Zillow has taken a meaningful step toward its ambitious price transparency goal, which is a critical piece of the iBuying adoption puzzle. The company made it official that it will start standing behind the Zestimate as an initial cash offer to sellers in 23 markets. Honoring the Zestimate as an offer has moved from conceptual to testing phase. Not every home will be eligible, of course, as Zillow will initially limit the offers to a subset of homes it feels it can price accurately, likely in the $250,000-$350,000 range. Over time, the algorithms powering the Zestimate will improve, allowing the company to expand eligibility for Zestimate cash offers and win further trust with the consumer.
iBuying is nascent today, accounting for less than 1% of home transactions annually in the US. Over the next decade, we believe that number will reach 10% and, in the process, transform the current friction-filled home buying and selling process by offering a new level of convenience, price transparency, and liquidity.
We believe the live Zestimate cash offer is intended primarily for off-market homes, i.e., homeowners who have not listed their property on the market. While sellers who have already listed their home could pivot and sell to Zillow Offers, they would likely have to navigate a listing agent contract. Also, the live Zestimate will be an initial offer, not final, which is understandable given an in-person tour will be required before a purchase.
Two Takeaways:
- Using the Zestimate as a live offer creates a direct link between Zillow’s large consumer audience and Zillow Offers winning iBuying volume.
- As Zillow uses the live Zestimate offer for brand and trust-building, the size of the spread between the initial offer and the final offer will have a material impact on the extent to which they are able to build trust.
Leveraging their large audience to win iBuying volume
Until now, Zillow’s 200m+ monthly active users have made for a great advertising business, yet it was unclear how Zillow Offers would benefit from the attention the Zillow app commands. Now, a casual user with their home off the market can see a live cash offer on their home, decide to accept it right in the app, and enter the iBuying process. Said and done, Zillow will have acquired a customer for next to nothing. This negligible customer acquisition cost, at scale, should lead to higher margins, which will translate into better offers on homes, leading to more volume and driving the flywheel.
The branding opportunity behind the Zestimate
At first glance, there appears to be risk for Zillow in standing behind the Zestimate to accurately price and profitably exchange homes. In reality, that’s a manageable risk because there will be a human inspection before a final offer. The reason Zillow needs to get the Zestimate right is for brand and trust building. If they’re making initial live Zestimate offers and following a human inspection, material changes are made to the final offers, consumer trust will be eroded. Conversely, if they are essentially honoring the Zestimate with a final cash offer, consumer trust will increase.
The question is whether off-market Zestimates are accurate enough today. While there are nuances in deciphering Zestimate accuracy data, we’ll approach it from a high level. There are roughly 100m off-market homes for which Zestimates are available. Based on Zillow’s reported historical accuracy, we believe around 8% of these can be priced within +/- 1% of the home’s sale price. Putting it together, that gives Zillow Offers a live Zestimate addressable market of 8m homes. For perspective, Zillow purchased 4,162 homes in 2020.
How the live Zestimate changes the iBuying process
Absent a live Zestimate offer, here’s what the typical Zillow Offers process entails today:
A live Zestimate essentially allows homeowners to skip steps 1 and 2. If said homeowner is pleased with the live Zestimate offer, they will save the time, hassle, and money of hiring a realtor and appraiser. While Zillow is clear that the Zestimate is not an official appraisal, as it continues to be refined over time we believe it will move closer to that status. Step number 3, the human inspection element, will remain in place to ensure Zillow is giving sellers a fair final offer. While this human backstop will likely be a part of the iBuying process for the foreseeable future, as the Zestimate is honed and consumer trust in it grows, the need for human inspection will diminish, ultimately moving toward “Zestimate as a final appraisal.” This will result in cost savings for Zillow, that will, in turn, lead to better offers for sellers.