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What You Should Know About Zillow’s iBuying Fiasco
November 16, 2021

What You Should Know About Zillow’s iBuying Fiasco

by The CE Shop Team

Zillow’s iBuying Program Is Shuttered, But iBuying Isn’t Dead 

By now, you’ve probably seen the headlines: In early November, Zillow abruptly shut down its iBuying program, Zillow Offers, and announced plans to lay off about a quarter of its staff.

As Zillow winds the program down, it will need to offload the thousands of homes it already owns, likely at a loss. All told, the real estate website “expects to record losses of more than $500 million from home-flipping by the end of this year,” The Wall Street Journal reported.

“Zillow’s home-flipping practice involved buying homes, lightly renovating them, and then selling them quickly, making money on transaction fees and home-price appreciation,” The Journal explained. “The company and other iBuyers used an algorithm to make home-price estimates and determine what to pay home sellers.”

But Zillow ultimately shut down its iBuying business “because it couldn’t accurately predict future home prices and was losing too much money,” The Journal reported.

The news shook the real estate industry, leaving many to wonder about the future of iBuying, which had become an increasingly common phenomenon in recent years. As the dust settles, here’s what you need to know.

A Once-Promising Program’s Downfall

Zillow launched its iBuying program in 2018 with high hopes.

Last year, Richard Barton, Zillow’s chief executive, predicted that Zillow Offers could generate $20 billion per year, The New York Times reported. Instead, the company lost nearly $330 million in the third quarter of this year, compared to a $40 million profit in the same period a year ago.

In October, Zillow announced that it would temporarily stop buying homes, blaming a lack of workers to fix up and sell the houses it had bought, The Times reported. Less than a month later, it shut down the program completely.

So, what happened?

“It appears the company underestimated the risk of holding houses in between transactions, which was a departure from the low-risk, high-margin ad business,” The Times reported. “And it tried to quickly ramp up its home-flipping business to 5,000 transactions a month, which... Barton set as a goal, in a housing market that was already low on inventory and was starting to cool off.”

Can the Zestimate Be Trusted?

The failure of Zillow’s iBuying program has led many to doubt the accuracy of one of its signature features: the Zestimate.

The company provides Zestimates, computer-generated estimates of a home’s value, for around 100 million homes nationwide, MarketWatch reported. It reportedly leaned heavily on Zestimates to generate offers on houses for its iBuying program — and it makes impressive claims about the algorithm’s accuracy. 

“Zillow says that the Zestimate has a median error rate of 1.9% for homes that are on the market and 6.9% for homes that are off the market,” MarketWatch reported.

But some experts say to take the estimates with a grain of salt.

“It’s really a toy,” said Mike DelPrete, a real estate analyst who tracks the iBuying sector, in an interview with MarketWatch. “It’s meant to drive people’s interest in property.”

Zillow doesn’t disclose exactly how the Zestimate is calculated but says it uses “statistical and machine learning models” to “examine hundreds of data points” for each home, Money reported.

Ryan Lundquist, an appraiser in Sacramento, California, told Money that the Zestimate is “really hit and miss.” That’s often because the amount of data that Zillow has about each market and each individual home varies widely.

iBuying Isn’t Going Anywhere

Perhaps the biggest question on real estate professionals’ minds is what impact Zillow’s announcement will have on other major players in the iBuying industry. So far, other iBuyers have signaled that they’re not going anywhere.

Opendoor and Offerpad, the two biggest players in iBuying after Zillow’s exit, say they are ramping up their home-flipping businesses and reporting new highs for revenue, The Journal reported. While Zillow said that “it couldn’t accurately predict future home prices,” its competitors “have insisted that their systems don’t share that flaw.” 

It’s important to note, though, that iBuying makes up a relatively small share of homebuying and selling across the country. In fact, iBuyers comprised only 1% of all U.S. home purchases in Q2 of 2021 — their largest market share to date, according to Zillow’s survey of the market released in September of this year.

The report does show, however, that iBuying makes up a more significant share of the market in some U.S. cities.

“​​Zillow’s own survey of the market shows that iBuyers bought 19 homes every day in Phoenix alone in the second quarter of 2021, around one in every 20 bought there, and 165 a day across the United States — one in every 100,” Wired reported. Atlanta, Dallas, and Phoenix saw the most homes sold using an iBuyer during that time, the report says.

But while other iBuyers are persisting, perhaps what Zillow Offers’ downfall really shows is that it’s difficult to replicate the expertise that a real estate agent brings to the table — and that they won’t ever be fully automated.

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