I think a useful analogy here is trade-ins. Everybody knows that a private sale gets you a better price for a car than selling to a dealer. But a lot of people don't want the headaches that come with one. Why wouldn't it be the same for housing, especially when people may have life circumstances that mean they need to sell ASAP?

Because of shear dollar amount. Let's say on trade, you can sell your car to a dealership for $8000. Privately, maybe you can get $10000 or 10,500. Now, of course, $2,500 is not nothing but for some people, that is a trade they're willing to make to simply get the car off of their hands rather than go thru with a full-scale private sale process.

On the other hand, for a house that you could sell "instantly" for, say, $450,000, but that you could potentially get by selling privately for $480,000 or $500,000, that is now leaving 10 times more dollars on the table. Proportionally, the difference between the car and the house might be similar but in absolute dollars, it's a huge difference.

I disagree for a few reasons:

1. Your numbers are somewhat arbitrarily chosen... a car could easily be worth $40k and in some markets a home could be worth $200k.

2. Precisely because the house is worth so much, most people cannot afford to pay two mortgages, or their mortgage and rent on a similar home, at the same time, so if they must move by a certain date, they're under pressure to sell.

3. If you decide to sell to Opendoor you can pretty sure that the sale is going to go through; no worries about financing, for instance.

4. It's true that the numbers are larger in absolute terms, but people are often not rational in this way. Plenty of sellers leave tens of thousands on the table for somewhat frivolous reasons.

5. There is a lot of fat as far as people skimming off the top of transactions -- brokers, title companies, etc. IBuyers can get much better rates on these services by being bulk buyers, meaning they don't actually have to come that far off of the next-best offer to make a profit.

I think the question of fungibility comes into play here, too. If I’m a HFT and I accidentally post a too-high bid for Anacott Steel then there are well-capitalized players in a position to sell me a whole lot of Anacott until I lower the bid. (They may even be other HFTs who can naked short it to me.) But if I’m an iBuyer and post a too-high bid for 742 Evergreen Terrace, only the Simpson family can hit that bid, and only the one time. If I’m systematically overbidding, then that’s bad, but not every counterparty is informed enough to take advantage (or willing to stomach the considerable transaction costs), and there’s not a well-capitalized player to step in and arbitrage away the difference.

But what if iBuyer calls the Wallstreet Chronicle and tells them that Blue Horseshoe is buying 742 Evergreen Terrace?

I don't think Levine successfully disputes the importance of adverse selection here. Sure, if you make a million low-ball offers, a handful will be accepted for God knows what reason. That doesn't mean that adverse selection isn't a serious danger when you attempt to scale up, as Zillow did.

I mean, why did Zillow go straight from making profitable purchases of few houses to losing money on tons? If there's some sweet spot in the middle that would have allowed them to scale up profitably, would it really be that hard to land on that spot?

I think it's obvious that homeowners know much more about the houses and neighborhoods they live in than Zillow, and this creates a big risk for Zillow.

I think he was saying that while no doubt it occurs on a case by case basis, it appears to be relatively insignificant either way.

When they were paying less than market price, they still made a lot per deal, and when they were paying more than market price, adverse selection hardly pushed them over the edge.

If you make "a million high ball offers" then the fact that some of them are particularly bad deals isn't the core problem.

I'm not 100% confident of this but it seems like the picture that is being painted.

And also, that it is particularly hard to hit the spot in between - I don't know if he's correct about that.

I won't say he's definitely wrong but it seems odd to argue that Zillow has so much market knowledge and money as to render adverse selection irrelevant, and yet they just couldn't resist making tons of unprofitable offers out of sheer impatience to scale up. What happened to all that market knowledge? There's got to be more to it than this.

This is where we get into internal incentives and theory of a firm.

My first project at a FANG made something like $42M for the company its first year, about $100M in total. There were 3 engineers working on it, and it cost the company maybe $500K in total. Great return on investment, right?

Except my Director wasn't in charge of making money, his job was to increase user happiness, typically measured as the proportion of interactions that were "successful". And this project didn't do this - since it encouraged browsing behavior (poking around without a goal), it actually decreased "successful" interactions. So the project was canceled and threatened with unlaunching about 18 months in.

I was like "Well can I buy it off you? $42M might be rounding error for you, but I'd love to have a business with a $42M ARR." But ultimately this was a no-go as well, because it used company infrastructure, user data, sale relationships, etc and negotiating that contract (along with all the legal and reputational risks to the parent company) would've cost a bunch more than $42M. Ultimately he was like "Well, if it's making that much money, maybe it should be transferred over to department that's actually in charge of making money", and that's where it landed for the next few years, until $100M became rounding error in the company's annual revenue and it wasn't worth that executive's time to sponsor it.

Projects have to move the needle for the executive that sponsors them, otherwise it's not worth their attention. Zillow made about $2.7B in 2019, with 47% gross margins. If Zillow Offers was profitable but could only flip say 1000 houses/year at a profit of $50K/house, that's only $50M, basically 2% of their existing revenue. It just doesn't move the needle for the shareholders, which means it won't move the needle for the CEO, which means it's not worth his attention. They needed it to be a substantial fraction of sales in the U.S. - if it had made a profit of $100K on $3M homes/year, that's a $3B business, more than double Zillow's existing revenue, at potentially higher margins.

This doesn't sound right. 2% of the firm's revenue in its first year, combined with a plausible growth trajectory to 5x or 50x that, is great!

I don't doubt that your €42m project got shut down, and that your employer might well have been right to do it. But this particular Zillow project wasn't shut down because it didn't move the needle - if anything, it was shut down because it did.

It sounds like the problem with Zillow Offers is that it didn't have the plausible growth trajectory to 5x or 50x that. It could be a profitable $50M business or an unprofitable $1B business, but not a profitable $1B business. The earnings call shutting it down mentioned that the company wasn't getting the economies of scale that they thought they would be getting.

> I think it's obvious that homeowners know much more about the houses and neighborhoods they live in than Zillow, and this creates a big risk for Zillow.

I really question the idea that most people have any idea what their home is worth without relying on... Services like Zillow. Especially if they've lived there a while.

Most people don't know what their home is worth, and if you get two appraisers or realtors to give you an estimate they'll likely be quite different.

Similarly, if you think a house is worth $500k but you list it for $600k, you don't know if someone will decide they love that house and they're willing to pay that amount or not.

That's one reason Opendoor tends to list houses at a fair premium to what they paid, as sometimes someone decides it is worth it and they make 20%+ on homes like that.

Yeah, and by the same token, you don't know if the buyer offering the top amount is really going to pull through, giving an offer from OpenDoor a certain appeal.

Zillow just has Zillow. The homeowner has Zillow, local realtors, inspections, personal experience of the house...

The local Realtors are ultimately just going off sales data, and inspections rarely happen before an agreement is made in principle to buy.

> inspections rarely happen before an agreement is made in principle to buy

That depends on the market.

Where is that done? I've bought in two states and sold in one and typically the way it's done is you have a contingency in the home sale that lets you walk if you don't like what your inspector finds. A seller could theoretically do their own but there's little upside, since this just creates a record of any issue that turns up that you now can't claim ignorance of.

In Oakland at the moment the sellers typically get the inspection done, provide the report in the disclosure packet, and then expect an offer with inspection contingency waived.

On the downside, there are the obvious risks in the structure of the incentives - in principle these may be sufficiently mitigated by the need to maintain a good reputation among buyers' agents; in practice they may not be.

On the upside, having had the opportunity (and motivation) to read many tens of such reports meant that I was (I believe) much better at reading them - and had a sense of what was typical amongst the homes I was looking at - by the time I read through the report for the house I wound up buying, and there haven't been any surprises so far...

I wonder -- does it really matter if the previous homeowner is more informed than Zillow? For things like "annoying neighbor" or other hard to quantify/quickly detect annoyances, the buyer doesn't know about those things either, so I guess the information asymmetry is almost 100% in Zillow's favor, right?

The buyer might not realise about the annoying neighbour (unless the most annoying thing about the neighbour is the mess they leave everywhere) but will definitely pick up on things that Zillow's algorithm doesn't.

no - because machine data of the deal is not complete, therefore cannot be represented in the models. As any computer-vision researcher knows, the code sometimes does not see what is "obvious" to almost any person.

This is one of the things that's still useful about agents. They want to keep doing deals with each other, so the selling agent is motivated to pass on information like this.

Maybe that's been your experience. Mine has been that they're eager to cover up issues and explain away those they can't. I mean no hate, that's their job.

It has been my experience. My agent took a particular likening to me for whatever reason, probably because I'm a very low drama client, and took me around on the open houses that are mostly intended for agents to connect. In my town these happen on Wednesday morning. Selling agent usually has some basic amenities out like a coffee station, pastries, occasionally pizza. A large number of agents just cruise through continuously. It's something of a festive atmosphere. I was usually the only client vs agent in these situations, and while all agents have a degree of salesmanship to what they do, I saw first hand very frank discussions of potential problems that would cause a deal to feel sour after it was done.

As an agent you make your money on the overall volume, not squeezing the last bit out of any particular deal. Near as I can tell getting a reputation for deception is nearly career suicide unless you're at the very low end of the market. I think you're making a fundamental mistake in thinking about incentives in the context of a single sale vs having a career in a business that is very strongly driven by personal networking. This is a common fallacy in microeconomic thinking.

My observation where I live is that there are somewhat exclusive networks and not everybody is in the same one -- they might be clustered around catering to a clientele speaking a particular foreign language, for instance, and be somewhat apart from more "mainstream" agents. Anyway, I personally watched the selling agent try and convince me and my agent that the water damage in a property I was looking at was hardly damage at all and anyway, it doesn't rain in California, so don't worry about it. Sure, that's just an anecdote. So is your story, though.

I don't doubt that two agents who had frequently worked with each other amicably might be more frank, but I do doubt that agents all, or even mostly, presumptively do this with every counterparty they meet.

If you bid low, almost no one will take the opposite side of the deal, so your overall deal flow is low and total profit is low (even if margins are high).

If you ‘open up’ the flood gates on the other end, then yes you’ll do a lot of deal flow - Buyers sense a sucker - and open up a lot of opportunities for matches. It just so happens you’re also losing your shirt.

It’s easy to ‘make money’ (close deals) by giving money to people, and losing money in the actual business.

Came here to say the same thing, Matt Levine's article is at https://www.bloomberg.com/opinion/articles/2021-11-18/zillow...