iBuying: Zillow vs Opendoor

Read the full interview HERE

We recently interviewed the Former Head of Strategy and Finance at Opendoor on the competition in iBuying. We explore:

iBuying transaction process, fees, and costs
Importance of optimising capital structure and operations to maintain margins
Drivers of a 5% gross margin and the cash flow profile for iBuyers
How Zillow could have an advantage due to organic traffic and lead gen scale
How and why Opendoor vertically integrated with agents and potential advantages over partnering with agents
Future of seller and buyer agent value proposition

Let’s say you got $200,000 for the house, $16,000 margin, which is the net revenue for the iBuyer, $2,000 to $3,000 of repair costs; how do you look at the lead generation cost, typically?

The iBuying space is constantly evolving. Zillow has come in and so how do you get a customer to understand this as most of us are barely hearing about and it’s only in select markets? There has been a lot of advertising by both Zillow and Opendoor. Probably more by Opendoor, who is an unknown brand with a very new product. I think Zillow has done a nice job with what they call their Zestimate which is on every page, of every house, pretty much. We can debate the accuracy of that, but customers were constantly going there to check it. They can click a button next to it that says, sell my home, for this price. I don’t think Zillow can really honor that price, so they have to get better at it. But you can imagine that that is a huge organic source of traffic, for Zillow, with the time they’ve been in market, the brand, what they make in real estate, the type of agents and consumers that go there.

Opendoor has had to do a little more advertising in traditional CAC channels, like Facebook, direct mail and television and other mediums. But what I would say is, it’s definitely an advantage for Zillow, but it’s not exactly clear in that most people don’t know that Zillow, yet, are engaged in iBuying. Often, you may go and click on that Zillow estimate and go through all these steps, all to say no, because it’s just a convenient lookie-loo tool, which is the way I used my Zestimate for years. But yet, Zillow has to bear all these costs of having somebody in the back-end, verifying the estimate, sending out an inspector, all to hear no.

So all traffic is not equal. I would predict that Zillow has a lot more traffic but the amount of monetizable traffic, that can be moved into an actual sale is, I think, far less. Most people are going to check out their home and you’re going to be closer to a single-digit conversion versus a 20% to 30% type of conversion, especially with a wide funnel, looking at price.

Surely Zillow must have an advantage in just the level of organic traffic plus the data they must have, over the years, in pricing and bidding for houses, more efficiently than Opendoor?

I believe in traffic, but I’m not privy to their exact operations and margin. We know what we’ve seen in their earnings, is that they are losing money per home. You will do that in the beginning, to gain share; you will do that to learn. Did they lose less money than Opendoor first lost when they entered the market? I’m not sure that the competencies that help you make or lose money or even price, are fully applicable. The Zestimate was, not necessarily, designed to be the price to buy the home but more to start the conversation. Developing something that, maybe, more biases recent comps or old comps and even the human element of going in there and inspecting it is not something that Zillow had. It had an advertising sales force; it didn’t have a team of operators and inspectors that are rolling trucks out of facilities. Developing these operational capabilities is very hard.

Then frankly, everybody is going to make mistakes. The best way for any algorithm to learn is to make mistakes and to relearn. I think that is a little bit about time in market. The Zestimate wasn’t probably as successful if you look at the index that said, how accurate was this when it sold, on the open market. I think Opendoor and Zillow is now incorporating that. Zillow has lots of advantages but I’m not quite convinced that pricing is quite yet what they’ve demonstrated on their earnings, with their margins still being relatively thin and losses, in some case. The data itself and the algorithm still needs tweaking. On traffic, they get a great head start.

What do you think really does provide a competitive advantage in iBuying?

This is a new category; this is a new product. It is very hard to build those. I’m sure lots of your listeners have struggled with it; some have succeeded. But it’s not easy, by any means. I would say that a long-term view, capital, a great team, the things that you talk about in a start-up. Let’s walk through some of those things that are different from other start-ups.

You need operational excellence. This is a 6% to 8% margin business. Just like Amazon and ecommerce, nobody loves that business; they love the cloud business. But Amazon is ruthlessly efficient. It optimizes the way boxes are stacked in its warehouse. If it can remove people for automation, it does. Whether it can ship on Tuesday or Thursday, it is just trying to optimize every dime, every penny, from labor down to the shipping method that gets to your house. It’s still a very thin margin business, so they have to scale.

But they’ve got a lot of fixed costs, unlike Opendoor, which seems to have a lot of marginal cost?

Yes, a lot of variable costs that you associate, whether you make a sale or not. When you look at that time horizon, you are going to have to get operationally efficient. You are going to need cheaper rates, which means there is some volume in play with this, in the plumber example we talked about. With enough blue signs in yards and word of mouth, that you’re not paying exorbitant CACs, just to acquire a customer. The last part of it that is critically important would be more a good selection in market choices. You shouldn’t be in San Francisco, where homes are $1 million and a 2% error is not $2,000, it’s $20,000. That’s a lot of engineers’ salaries and other things that are freed up, if you start doing this.

Opendoor has had a little bit of a learning curve in learning that this market works, this season works, but this doesn’t. Time in market, skills in market, word of mouth, all of those work. I’m of the thesis that this will be the way that people buy and sell homes. It’s just a matter of when, how many homes and who is going to do it. I think this is about execution. I do believe that there are markets where the teams have better management, better operations, better execution, are going to do well here.

The second piece of the pie that we can talk about is that service is built around the iBuying. iBuying is 6% or 8%. Those following the industry know that, now, Opendoor and Zillow are both offering mortgages. Zillow bought a mortgage company, Opendoor bought a title insurance company. They’re both looking at the resell side of the business, so you don’t have to fully buy the book from the sellers, but then you resell it to folks and you’re making another 3% there, instead of giving it away. It’s a very complex business and I think we’re in the very early innings to say what will matter here or there versus what will matter over the long term. Which start-up executes the best, I think, is key.