Zillow Offers iBuyer program failure illustrates technology’s limitations within the real estate market. It takes a real estate expert to understand the nuances of the market – not an algorithm – and benefit buyers and sellers by properly pricing and selling a home.
Why is Zillow losing money?
Launched in 2006, the popular online search portal grossed $3.3 billion in revenue for 2020 with 9.6 billion visits by capitalizing on America’s favorite pandemic pastime – escaping quarantine through beautiful and exotic online property listings.
Zillow Offers was the iBuying arm of the real estate tech company, attempting to take their IDX search platform to the next level by promising homeowners a quick and easy sale with a cash offer. Their algorithm helped them assess property values in promising neighborhoods so the company could buy and resell homes to make a profit on the house flip.
But despite the hot real estate market in 2021, Zillow stock plunged 20% this month when their iBuyer Offers program failed. The company shed about 38% market value last week, equating to $10 billion. “We’ve determined the unpredictability in forecasting home prices far exceeds what we anticipated, and continuing to scale Zillow Offers would result in too much earnings and balance-sheet volatility,” according to Zillow CEO Rich Barton in a press release.
Does Zillow buy homes at market value?
Barton cited market volatility and “a labor- and supply-constrained economy” as the reason they had to shut down their program. After laying off a quarter of their staff, the company expects to take a downgrade of more than half a billion dollars after they admitted to “unintentionally” overpaying on the purchase price for houses that they’re now struggling to sell.
Zillow’s automated home estimates have always had their issues, including the fact that Zillow’s very own CEO sold his home for 40% less than the “Zestimate”. In fact, even the disclaimer on their website admitted that their estimates weren’t an accurate read on market value because you need the expertise of an agent:
“The Zestimate® home valuation model is Zillow’s estimate of a home’s market value. It is not an appraisal and it should be used as a starting point. We encourage buyers, sellers, and homeowners to supplement the Zestimate with other research such as visiting the home, getting a professional appraisal of the home, or requesting a comparative market analysis (CMA) from a real estate agent.”
Getting “within 10 percent of the selling price of the home” got the company into trouble, causing them to overpay for inventory in today’s housing market. So, they weren’t buying homes at a fair market value, and they weren’t able to add enough value in improvements to meet even today’s strong buyer demand.
Detrimental to the market and consumers, Zillow Offers reviews also show that while homeowners received an initial cash offer that was enticing, after inspections and a significant service fee, the competitors purchase price was disappointing. When listing on the open market, family-owned brokerages are able to offer homeowners significant savings Zillow cannot.
Why tech can’t hold a candle to a true expert
Zillow’s decision to abandon their Offers arm of house flipping says a lot about the limitations of technology within the real estate space. While algorithms and data may help identify where Americans are looking to buy, it’s not able to predict where real estate prices are headed, or whether a specific home will sell fast or not.
For that, you need boots-on-the-ground local real estate experts to assess properties, as well as the surrounding neighborhood market. Which is exactly what we have at First Team, and something tech companies can’t replicate. We’ve been navigating the unpredictability of the real estate market for 45 years, always focused on the success of our loyal clientele.
“The nature of the real estate market is unpredictable, it always has been. Shifts can happen even week to week and to properly price and sell a home, you’ve got to continually adapt and change your strategy. That’s why it’s not surprising that Zillow wasn’t able to keep up – technology and algorithms can only take you so far,” stated Michele Harrington, Chief Operating Officer of First Team Real Estate. “At the end of the day, it takes an intuitive human being to ride the market shifts and ensure profits are viable for the buyers and sellers that the market is ultimately serving.”
In all, Zillow bought about 10,000 homes during Q3 2021 and is still in contract to buy another 8,172 homes. However, it only sold about 3,000 homes during the same period according to a shareholder letter. The company has blamed the lack of contractors and supply shortages for why they were unable to fix and sell all of the homes they purchased. Knowing what repairs are necessary to sell for a profit – and completing them on a viable timeline – is what our agents do best.
The tech company’s algorithm couldn’t predict the slowdown in price appreciation, and they were attempting to treat homes like stocks that are sold and traded in seconds – not a schedule of weeks or months. That’s why Zillow’s average gross loss was nearly $80,000 for every house it sold in the third quarter, unable to optimize the final offer sale price.
Simply put, buying and selling houses is an art, not a science. And out-of-touch tech companies like Zillow, Opendoor, Offerpad, Redfin, and more aren’t equipped to take on the real estate transaction and better serve homebuyers and sellers. If you want to do it right and capture top profits, it takes a trained professional.
