Editor’s Note: Hal Cranmer has had a wild past. Born in India, he’s lived all over the world and started his working life as an Air Force Special Operations and Commercial airline pilot. After 9/11 brought him down from the clouds, he entered the corporate world and rose to the level of running a $36M machining plant. Yet from 2006 on, he caught the passion for real estate investing. He flipped a bunch of houses in Minneapolis and still owns several multifamily rentals there. Lately, he is into assisted living, and owns 5 assisted living homes in the Phoenix area. He loves to follow real estate trends, both locally and nationally.
As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Cranmer provides us with his own unique, lively and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out our other super-helpful Market News Updates. For now, enjoy...
From Hal Cranmer…
Of course you’re familiar with Zillow—real estate’s most powerful consumer brand. The site investors love to poo-poo because their ‘Zestimates’ never seem right. Yet Zillow keeps evolving and growing. And more and more people in real estate use it.
As part of that evolution, Zillow recently announced their newest feature – Zillow Instant Offers. This feature gives homeowners choices in how they sell their homes.
And they’re taking a page from the playbook of wholesalers and flippers.
In April 2018, Zillow revealed that they are going to start buying and selling homes directly from homeowners.
In other words, they’re going to buy homes straight from the sellers, rehab them and then resell them.
Sound familiar?
The program started with two test markets: Las Vegas and Phoenix.
Zillow gives homeowners a choice:
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They can receive cash offers for their property directly from Zillow.
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They can go with a Comparative Market Analysis from a local Realtor.
The cash offers come directly from a group of Zillow investors. The offers are generally 10%-15% less than the Realtor’s estimate.
When a potential seller goes on the Zillow Offers website, they will need to upload details about the house, along with pictures. Details mostly focus on repairs.
Just as a flipper or rehabber would do an inspection of the home before making an offer, Zillow will examine the information in order to make an offer. Of course Zillow will also send out an inspector like any good buyer to verify the information.
Zillow will discount the offers based on the amount of repairs. And, of course, the real estate agent may also discount the price based on repairs needed.
All business interaction happens in one place: Zillow’s platform. The potential seller can then decide whether they want to:
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Sell to Zillow
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Use the Zillow agent
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Use another agent
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Take the home off the market and fuggedaboutit
The idea is to make the selling process as transparent as possible. Zillow, like many investors, is offering to buy homes at a discount in exchange for fast closings and cash.
Sounds pretty straightforward, doesn’t it? But wait, maybe there’s a little ulterior motive going on here…
Zillow’s Leap of Faith
We’ve always known Zillow as a company that sells ads, not houses. According to Zillow’s CEO Spencer Rascoff back in 2015, Zillow is a media company, not a real estate company.
He said that:
“We’re all about providing consumers with access to information and then connecting them with local professionals. And we do a great job of giving those local professional high-quality leads. They’ll convert those leads at a high rate and then want more media impressions from us. So we’re not actually in the transaction, we’re in the media business.”
Did Zillow change from a ‘media’ company to a house-flipping company?
Selling Ads and Houses
It seems like Zillow has become a company that sells both ads and houses. They also recently acquired a mortgage company to help make it easier for buyers to purchase homes from Zillow (or their preferred agents).
Homeowners looking to sell their homes can easily compare an agent’s comparative market analysis to offers provided by Zillow and/or other sellers as well.
Zillow promises to list homes as ‘fast as possible’. After they purchase a property, they immediately make necessary repairs and improvements and then list them ASAP.
Zillow’s bold move reflects that of Redfin, when they launched their home-buying feature, Redfin Now.
What Makes Them Different?
What’s the difference between Instant Offers and Opendoor or Offerpad?
Zillow does not eliminate real estate agents in the process of buying and selling a property.
A local Zillow Premier Agent may represent Zillow in every real estate transaction. That means agents are still able to earn a commission whenever someone buys and sells the property.
When they first tested Instant Offers, they found out that most of the sellers ended up working with local real estate agents to sell their homes. But you still have the option to work directly with Zillow.
According to them:
“Across all testing, Zillow found the vast majority of sellers who requested an Instant Offer ended up selling their home with an agent, making Instant Offers an excellent source of seller leads for Premier Agents and brokerage partners.”
Instant Offers paves the way for real estate agents to acquire new listings through “connecting them with motivated sellers who have taken direct action to sell their home.”
It seems like Zillow may not be trying to flip a ton of homes. It seems like Zillow Offers may be a way to drive more traffic to preferred agents who pay them for leads.
Think about it:
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Zillow Flipping Homes
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Investor Flipping Homes
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Offer 10%-15% below market value less repairs
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Uses agents on both sides of transaction
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Works with contractors remotely (more expensive)
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Offer 30% below market value less repairs
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Minimizes use of agents (neither side of transaction, if possible)
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Generally more on site to handle problems
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Investors generally use their ‘70% of After Repair Value less repairs’ formula to figure out their maximum offer. They know if they go much higher than that they won’t make a profit – especially if some unexpected costs come up.
Zillow makes just one offer, and it is only 10%-15% below the market value given by the agent.
Maybe Zillow accepts that a few homeowners will take them up on their offer. But maybe they are hoping that the lower offer will drive homeowners to use the preferred agent instead. It seems like Zillow might not be as big a player in the flipping business as some might speculate.
Driving traffic to an agent and receiving a commission is a lot less of a headache for an internet company than to flip the home themselves.
To boost seller lead opportunities for Zillow agents, the company is parenting with brokerages in Phoenix and Las Vegas.
A Problem Instant Offer Aims to Solve
Selling a home is stressful. Zillow knows that, and it aims to solve this very problem.
Even though real estate is big business, sellers are stressed about the home-selling process. They’re constantly looking for ways to sell their properties fast, so they can move on. That’s how we can find some great discounts.
For those investors who are worried Zillow will take all the good flipping opportunities away, think again...
We are still on the ground, marketing locally. We can build trust with the motivated sellers. Many motivated sellers are not going to even know about Zillow Offers.
Maybe if a lot of sellers take Zillow up on their offer, Zillow will soon realize they aren’t making any money, and will discontinue the service. A down market may make Zillow Offers very unprofitable for them. Buying at only a 10%-15% discount makes for very thin, if not negative, margins.
In a good market, most sellers will take the Realtor choice (Zillow makes a commission). In a down market, they may worry about listing with a Realtor and take Zillow’s offer. Zillow may be willing to accept losses on a few flips in order to drive commissions with agents. But, in a down market those losses may become much larger.
It’ll be interesting to see how all of this plays out.
What Do You Think?
Do you think Zillow will start flipping homes like crazy? Or is this a gimmick to push more sellers to their Realtor-customers? Let us know in the comments below.