How does Opendoor and Zillow make money with instant offers?
(Read the Denver post article here.)
Let’s calculate an example: For a house that is analyzed to be worth $450k, they will offer $441k (2% less). If the Seller agrees, they will send out an inspector to make sure there isn’t anything too expensive to fix. If all looks good, they take off 7% for “commissions” (about $31k). The Seller receives $410k at closing.
After Repair Value $450,000 – Two percent $9,000 = $441,000
$441,000 – Seven percent $31,000 = $410,000
If the Seller had listed with an agent at $450k and got an offer at that price, they would probably pay 6% commission and pocket $423k. So, the Seller foregoes $13k of potential profit in exchange for an easy selling experience that promises to eliminate the traditional headaches that come from selling a house.
After the purchase, Zillow makes a few repairs and relists the house at $450k. After they pay a Buyer’s agent commission of about $12,600 (assuming its 2.8%), Zillow will gross about $27,400.
Sale price $450,000 – Purchase price $410,000 = $40,000
$40,000 – Selling commission $12,600 = $27,400
(assuming a 2.8% Buyer’s Agent commission)
They still need to pay all their marketing expenses, holding costs and employees. In the end, the actual profit is quite minimal. However, it helps Zillow to expand their brand, sell advertising on their site and remain competitive with Opendoor.