five companies leading the charge in the U.S. with Opendoor so far having the most activity. But will Opendoor still come out ahead at the end of 2019 with some of the largest real estate companies entering the space?

There are three critical factors, customer acquisition cost, capital and data, that I believe will influence who ultimately dominates the market this year but to no surprise, it is my prediction that the one with the best data will have the biggest advantage.

The players

First, Zillow. At this moment, with a market cap of $7.35 billion, they have the largest war chest, the most employees and resources to fuel their iBuyer growth. Rich Barton was announced CEO in 2019 and set out a series of longer-term goals, including buying 5,000 homes a month. That’s a colossal increase from the 500 they purchased in Q4 of 2018. They also have the most website traffic so they benefit from understanding not only where people are buying, but where they are looking as well, which can be a great leading indicator.

Second, Opendoor. To date, $1.3 billion in venture capital has been raised and over $1B of it in 2018 alone. The CEO, Eric Wu has said that in the not-so-far future, the transaction of a home sale will cost nothing. This is a bold statement, but at the moment, Opendoor has a ton of capital and has taken off with 60% iBuyer market share in Phoenix.

Third, Redfin. Market cap $1.77 billion and the second largest online real estate platform next to Zillow. They recently partnered with RE/MAX, providing a unique opportunity to increase its reach to agents and potential buyers and sellers. It is highly likely they will be a large competitor to Zillow in this space.

Fourth, Offerpad. Raised nearly $900 million from venture capital and $100 million in debt. They are operating in 86 cities across the U.S. and had a larger price appreciation on their purchased homes than Opendoor and Zillow in 2018, fluctuating between 7% and 9%.

Fifth, Knock. Full transparency, they are a Foundry Group portfolio company so they are connected to my company in a way. Raising over $430 million since 2016, they are positioned to be a rapidly growing startup in the iBuyer space. Sean and Jamie, the founding team, bring vast industry experience (formerly at Trulia) and are using data science and technology throughout the entire home selling process.

Now you know the players, so who will win and how?

Number #1 = Customer Acquisition Cost (CAC)

It’s all about the seller leads in the iBuyer model. Zillow and Redfin have the advantage here looking at the sheer amount of website traffic that each receives. According to Alexa:

  • is ranked the 35 most visited website in the United States with around 37 million monthly unique visitors.
  • is ranked the 155 most visited website in the United States with around 15 million monthly unique visitors.

The ability to split-test instant offers on this amount of website traffic creates a distinct advantage for Zillow and Redfin. Whether they are able to harness their traffic to make better marketing decisions is yet to be seen.

As for Opendoor, Offerpad, and Knock. They will continue to use traditional methods of advertising, marketing and direct mail to make offers to potential sellers. This is a solution but it will be harder to acquire leads with larger competitors joining the space.

Number #2: Capital

Zillow wants to buy up to 5,000 homes a month. At a median price of $300,000, that would cost $1.5B a month. Yikes. You need a lot of capital to do that. Being a public company like Zillow or $1 billion in raised capital like Opendoor is another big advantage in the iBuyer space. Now, with that being said, if another 2008 happens, everyone is screwed. I don’t have a ton of data on this but you can imagine how sitting on thousands of homes with only 50% of their original value could bankrupt a lot of companies, no matter how much cash they have on hand.

Number #3: Data

Data collection, maintenance, and quality are critical to iBuyer success. They need to rely on historical public record data such as transactions and assessments to make informed data-driven decisions when evaluating and making an offer on a property. Yet access to this data can be incredibly difficult and requires a ton of resources.

From looking at the current landscape, Zillow has the most software engineers and data scientists attacking this problem and investing millions every year. And appropriately so, as the stakes are high. Accurate data fuels accurate valuation models and these models are integral for iBuyers to find and invest in properties at scale. This is a high-risk, capital intensive business model that has not been tested in a down market. But, backed by the best data, Zillow will be most able to maintain their advantage and weather the storm.

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