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How Zillow’s Flipping Business Flopped in Colorado
November 22, 2021

How Zillow’s Flipping Business Flopped in Colorado

by The CE Shop Team

Zillow Offers’ Exit May Bring Colorado Homebuyers Relief

On 11/2/21, Zillow announced that it’s shutting down its iBuying program, Zillow Offers, citing the unpredictability in forecasting home prices had exceeded what the company anticipated, and scaling Zillow Offers would result in too much volatility — resulting in the company taking a $304 million write-down in the third quarter.

The company also announced that it will report additional losses of between $240 million and $265 million in the fourth quarter, mainly through the sale of its remaining homes. According to the Colorado Sun, Zillow will be selling more than 500 homes in 10 Front Range counties, including homes the company purchased as late as October.

“It’s pretty crazy to watch, isn’t it?” said Michael DelPrete in an interview with the Sun. DelPrete teaches a class on real estate technology at the University of Colorado’s Leeds School of Business.

Indeed, it is. Ultimately, the company's algorithm, the Zestimate, led to Zillow’s flipped homes flopping. Brian Anzur, the president of the board for the South Metro Denver REALTORS® Association, told the Sun that in some cases, Zillow overpaid for homes that presented issues that the Zestimate algorithm simply couldn’t incorporate into its calculations. He brought his clients to a Zillow-owned home that was priced $75,000 higher than other properties nearby, which included a blighted abode next store.

“Zillow could not see [everything that goes into pricing a property]. They see beds, baths, square footage, and locations. Their algorithm really fell short in evaluating other things that are important to purchasers.”

And that blind spot became all the more apparent as Zillow Offers shut its doors. In the wake of this significant change, let’s examine the impact that Zillow’s iBuying arm had on the market, both nationally and locally.

Zillow’s Effect on the U.S. Real Estate Market

Zillow launched its iBuyer program, Zillow Offers, in 2018, and Colorado was one of the first real estate markets the program entered. Multi-billion-dollar companies like Zillow have the tech resources to purchase houses quickly via iBuying, which has gained traction in recent years. 

For those who aren’t familiar with the process of iBuying, homeowners disclose information about their property to an iBuyer program, which uses an algorithm to estimate the value of the home and generate an offer in 24 hours or less.

While the convenience of iBuying appeals to many sellers, it comes at a cost.

iBuyers cost home sellers about 13%-15% of the home’s sale price, while an agent costs 5%-7%, according to a 2019 research report from real estate data firm Collateral Analytics.

In a 2018 Forbes article, Zillow Chief Marketing Officer Jeremy Wacksman admitted that “the discount the seller may take [from selling with Zillow] could be anywhere between 10-15% or even higher. It depends on the home, market conditions, and other factors. For some people it’s worth taking less, not worrying if the sale will close and being able to move quickly."

While sellers reveled in the convenience and, toward the end of Zillow Offers, the inflated offers made on their properties, real estate agents and prospective homebuyers were decidedly less enthused. In an already scorching market, many buyers saw iBuyers as near-bullies who used their institutional wealth to steal the American Dream of homeownership out from under them.

Zillow Offers targeted affordable homes with an average home price of $320,000, which made markets like Denver particularly alluring for iBuyers. The median sales price in Denver is $525,000, but back in 2018, it was $415,000. With Denver home pricing’s meteoric rise, the program quickly expanded to Fort Collins and Colorado Springs, where housing costs were more affordable.

In shutting down Zillow Offers, the company has decided to try and offload roughly 7,000 homes nationwide, looking to earn back around $2.8 billion as a result. A report from KeyBanc analyst Edward Yruma uncovered that two-thirds of the Zillow homes available for sale feature an asking price below what Zillow initially paid for the property, and the average discount is 4.5%. 

Now that we know Zillow’s impact on a national scale, let’s explore how Zillow Offers operated within Colorado’s real estate market. 

How Zillow’s Flipping Business Flopped in Colorado

What Was Zillow’s Impact on Colorado’s Housing Market?

On a national scale, iBuying purchases only account for 1% of all residential home sales in Q2 of 2021. But when you take a closer look at key markets like Colorado, the programs’ market share is much higher. 

Colorado was one of the first markets in which Zillow operated, and the iBuying program wasted no time expanding to three of the state’s biggest real estate markets. Colorado was a major market for the iBuyer “arms race”, with homeowners selling nearly 700 homes to Zillow in 2021. In September 2021, Zillow’s market share of residential home purchases reached 3.8% in Denver, nearly 2% in Colorado Springs, and 2% in Fort Collins. 

Zillow’s portfolio of more than 500 homes on the Front Range is spread across many neighborhoods, so selling those in bulk will not likely impact the regional or even neighborhood markets, experts say.

DelPrete expects Zillow’s exit from flipping homes to lure institutional investors eager to secure a swath of hot-market housing, either for renting or selling.

Zillow recently confirmed that it will offload thousands of these homes to institutional investors.

Institutional investment in real estate is common in Colorado. The National Association of Real Estate Investment Trusts, or Nareit, shows 128 real estate investment trusts (REITs) owning 8,734 properties in Colorado. Those properties include nearly 3,200 billboards, 1,200 communication towers, and a mix of shops, health care facilities, storage facilities, apartment buildings, resorts, and office buildings. REITs own 3,139 single-family homes in Colorado, according to one group’s website.

In other words, while real estate agents may be celebrating this change to the iBuying scene, homebuyers may not notice a lasting difference, particularly if Zillow Offers didn’t have a significant presence in their local market.

Ultimately, all iBuyers will face a similar fate if they can’t find a solution to the labor and supply shortages that have halted the home renovation projects that these programs rely on to sell homes for profit.

How has iBuying impacted your market? Are you a fan of the programs, or are you relieved about Zillow Offers closing? Let us know in the comments below!

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