OpenDoor, Zillow, and others have created a stir in the real estate industry by putting a new name on home flipping called iBuyer. According to the Q1 report from ATTOM Data, 49,059 homes were flipped in Q1 of this year, estimating that iBuyers may only occupy less than 20% of the flipper market today. The volume of units represents a 62% unit increase over last year, but only a 35%-dollar volume increase. This leads me to believe that flipping is occurring at a higher frequency in the lower price points of metropolitan areas. Flipping absorbs about 7.5% of the total US real estate market, so it is hardly significant and puts iBuyers somewhere in the 2% range of trades. The report spells bad news for Zillow Group as they try to scale, and neutral news for OpenDoor.
ATTOM Data’s methodology for calling a transaction a flip is a purchase and sale that occurs in a period of fewer than 12 months. When you drill into the report, you recognize that the increases in flipping have not occurred in cities where iBuyers claim the highest levels of activities. Phoenix is conspicuously missing as a leading market for flipping. The top markets were San Diego, Seattle, Washington DC, San Francisco, Denver, and Boston. I believe that Denver is the only market on that list that has some iBuyer activity (Shout out to Zavvie, a WAV Group client who is putting an interesting twist on iBuyer).
Interestingly, the markets leading in return on investment for flipping were Pittsburg, Flint, Shreveport, Scranton, and Knoxville– again, not markets that have significant iBuyer activity. On the low end, flippers’ profit per transaction is about $8500. On the high end, flipper profit is about $68,000. The ATTOM Data report should be handy for iBuyer companies to select and forecast the best markets, but they do not seem to be leveraged by OpenDoor or Zillow. In contrast, the iBuyer companies seem to focus more on where their algorithms are most accurate. Again, because of the volume of tract home developments in Phoenix, algorithms like the Zestimate have the highest likelihood for accuracy. In Phoenix, it is not unusual to have 10 or more identical homes in the same development transact in a year, making it easy to predict the value. Dollars per square foot is often +/- $2. In a market like Philadelphia where homes have significant ranges in year built, condition, and architectural design, it’s hard to use math to predict values. Humans need to look at the house because dollars per square foot could vary wildly.
One of the critiques of iBuyer programs is that they only work strategically in markets where home prices are going up and average days on market is fairly tight. Days on market for Naples, Bridgeport, New Haven, Provo, and Hartford were all over 200 days. Nationally, the average days to flip went up from 175 days to 180 days. Again – this is not a good sign for iBuyers because the carry costs of capital extend as days on market extends. If the flipper makes $25k on the flip, the interest costs plus the home improvement costs leave a very narrow net margin.
Given all of these factors in the ATTOM Data report, I cannot support Zillow’s strategic guidance that iBuyer programs will enable the company to replace the dramatic drop-off in advertising revenue from Zillow Premier Agent. I would expect their earnings and stock performance to take a hit over the next 24 months even after factoring in the likelihood of fed rate cuts.
My perspective is a bit different for OpenDoor. That company is not profit focused. They are building a definition of iBuyer that does not need to return investor profits for decades. Softbank is notorious for making investments that have 100-year horizons. OpenDoor is operating in a sandbox, playing around with competing strategies and tactics, launching other home services businesses to support their flipping business. (There is a significant lift in profit when you get additional proceeds from Title, Mortgage, Insurance, Moving, etc). Like so many startups with this mentality, their goal is to explore possibilities and to fail fast and fail often.
Zillow Premier Agent revenue went up dramatically when they launched their bidding system that caused agents to bid up the price per area to get the highest percentage of leads. After some time to mature, agents seemingly dropped their bids because of the low volume and quality of the leads. Agents are getting smarter with their ad spend and interrogating cost per lead and conversion rates per lead source. On a more positive note – Zillow is probably generating a pretty significant volume of seller leads before the homeowner ever speaks to an agent. That could rescue Premier Agent, but very little information is available about cost per seller lead or conversions on seller leads at this time. Even if Zillow never flips a home, driving seller leads on the prospect of having Zillow buy the house could generate a lot of agent advertising revenue.
A lot of this assessment is pinned to ATTOM Data. If their data quality is lacking, that could change the entire picture. We would encourage analysts to source facts about flipping from a variety of vendors including CoreLogic and Black Knight.
I am surprised that companies like Zillow, OpenDoor, Compass or others have not jumped on the strategy of concierge moving services. WAV Group works with a few of these firms like MoveEasy that are generating significant revenue per transaction that pads broker profit.
Disclaimer – WAV Group has not provided services to OpenDoor or Zillow Group – but we have worked with every other company mentioned herein.
Victor, interesting but not surprising. But I love the data perspective of this (being a big nerd still). Thanks! Glenn