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Opendoor vs. Zillow: Comparing pricing models

The best leading indicator for effective pricing is the buyer-to-list premium.

catastrophic pricing failure sunk Zillow’s iBuyer business. Clearly, home price appreciation is a key factor of the housing market in 2021 and beyond. And being able to accurately predict house prices — not only today, but into the future — is a non-negotiable prerequisite for iBuyers. Let’s look at iBuyer pricing models.

The best leading indicator of effective and accurate pricing is the buy-to-list premium; the difference between the purchase price and current listing price of a home. Unlike Opendoor, Zillow overpaid for the homes it acquired and is selling them for a loss; a negative buy-to-list premium, and a big problem.

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Opendoor’s median buy-to-list premium is rising once again, a sign of a healthy pricing and resale operation that is successfully reading the market.

While Opendoor’s median buy-to-list premium is higher than Zillow’s, the magic is in the distribution curve. Opendoor has a wide distribution of premiums that skews higher, leading to higher gross profits.

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The finesse of Opendoor’s pricing curve has been refined and improved over the past month. Not only has its median buy-to-list premium increased, but the percentage of listings with higher premiums has increased; the curve has shifted to the right.

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A matter of timing

The buy-to-list premium is a leading indicator and a predictor of what is to come. The price a home sells for (buy-to-sale) is typically, but not always, a few percentage points lower than the listing price.

Even though Opendoor’s buy-to-list premium is rising in Q4, its home price appreciation will be quite low for the quarter due to the intense pricing pressure of the previous quarter.

Strategic implications

A comparison of Zillow Offers and Opendoor highlights the critical importance of pricing in iBuying. There’s an understated elegance in the detail; it’s not just buying low and selling high. A successful pricing operation — not just an algorithm, but people! — needs to work at scale, needs to improve over time, and needs to be more nuanced than a brute-force bell curve.

As the Zillow Offers collapse has demonstrated, pricing is a true potential competitive advantage for iBuyers. Getting it right is a prerequisite for success, while getting it wrong can lead to catastrophic failures.

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