Eddie Y. Ramirez Blog: Is OfferPad, OpenDoor and Zillow Offers really good for the homeowner?

OfferPad, OpenDoor and Zillow Offers, what are they?

OpenDoor was first out of the blocks, they would buy your house in a quick close, and you would never need to deal with agents and showings. Then OfferPad was next up, run by a local Phoenix real estate agent and they were offering the same thing. Then a few months ago Zillow announced they were getting in the game and connecting the users of their website with investors for cash offers, again you could avoid the real estate agent.

Real estate agents for the most part that I talked to started going berzerk. “Who would a seller sell their home for less than market value?” “They are trying to eliminate us.” “Zillow is trying to go around the agent.” These are all common things we heard.

Jim Sexton, a long time beloved broker of John Hall Realty and another office which I don’t like to name, just this week announced he was moving over to OpenDoor to head up their Broker operations.

The first thing you need to know about Jim is, I have been in the business for nine years now. Nick has been in for over 25 years, and Shar has been a Phoenix real estate agent 15 years. That is a half century between us. I don’t think in all our year’s any of us has ever heard anyone say anything bad about Jim. Jim is a class act, one of the truly nice guys in the business and one of the nice guys in life. So when another agent posted on his Facebook wall under the job change “Really? Wow! Is that the same Opendoor that seeks to eliminate agents?” Well, the reaction from agents off of Jim’s wall was mixed. They all love Jim, but many do indeed think that OpenDoor and OfferPad and Zillow want to eliminate agents. So is there any truth to that or any real fear?

What is the real threat of OpenDoor, OfferPad and Zillow Offers

Not much, that is what the real threat is. Sure we can get paranoid and think they are all out to get us, or we can do our job and not worry about it.

How OpenDoor and OfferPad work

Many would love to avoid a real estate agent when they sell their house. And when you think about it, how many of those real estate agents who complain sell their car on Craigslist. How many of them now use Travelocity to book their trips instead of a travel agent. And how many of them use LegalZoom for a basic Will instead of forking over the payment to a lawyer. And why not, it is cheaper and often less hassle. I know, “but real estate is different.” Spoken like a true real estate agent.

Many would love to avoid a real estate agent when they sell their house. And when you think about it, how many of those real estate agents who complain sell their car on Craigslist. How many of them now use Travelocity to book their trips instead of a travel agent. And how many of them use Zoom for a basic will instead of forking over the payment to a lawyer. And why not, it is cheaper and often less hassle. I know, “but real estate is different.” Spoken like a true real estate agent.

Say you want to sell your house, you want the top dollar and the least hassle you can get. Why not contact OfferPad and OpenDoor and see what you can get. The way it works is they will ask you all about your house and give you an offer. You can then select to accept the offer or reject it. If you accept the offer, the company will send someone out to do an inspection. Remember, they have never been in your house, they have never seen the inside. They are making a blind offer. Here is where it can get interesting. I have heard stories ranging from they kept the same price all the way to they beat me up bad on price after because of the inspection. I am sure there are cases where both of these are true.

Why are OpenDoor and OfferPad buying houses? Typically they want to buy the house, put as little work into it as possible (think paint and carpet) and flip your house. Now like any investor who wants to do a flip, they want to make a profit. They are not a charity organization. So typically your house is going to sell for less than if you sold the market on the open market.

So why would you sell for less?

There could be plenty of reasons. Maybe your family is, unfortunately, going through a bad divorce, you have several kids at home and a few pets, and you just want to be done with it without having several people coming through on a two-hour notice.

Maybe you started a remodel five years ago, then lost your job and have not had the money to finish it. You know the house needs a lot of work. You know the AC is not blowing as cold as it should, and someone is going to need to spend $15k to finish the remodel job that you started and never finished.

Maybe you are like one neighbor I talked to about selling his house. He had work issues, was working part time and didn’t have the money to finish. But he also had 12 cats, and imagine what a house with 12 cats may look and smell like. Yea, well this was a little worse. And he insisted on being home for any home showings because of his kids…. er I mean cats. I passed on the listing, another agent took it, and a few months later the home owner sold the house to OfferPad who did a complete remodel and greatly helped the values in our neighborhood.

There are many reasons that you may not want to do a traditional listing.

Then there is the mistake.

I have a friend; I will call him Aaron. Aaron came to me and said he wanted to buy a new house and sell his house. Great! Let me see what I can do for you. I ran comps on his house and came up with a number of maybe $315k. $315k was a good midrange with the standard builder grade materials that he had. I told him maybe, maybe, we could stretch it a little. I told him if he wanted to put some money into the house he could probably get it up to $350-$360k, but that is with $30k of upgrades. A remodel was not something he wanted to take on.

Aaron decided to call OfferPad which I encouraged him to do. I was not afraid. I knew they could not pay more than $315k, what was I to be worried about? OfferPad came back at $342k, and after all closing costs and fees, he would walk away with $309k. I laughed. Then I went back wondering what I missed and looked at the comps. Then I laughed again. No way, no freaking way. I said shit; I would take that in a heart beat. I also told Aaron do not get your heart set on that number. They will likely beat you up on repairs, so just be prepared for it. He understood.

Nope, they gave him $342k. And yes, I am certain my pricing was right. OfferPad kept it off the market for two months and during that time put in all new stainless steel appliances, put in nice tile, great looking granite counter tops with backsplashes, new paint throughout, all new fans and lights and faucets, all the fixtures were replaced. The remodel I had said would need to be done to fetch top dollar. At absolute best, with a very nice contractor discounts and cheap labor, they probably spent a good $20k in upgrades.

OfferPad put it on the market and sold it. It sold for $362k. They also offered a 2% concession to the buyer. And they paid a 3% commission rate to the buyer’s agent. So after those two expenses, they walked away with $344k on the house they paid $342k for, and that is assuming they had no other carrying costs, which we all know they did. So what about all those upgrades they had to pay for? I am sure they had some profit built into their costs on the buy side, but I doubt they had anything close to $20,000k. I am almost certain, without seeing their books on the deal, that OfferPad lost money on this deal. It was not a good deal for OfferPad at all. Even if they had $20k built in, they still lost money. It was a great deal for Aaron and his family though.

I had an investor I have sold some properties for in the past recently call me and say he had one more to sell in Downtown Chandler. I ran the numbers and thought he could do well, but my well and his well were two different numbers. I showed him the comps, and with the work his rental property needed, he saw the problem. I told him, call OfferPad and OpenDoor. Why would an agent do that? Because this investor wanted more than I could get him, and hey, they overpaid before so maybe… I was looking out for the best interest of my client. That investor called, and well, it is back on the market as a rental for another year.

OfferPad and OpenDoor may make a mistake now and then and overpay for a house. But don’t expect them to do it often or they won’t be in business for long. But if you are looking for the best deal why wouldn’t you look at every option? It likely won’t be the best option, but Aaron is sure glad he checked into it.

What has been the impact of OpenDoor and OfferPad on the Phoenix real estate market?

Phoenix has been at the center of operations for both of these companies and we were a very early market. Looking back over a year time frame (ending in March 2017), the total purchses by these companies reached 1,839 sales. According to the Cromford Report, this is 1.5% of the total housing market of 121,379 units, a market which incidentally has grown by over 10% in the last 12 months. During the last 12 months the share has split 21% / 79% in favor of Opendoor, though the OfferPad share has increased to 26% during the first 5 months of 2017 and 36% in May 2017. It seems that the gap between Opendoor and OfferPad is closing. Opendoor’s first sale was in November 2014, 14 months prior to OfferPad’s first sale, so they enjoyed first-mover advantage for quite some time.

Also according to Cromford, it also appears that the market share has peaked. In February 2017, they reached a combined 2.37% of units closed, and this has fallen in the following 3 months to 1.93%, 1.53% and 0.95%.

What about Zillow Offers

Zillow recently announced in a couple of markets that they have a new program that allows homeowners to submit their house and have some investors bid on it. Again, agents went absolutely crazy saying see…. Zillow is trying to put us out of business. Of course, that is not even close to what Zillow was trying to do. Zillow uses this as a way to get a list of homeowners that are interested in selling their house. 90% (or more) of the time the offers will not be acceptable to the owner. Then Zillow can turn around and give the info to a Zillow Premier agent, their real paying clients, and this is a great opportunity for those agents. A list of people who want to sell their house.

Stop being paranoid and do your job

My advice to agents, cease to be paranoid and just do your job the absolute best you can. Give your clients the best service they ever had, and you will have nothing to worry about.

But IF Zillow or anyone else came out with a way to take the hassle out of selling a home. To get the seller top dollar while most importantly giving them the legal protection they need, a way to handle all that paperwork and deadlines, then so what. Game over. If it is best for the client, then that is what will happen. Then we will need to do like travel agents did and just find a new line of work. While I don’t want that to happen, I’m ok with it if it does. I will survive. So enough with the sky is falling and get back to work for your client.

And homeowners, if you want to call OfferPad and OpenDoor and see if they can get you a better offer then go ahead. On those few cases, they can be then great! Take advantage of it.

But also make sure you call one of the Phoenix Real Estate Guy team members to show you how we can help you!

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