Why Zillow’s iBuying Automated Valuation Models aren’t Dead

Posted by John Gilbert on

Even though Zillow recently scaled back iBuying, the technology behind it, automated valuation models (AVM), isn’t going anywhere. 

The same AVM tech that powers home improvement value calculators, Zestimates, and iBuying will only get more powerful. It is the hottest way companies like Zillow and OpenDoor attract billions of venture capital to scale their growth. 

And despite Zillow’s $328 Million loss from iBuying in the Third Quarter of 2021, OpenDoor, Redfin, and OfferPad are still in a race to buy homes. 

The Reason? 

Because buying the consumer experience is more profitable than buying the consumer’s home. OpenDoor and others will continue to scale their iBuying business, even at a loss, to gain competitive control on market data and influence. And Zillow will no doubt find use for its predictive price valuation tech to keep up.

But in order to understand why this isn’t the last time we will be hearing about iBuying and automated valuation models, we need to correct some misconceptions about Zillows strategy and why it failed.

Why Zillow’s iBuying Strategy wasn’t Simply About House Flipping 

For those who don’t know, iBuying is simply a digitized system in which companies like Zillow use automated technology to make offers on middle-income homes.

It is easy to mistake Zillow’s iBuying business as house flipping. It used automated valuation models to systematically make offers on homes it thought could renovate and sell at a profit. Minus the fancy tech, that is the cookie-cutter definition of a house flipper. But Zillow publicly resented the phrase. Especially when TikTokers accused it of artificially inflating house prices to make higher house-flipping profits. 

But when you zoom out and evaluate its business model, house flipping represented a small fraction of its revenue growth. Every time a consumer would request a Zillow Offer, they would generate a seller lead. And on average, Zillow would only buy between 1%-2% of these homes and sell the remaining leads to premier agents. In Q3 of 2021, Zillow’s advertising arm (internet, media, and technology) was the only profitable part of the business. 

Zillow and its competitors have always understood that iBuying has first to scale before becoming a profitable business segment. Before Zillow closed down the iBuying arm of its business, it hoped that it would generate an average of 4-5% annual profit once it finished scaling. 

Despite the optics of buying homes, getting a brokerage license, and hiring their agents, owning the entire housing market has never been in Zillow’s interest. Capital costs are too high, and margins are too thin. And its biggest customers are the brokers and agents competing for those seller and buyer leads. 

But even at full scale, the value of iBuying doesn’t come from flipping houses. A Zillow spokesperson Viet Shelton recently stated that the company has a “dream” that people will one day sell one home on Zillow and then buy another on the website too. Zillow understood that the real value comes from owning the consumer experience. 

Why Zillow Entered the Race to be the Biggest iBuyer 

Ultimately, Zillow entered the iBuying space to break into greater real estate advertising and digital retailing market share as well as additional revenue streams.

When Zillow introduced its home price estimate tool (Zestimate), it captured the entry point of the home buying and selling experience. This positioning was essential for its advertising business because it required agents and brokers to purchase leads from Zillow. 

But as soon as OpenDoor started offering automated offers for homes, consumers shifted their entry point from getting a digital estimate from Zillow to an offer from OpenDoor. To regain its leverage, Zillow needed to enter the iBuying game.  

Zillow knew that a market of homeowners didn’t have the time or patience to renovate, list their homes, and work with an agent. This market was willing to receive an offer below market value if the selling experience was fast, easy, and flexible. 

But Zillow also understood that most consumers choose the path of least resistance. In 2021 33% of home purchases were made without seeing the house in person, and that was a 21% increase from two years prior. Market pressures and Covid 19 are conditioning consumers for an entirely digitized home buying and selling experience.

So if Zillow was able to effectively brand itself as a seamless digital retailing platform for real estate, it could capture more of this market and maintain its position as the consumer’s starting point for buying and selling homes.

And if its iBuying branding strategy was successful, it could gain even greater access to revenue streams like home titling, home insurance, agent commissions, and home financing. 

But it failed. So what went wrong?

The Battle Zillow Lost in an All Out War for the Consumer Experience

Zillow’s iBuying strategy failed because it couldn’t keep up with OpenDoor’s buying frenzy. The entire iBuyer market was racing to acquire as much inventory as possible because supply was short, and each iBuyer felt pressure to show profitability to shareholders.  

But Zillow and OpenDoor have different business models. OpenDoor is primarily an iBuyer. So its entire business model is dependent on scaling iBuying to a point where revenue is less volatile, and profits are more consistent. 

This narrow focus makes its valuation models more accurate and their balance sheet more tolerant to volatility as they compete for market dominance. So when the housing market experienced an explosive increase in demand earlier in 2021, they were better positioned to bear sudden shifts in valuation and supply shortages. 

On the other hand, Zillow could not manage these drastic swings in the market. They reported that their valuation models could not accurately predict home prices six months out in this market. And since iBuying represents a fraction of their business model, their balance sheet could not support sustained losses from iBuying.       

But this does not mean that Zillow lost the war for the consumer experience. It still has powerful automated valuation models, brokerage licenses, and financing tools to assist home transactions. Zillow can still retool its core technology to capture the consumer experience better. Power buying, the process of helping consumers buy homes with cash, is just one example. 

How Homeowners Can Best use Value Calculator Technology  

Property and home improvement value calculators remain the most potent home seller tools. Since they are effective lead magnets, companies invest their best resources into making these calculators up to date. 

OpenDoor’s home improvement valuation calculator is a great example. It allows homeowners to calculate the average value of any home renovation by entering their city and estimated home value.  

For example, in Los Angeles, adding a bedroom of at least 150 square feet to a $550,000 home can add between $24,500 and $29,900 in total value. This tool is powerful because it uses OpenDoor’s models to predict profit margins from their renovations. 

Analyzing the value differences between renovations of different home valuations is the best way to use the home improvement value calculator. Most other value estimates can’t provide that level of specificity. Instead, all you find is an average value for all home types.

The calculator also has a great graph that helps you visualize profit margins between different home valuations and cities. For example, it shows how a bathroom remodel in an $800,000 home only has a value increase of $11,300 compared to $14,300 for a $200,000 home in Atlanta, GA.

This data can help formulate house flipping strategies and renovation budgets specific to your home and city. The tool also can calculate value estimates for higher-end renovations. 

The Bottom Line

Even though iBuyers make the market more competitive, their tools can help consumers make investments in their own homes or find ones with a lot of potential. As long as these companies compete for user engagement, their models will only get more accurate and informative. 

If you want to take advantage, check out the calculator on OpenDoor to see what you could add to your home’s value. And if you have questions about costs, contact our team of experts for a free estimate on a home renovation. Call us at 310-500-7234 | info@ucandrinc.com

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When to Turn Your Garage into a Room vs. an Apartment

Posted by John Gilbert on

Knowing when to and how to turn your garage into a room is a game-changer for building home equity. In our published article about rising ADU house hacking trends, we explained why accessory dwelling unit apartments are exploding in popularity and how they can increase your home’s value. 

Although many are eager to jump at the chance to build an ADU, we shouldn’t assume it will yield the most value. 

Sometimes it makes more sense to convert your garage into an extra room. And I know, this is less sexy because it doesn’t offer the same passive income opportunity. But, if done right, it can radically transform your living space into the perfect dream home for your target demographic. 

But also, forget target demographics. Knowing when to turn your garage into a room can make you forget about ever selling. It can offer you the space and comfort you need for generations to come.  

We are going to explain the considerations of both options in terms of budget needs. And then, we will give example scenarios that will help you determine which option will offer the most return.  

How to Calculate Costs for Turning Your Garage into an Apartment 

When deciding between if you want to turn your garage into an apartment or room, you have to consider all the cost factors. Looking up the average costs per square footage isn’t enough. Although it’s a good starting point, these estimates will not help you make an informed budgeting decision. And it’s because there are key ADU design considerations that drastically swing the price in either direction.     

The first design consideration is total living space. If you are only working with a single car garage, you have to install the same appliances you would for a double. This includes the plumbing and electricity for a kitchen, bathroom, and cleaning appliances. 

If the living space is not enough, it may require expanding the foundation or adding a second floor above the garage. Both of these options add other material costs like roofing, concrete, and lumber. And if these options require more electrical and plumbing, the added labor costs will be more expensive per hour. 

Sometimes these design decisions are worth the added costs because of the high housing demand. If you live in an area like Los Angeles and most places in southern California, then there is enough of a housing shortage and price squeeze to make this investment worth it in the long run.

But if your ROI objectives are less about building passive income, then there might be a better alternative to increasing the overall value of your home.   

It is also important to calculate the permitting costs and the indirect permit requirement costs. For example, different cities have requirements on the space between the edge of the property and the ADU garage. Most require 4 feet set backs. Moving the edge of the garage to meet those requirements can be very expensive. 

But you also want to keep in mind that the minimum size requirement is 150 square feet. So if you need to shrink the total square footage to accommodate for set back space, you need to make sure total square footage is above 150 sqft. Check out our ADU resources page for more info.

And check out our post on garage conversion permitting for more information on the permitting process.

How to Calculate the Cost of Turning a Garage into A Room

Non-ADU garage conversions have fewer city and design requirements. So, depending on the size and location of the garage, turning a garage into a non-ADU room can cost a lot less and may fit your budget.

Even though the non-ADU garage conversions cost less, the return on investment is harder to calculate. And the reason is that the return is contextual to the specific solution that the garage conversion provides. 

For example, if your house only has one bedroom, turning your garage into a second bedroom adds more value by changing the home classification. Room additions have diminishing returns, though. For example, going from a one-bedroom to a two-bedroom adds a lot more value than going from a five-bedroom to a six-bedroom. The reason is simple supply and demand. 

If you look at population trends, most areas see a decline in the number of children per family unit. As a result, demand for houses with four bedrooms and up is going down. 

Now, if you are turning a single car garage into a spare room, then the most significant cost considerations are flooring materials, windows and doors, and electrical and heating. But, if you are turning a two-car garage into a master bedroom, then you will most likely need to factor in the cost of a master bathroom as well. Either option, though, will still be less expensive per square foot than an ADU conversion.    

How to Compare Value of Garage Conversion Options

So now that you have a basic overview of cost factors for garage conversions, the big question is, how do you determine which option will yield the most value?

Non ADU value calculation:

Any added square footage to your home adds an average of 30% in resale value, but all of this is dependent on what the added space accomplishes for your home. A bedroom can be a safe bet, but its potential value can vary depending on your neighborhood. If you have a one-bedroom, research the average cost of a two-bedroom in your neighborhood. But also look for other buying obstacles that the extra space in the garage could solve. 

For example, if your kitchen and living room area is too small for a dining table, knocking down the wall between the living room and the garage could transform any home’s most important selling point. The ROI of this option is harder to quantify through a google search, but one of our experts could give you an informed estimate.  

Using the garage to expand your kitchen or living space can also provide more natural light. It is widespread and even recommended to keep the garage door opening when you turn your garage into a room or apartment. The first reason is that it makes it easier for future homeowners to turn it back if they wish. But secondly, it is an excellent source of natural light.  

One of our clients recently combined their garage with a kitchen remodel. And they kept the garage opening! The added natural light in the kitchen and living space completely transformed the aura.

ADU value calculation:

If you want to calculate the potential resale value of a home with an ADU on it, then you will want to think like a real estate developing investor. Since your property would be zoned for two separate rental units, you will want to calculate the total amount of rental income your property could generate.

Then you will want to factor in interest rates to calculate a mortgage cost that would offer an investor 5-10% in profit. If that price is more than what you calculated for the room addition, then an ADU conversion may offer more resale value.

Once you have calculated the potential added value of each option, you need to subtract the cost estimate to come up with a return on investment. We can help with all of these steps. And we even recommend that you shop around to be confident that you have the best investment strategy. Our contractors and designers love to think outside of the box to provide the best results. Give us a call for a free consultation!

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Bathroom Remodel

A Bathroom Remodeling Investment Breakdown for Los Angeles

Posted by John Gilbert on

If you live in Los Angeles or want to sell a house here, you know that 2021 has been a crazy year for housing prices. This frenzy is why many of our clients ask for investment breakdowns for bathroom remodels, home additions, ADUs and alike. A myriad of factors contributes to the total cost and resale value of any of these improvements. 

In this article, we will cover some of the most critical investment considerations in bathroom remodels. We will first provide the most up-to-date data on average bathroom remodeling costs in southern California. We will then list all the design and materials choices that influence the cost. And lastly, we will break down the ROI factors for your bathroom remodel. 

Table of contents:

Related:

What Is The Average Bathroom Remodeling Cost in Los Angeles? 

In 2021 Cost Vs. Value reported that the cost for mid-range bathroom remodels averaged $29,744. Our own mid-range remodels can go from range from $15,000 to $30,000. These researchers define mid-range remodels as renovations that use basic materials. They are often considered nice but not high-end and include standard white toilets and ceramic tile floors.

Alternatively, Cost Vs. Value reported that the cost of upscale bathroom remodels averaged $88,491. Their threshold for upscale remodels includes luxury top-of-the-line improvements like heated floors, new lighting, and major structural changes. 

But design preferences aren’t the only factors that determine cost. Your neighborhood and city can also influence the going rates for materials and labor. For example, the average mid-range bathroom remodels price was more than $5,000 lower just north of Los Angeles. Cost Vs. Value reported that the average bathroom remodeling cost was $24,424 in Ventura County.    

How Do Bathroom Remodeling Costs Vary? 

We can’t include every factor that will influence the cost of your bathroom to remodel, but we can break cost factors into three hierarchical categories of a bathroom remodel. This hierarchy starts with the bathroom layout then follows with the shower, vanity, and toilet. We have found that this approach is best at helping you make design decisions that will meet budget objectives. The reason is, every design decision will have a cascading effect on the following categories. So, you can save more money by starting with design choices that will have the most significant impact on cost.

Bathroom Layout

Deciding your new bathroom layout will have the most significant impact on the total cost. The reason is that moving the shower, toilet, and sink location will require new plumbing and electrical wiring. The hours required in paying both an electrician and plumber for rearranging these fixtures add up. 

Secondly, these layout costs compound if the bathroom is on the ground floor. Most homes in southern California don’t have a basement. So, the ground floor is directly above a concrete slab. As a result, any plumbing that requires cutting into the concrete will be a lot more expensive. 

Additionally, if your layout uses custom dimensions for the vanity and shower, you will not be able to cut costs by using prefabricated options for both. 

Lastly, increasing the bathroom’s square footage by knocking out a wall may also require additional plumbing and rewiring. This depends on where exactly the wall is. But, regardless of the construction, any increase in square footage will require more materials. So if high-end materials like heated floors or expensive tiles are essential, you will need to consider the added flooring costs from increasing the square footage.

Shower

The most cost-efficient shower option is to use a prefabricated surround. A shower surround is a fiberglass all in one unit that goes above the bathtub line. The showers are a more affordable alternative to tile and range from $400 to $2,000 at Lowes and Home Depot. The fiberglass surrounds are more durable than tile. They will last a long time and will help insulate your shower. Your options are limited, but you can find unique surroundings that incorporate stone design patterns into the fiberglass.

If you are not looking to use a prefabricated option, then there are additional material costs that you will need to consider when choosing your design:

Hi-tech polymer: Two walls can cost $2,100, three walls up to $8,900

Tile: Ranges from $0.90/sq ft. to $7/sq ft.

Plumbing: Drain & shower fixtures can range from $500-$2000

Tub: Ranges from $100-$950

Shower doors: $510-$2,200 

Shower pan: $ 500-$700.00

Vanity

Like bathroom showers, vanities also come in prefabricated versions that you can purchase at Lowes and Home Depot. There are pros and cons to both, but as you can imagine, the prefabricated options cost less. These can range from $1000-$3000

The custom vanities require some important considerations that don’t often come with the prefab options. The first is that customizations often require multiple countertop slabs, which means that the countertop will have a seam. Clients should talk with our designers about choices on the best location for that seam.

Secondly, homeowners often forget to consider the optimal distance between the sink and the wall. Some people prefer space for various toiletries but don’t consider that preference until the vanity is complete.

Toilet

As functionally crucial as a toilet is to a bathroom remodel, your design choices will have less impact on the total cost than the other categories. There is a long list of categories to choose from, but gravity-assisted and pressure-assisted toilets are the two most popular options. Gravity-assisted toilets are the least expensive option ranging from $100-$600, and pressure-assisted toilets range from $350 to $650.

How Much Value Can a Bathroom Remodel Add to a Home?

Remodeling magazine reported that on average, for every dollar spent on essential bathroom remodeling changes like new toilets, sinks, flooring and paint, California homeowners saw a $1.71 return. But, there are some important considerations to make in estimating your ROI.

First, you want to consider the overall state of your bathroom. Your return will be higher if there is a more considerable difference between your before and after pictures. So if there are visible damages like cracked tiles and outdated fixtures, a moderate remodel will go a long way. You can see evidence for this difference in Cost Vs. Value’s recent report on ROI for bathroom remodels. Midrange remodels are 6% more valuable than upscale remodels. 

Secondly, does your neighborhood have a market of buyers looking for your remodel? Real estate agents can provide a report that shows the kind of renovations that appeal to buyers. Keep in mind that buyer sentiment is constantly changing, so this is only valuable if you look to sell quickly. If you are looking for a long-term investment, the best improvements will be functional instead of aesthetic.

Bathroom Remodeling ROI Example

For example, creating more space always creates more value for bathroom remodels. In our last bathroom remodel, we found a creative way to add space by moving the furnace. Its previous location was in a closet, taking up space in the bathroom. We knocked out that closet and dragged the furnace into the attic. Since we were already in the reconstruction process, we decided to move the shower to provide additional space for the bedroom closet. This 2 in 1 move increased the long-term value of the home by making the space more functional. No matter what buyer sentiment may be, having that extra space in the bedroom closet and bathroom will be a plus.  

In this same bathroom remodel, we converted the bathtub into a roll-in shower. We did all of this under $40,000 and the average resale value of this kind of bathroom in Los Angeles is upwards of $60,000. This hot design choice can make the bathroom look like a luxury hotel within an affordable budget. We have an entire article on all the design tips in making your bathroom feel like you are at a resort. 

If you would like to discuss other creative ways to renovate your bathroom, give us a call, and we will connect you with one of our expert designers.