Zillow's billion dollar seller lead opportunity

Last week, Zillow announced its latest financial results, and the stock dropped 25 percent (losing $2 billion in value). But the story everyone is missing is the Zillow Offers iBuying business, and the huge potential of seller leads.

Why it matters: Last week I was quoted on MarketWatch saying, “If you’re thinking about Zillow doing iBuying and you’re not thinking about seller leads, you’re thinking about it the wrong way.” Seller leads are the real billion dollar opportunity.

Slowing premier agent growth

Here's the reason why Zillow's stock tanked 25 percent last week, in one chart:

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Zillow's premier agent program accounts for over 70 percent of its revenue, or nearly $1 billion. Growth is slowing down. I'm not sure why this surprised anyone on Wall Street; I've been writing about it since early this year (Zillow's revenue growth slows and Zillow's strategic shift to iBuying and mortgages). I believe it's the primary reason Zillow has aggressively expanded into adjacent businesses.

The value of seller leads

Zillow's iBuyer business continues to grow, and the latest results crystalize the opportunity in seller leads.

Zillow says that since launch, nearly 20,000 homeowners have taken direct action on its platform to sell their home. Of those, it has purchased just about 1 percent of homes (around 200). That leaves about 19,800 leads who remain interested in selling their homes.

If Zillow simply sold those leads at $100 a pop, they're worth nearly $2 million.

But the real opportunity is giving those leads to premier agents in exchange for an industry-standard referral fee, about 1 percent, if the property sells (similar to the Opcity business model).

Here's the kicker: Zillow claims about 45 percent of consumers that go through the Zillow Offers funnel end up listing their home. That's a high conversion rate reflective of a high intent to sell; about 10 times higher than Opcity's conversion rate.

Assuming a 1 percent referral fee, a $250,000 home, and a conversion rate of 45 percent, those 19,800 leads are worth $22 million in revenue to Zillow, almost all profit.

Compare that to the estimated profit of its iBuyer business (1.5 percent net profit), which, on 200 houses, is $750,000. The value of the seller leads is worth almost 30 times the profit from flipping houses!

Total addressable market

Zillow says that based on its current purchase criteria, if Zillow Offers were available in the top 200 metro areas in the U.S., sellers of nearly half of the homes sold in 2017 across the entire nation would have been eligible to receive offers from it to buy their home directly. That equates to around 2.75 million homes annually.

Last quarter, Zillow said that it received offer requests from around 15 percent of the total for-sale stock in the Phoenix market. Interestingly, that number increased to 25 percent in September and 35 percent in October. That's a reflection of the strong lead generation power of Zillow Offers across its various web properties.

Based on these numbers, if Zillow goes national (200 metro areas) and sees 35 percent of the for-sale stock, it would receive 962,500 offer requests each year.

The billion dollar opportunity

Taking the latest numbers, which have been validated to the tune of 20,000 offer requests over five months in two markets, the total opportunity becomes clear with a national rollout.

Seller leads can be a billion dollar business for Zillow if you believe the current numbers. Even if a national conversion rate is lower, or the % of for-sale stock fluctuates, it's still worth several hundred million dollars in revenue annually.

Should Zillow even buy houses?

Given the value of the seller leads, should Zillow even be in the business of buying houses? Yes, if it wants a credible product for consumers. The real question is: What proportion of houses should Zillow actually buy?

Zillow's "big picture" is 5 percent national market share, which equates to buying around 10 percent of all offer requests (it is currently buying around 1 percent of offer requests). At a 1.5 percent net margin, that's around $1 billion in profit.

But to reach that scale, Zillow would need to spend $68 billion to purchase 275,000 houses annually. Assuming an average holding time of 90 days, it would need a credit line of $17 billion to fund the effort. Big numbers.

A more realistic target would be to only purchase around 1 percent of requests. Nationally, that would be 27,500 homes, which is only around double what Opendoor is currently doing, so it's feasible.

In any case, the point is clear: Zillow doesn't need to actually buy and sell a lot of houses for this model to generate significant profits for the company in a national rollout.

Strategic implications

Zillow is a lead generation machine, and its recent foray into iBuying is no exception. 

If you're in the industry and your value proposition to agents is seller lead generation, there's a new game in town. Zillow will be able to generate a massive volume of seller leads with higher intent than almost any other source. If successful, this will have significant implications across the industry.

Further analysis

If you're looking to dive deeper into the world of iBuyers, consider the following:

Opendoor's pivot to agents

According to a report on Inman, Opendoor is launching a new preferred agent partnership program where it is co-listing a growing portion of its for sale properties with partner agents.

Why it matters: This is a significant pivot for Opendoor, aligning it closer to agents in a major way. It signals that working with the traditional industry -- rather than trying to disrupt it -- is an important part of its growth strategy.

Working with agents

Opendoor's new preferred agent partnership program brings the company much closer to agents. As opposed to the company's hallmark of buying and selling direct to consumers, with a do-it-yourself open home model, this latest move represents a big pivot.

Before this program was announced, the way Opendoor sold its homes was fairly uniform: it would list direct without an agent, offer self-guided tours, brand everything Opendoor, and not pay seller agent fees since it was selling direct. But things have changed:

An unknown question is how Opendoor is compensating co-listing agents. There are three possibilities, listed in order of likelihood:

  • The agent receives a referral fee (likely 1 percent) for representing Opendoor.

  • The agent receives a fixed fee ($1,000) for representing Opendoor.

  • The agent receives no direct compensation, but benefits from potential leads while hosting open homes.

Why the pivot?

This is a big move for Opendoor, and it would only make a change if there was a business benefit.

Opendoor is moving towards an agent-centric model, where it's co-listing and co-branding with a traditional real estate agent (and the traditional process it is aiming to disrupt). That's a non-trivial shift. And assuming Opendoor is compensating co-listing agents as outlined above, there's a significant economic shift as well.

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Opendoor is in the business of buying and selling houses. So any pivot must enhance that capability, leading to two possible reasons for the change:

  • Sell more houses, faster.

  • Attract more agents representing sellers (buy more houses).

For a co-listing arrangement to make business sense, it must enable Opendoor to buy or sell more houses. Either its existing process isn't quite where Opendoor wants it to be, or there's an external reason to cozy up to agents...

The Zillow factor

There's one other factor to consider, and that's the relatively recent arrival of Zillow to the iBuyer game. As a reminder, Zillow's angle is to include agents in each step of the process, using its premier agent network to represent all sides of the transaction.

Opendoor's latest move puts it squarely at parity with Zillow in terms of agent involvement and the value proposition for agents.

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Now, if you're an agent, the benefits of working with Opendoor are the same as working with Zillow. For Opendoor to make this degree of change, and give up image and economic value in order to appeal to agents, it must really want to work with agents!

Strategic implications

There's a long history of would-be real estate disruptors that attempted to disintermediate the traditional industry, only to change their minds and pivot back.

It's hard to go against real estate agents. There's just so many of them, and psychologically consumers want to keep using them. Many disruptors start with anti-agent tendencies but eventually come back to the fold. It's easier and more profitable to work with the industry than against it.

This is not a full-scale retreat on Opendoor's part; far from it. But it's the strongest signal yet of the importance of agents to its current growth strategy.

Zillow, Opendoor, and controlling the consumer journey

Last week I conducted the iBuyer Intelligence Briefing -- a conference call on the latest iBuyer news, trends, and insights -- with listeners from around the world.

After the call, one particular question lingered: Which part of the industry controls the starting point of the real estate transaction, portals or iBuyers? Who has the advantage, and what are the implications for iBuyers?

Zillow's lead generation machine

Zillow announced its Zillow Offers program in Phoenix earlier this year, and started buying houses in May. It is heavily promoting the program across its site. While looking in the Phoenix market, a prominent message is displayed on all active for sale listings.

 
 

And if a visitor looks at an off-market listing (like their own home), this is the call-out at the top of the listing.

 
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In its latest quarterly results, Zillow revealed how effective the promotion was: "Since launch, we have received more than 10,000 offer requests from potential sellers." And: "...in Phoenix, for example, we are seeing about 15% of all dollar value that's being sold in Phoenix any given month." That translates to about 1,600 offer requests per month.

Opendoor is on record saying that more than "one in two sellers who received an Opendoor offer" will accept it. It's currently buying around 300 houses per month in Phoenix, so that's about 600 offers made per month.

 
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There's a difference between an offer being requested, and an offer being made. What's clear, though, is that Zillow is generating a massive amount of offer requests each month, at volumes that rival (and exceed) Opendoor.

Most importantly, Zillow's leads are coming with zero incremental customer acquisition cost, while Opendoor and other iBuyers must advertise directly to consumers to generate leads.

The Zillow effect

The ultimate question is whether Zillow's entry into the market is having an effect on Opendoor. Is Zillow soaking up demand from consumers, to the detriment of Opendoor?

 
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The chart above shows a clear picture: the number of homes that Opendoor is purchasing in Phoenix has plateaued. But there are two possible explanations for what's going on:

  • Zillow is having an effect on Opendoor's traction in Phoenix by soaking up consumer demand.

  • Opendoor is slowing its buying activity for other reasons (we've seen this before).

It's too early to say if Zillow is having a direct effect on Opendoor's business in Phoenix. Opendoor may slow its buying activity for a variety of other reasons, namely a potential market slowdown.

But what's clear is the leading position Zillow holds in the consumer journey and its massive reach give it a competitive advantage in acquiring customers -- which has long-term consequences.

Strategic implications

Back in February, I wrote the following: "The most logical response from a major player such as Realogy or Keller Williams would be to launch their own iBuyer program." Which is exactly what happened last week. More competition is coming to the market.

As incumbents, portals, and other new entrants enter the iBuyer market, they have the potential to soak up consumer demand and adversely effect Opendoor's business.

But for Zillow in particular, the evidence is clear: Real estate portals are in pole position to capture consumer demand for iBuying services, because they are at the start of the consumer journey. Will other global portals follow Zillow's lead?

Zillow will beat its Q3 homes revenue guidance

With September wrapping up, we can look at the latest iBuyer numbers out of Phoenix and see how Zillow is doing.

Why it matters: Based on the data in Phoenix alone, Zillow will beat its Homes revenue guidance of $2 - $7 million. But other indicators, including a lower-than-expected margin and higher purchase prices, are worth watching.

Q3 Revenue beat

During its last earnings results, Zillow provided Q3 revenue guidance for its Homes unit of $2 - $7 million. Based on our proprietary data set for Phoenix, Zillow sold 30 properties in Q3 for $9.3 million in revenue. So in Phoenix alone, Zillow will beat its revenue guidance.

Thirty sales over three months is a modest amount. By comparison, Opendoor sold 26x that number in the same period. Zillow is clearly still in its ramp-up period and has some ways to go.

This result highlights a few other observations:

  • Guidance is hard. Zillow is still finding its way in this new endeavor, and is having to constantly readjust its assumptions. It’s a positive sign, but clearly highlights how new to this business Zillow is.

  • Zillow's full-year revenue guidance of $20 - $40 million in Homes revenue is achievable (it simply needs to sell the same number of houses in Q4 to hit the low end of that range), but a lot depends on traction in other markets. I would expect Zillow to revise this guidance during the next earnings call.

Buying momentum up

In Phoenix, Zillow continues to expand its operations on a month-to-month basis. The number of homes purchased is increasing by about 40% month-on-month — to over 60 in September. By comparison, Opendoor is buying around 5x as many houses in that same period (solely in Phoenix). Zillow is clearly serious and committed to this new initiative.

Unsold inventory

One of the potentially worrying indicators, however, is the amount of unsold inventory Zillow has in Phoenix. While the number of properties it is buying is increasing, the number sold is low.

To-date, Zillow has purchased over 150 properties and has sold 30.

In September, the ratio of homes bought to homes sold is 0.14 — down from 0.34 in August. Comparatively, that ratio for Opendoor is 1.01 and 0.95 for Offerpad.

 
 

Clearly Zillow is still ramping up its operations so it’s natural to expect a lag between buying and selling properties. But even accounting for a 90 day holding time window, the September number should have been larger (I would have expected a buy:sell ratio closer to 0.50). All eyes are on October.

There are a number of other interesting indicators worth watching:

  • A lower-than-expected margin (the difference between what Zillow buys and sells a house for).

  • A median purchase price that is materially higher than its iBuyer peers (but is starting to drop).

Traditional agents wade into instant offers

A Keller Williams team in Phoenix recently launched OfferDepot, an instant offer play, to "help with all the confusion with cash offers vs bringing your home to market."

Why it matters: This is the first move from a traditional real estate company into the instant offers space.

Welcome, incumbents. Seriously.

The idea that traditional real estate incumbents would enter into the iBuyer's instant offers party isn't new. Back in February, I wrote:

"...the more successful Opendoor becomes, the more of a threat they become to industry incumbents, which forces them to respond. The most logical response from a major player such as Realogy or Keller Williams would be to launch their own iBuyer program."

This isn't a top-down corporate initiative on the part of Keller Williams. Rather, this is a local team reacting to the rising interest in iBuyers and pushing to stay relevant.

The Keller Williams team isn't buying houses directly. It is collecting inbound leads from potential sellers, gathering information on the home, receiving instant offers on their behalf, and presenting everything back to the home owner (including an option to list the home on the open market) in a comparative analysis.

Why now?

We can speculate as to the reasons this Keller Williams team decoded to jump in to the fray:

  • It doesn't want to miss the boat. Whether it's Opendoor raising another $325 million or Zillow jumping in with both feet, interest in the space has never been stronger. Traditional real estate agents -- and Keller Williams  -- are in the business of selling homes. Why would they let this new model pass them by? Doing nothing is not an option.
  • A one-stop-shop. It's relatively easy for traditional agents to bolt on an instant offer service, thereby turning them into a one-stop-shop for home sellers (and negating the need to contact an iBuyer like Opendoor or Offerpad).
  • Seller leads are super valuable. This is another form of lead generation for traditional agents, with each request representing a likely customer.

Implications for iBuyers

In my previous analysis, I summed up the major implications of incumbents entering the instant offer space. The first deals with the user experience:

"Make no mistake, the offer and the experience from the incumbent is going to be bad. They’re simply not set up to provide the same quality of service as Opendoor."

The online experience isn't great. In a design reminiscent of the mid- to late-90's, users must struggle through a form to submit their home's information. It's a far cry from the premium experience Opendoor strives to offer its customers through the entire process.

But it works. It does what it needs to and collects leads. And it is this dilutive effect that is the biggest implication to dedicated iBuyers like Opendoor. As I wrote in that same analysis:

"The proposition from the incumbents will be poor, but it will be enough to soak up a portion of the demand in the market and take momentum away from Opendoor and other iBuyers."

It's simple economics. If we assume the demand remains constant, the addition of supply will dilute the amount of business any one iBuyer receives.

There will also be more customer confusion as incumbents get into the game. When Opendoor was the only option in town, it was simple. But now there are a variety of choices: multiple dedicated iBuyers (Opendoor, Offerpad), a popular web portal (Zillow), a tech-enabled brokerage (Redfin Now), and a traditional real estate agent (OfferDepot). What's the difference? Who do I trust? It's difficult to explain the various propositions to consumers.

At the end of the day, that's good for traditional brokers and agents (as they can soak up additional demand), and bad for dedicated iBuyers (because of the dilutive effect and customer confusion).

Where to from here

This is just the start! Expect a lot more activity in this space by the incumbents. It's only a matter of time before a big incumbent launches a well-funded, well-designed initiative. And it may not stop at just presenting offers on an iBuyer's behalf...