Zillow and Opendoor aren’t making much on home-flipping

New report finds that the transaction fee is where iBuying companies are making their money, and it isn’t much

National /
Nov.November 12, 2019 12:35 PM
Zillow CEO Rich Barton (Credit: iStock)

Zillow CEO Rich Barton (Credit: iStock)

The slew of iBuying companies that have popped up in the last two years aren’t low-balling sellers, but they don’t appear to be making much of a profit, either.

Despite the convenience and rising popularity of selling homes online, the iBuying industry — essentially, where a corporation like Zillow uses an algorithm to buy a house, spend a small amount on renovations, and sell it again — is working with microscopic profit margins, if they make money at all.

Zillow, for example, lost an average of $4,826 on each home sale in the third quarter, after interest expenses — up from $2,916 in the second quarter, the company revealed last week.

Where firms like Zillow and OpenDoor do make some money is on the transaction fee, which runs between 6 percent and 9 percent, according to the Wall Street Journal.

“We’re looking to move it as quickly as possible and earn our money off the transaction fee,” Zillow CEO Rich Barton said last month. “And ultimately because this transaction sits at the nexus of all of these adjacent markets that we know so well, that are big businesses in and of itself, they’re dying to be integrated into one thing.”

A new study by real estate professor Mike DelPrete found that iBuyers such as Zillow and Opendoor purchase homes at only 1 percent less than the value of the home, as assessed by First American Financial Corp (quick math: $3,800 on a $270,000 home). DelPrete, who analyzed 20,000 transactions from iBuyers, also found that Zillow and OpenDoor on average made 3.3 percent, or $8,900, when they resold the home.

The convenience of not going through a traditional real estate agent — who charge between 5 percent and 6 percent — along with giving their buyers cash, is attracting more customers. But whether iBuying can sustain such a low profit-margin business or survive a downturn remains unclear.

“How are they ever going to make money?” DelPrete asked.

[WSJ] — Jacqueline Flynn


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