On November 3rd Zillow announced that it would close its’ Zillow Offers group. Zillow is closing down their offers program following loses in the third quarter of 2021 of $380 million. Zillow has announced layoffs of 2,000 employees as a result of the division closure.
Zillow offers is an example of an iBuyer program. IBuyer programs are “instant” or technology enabled buyers who purchase homes from consumers without placing it on the open market for price discovery. Zillow Offers purchased residential homes based on the popular “Zestimate” pricing algorithm. Homeowners are familiar with zestimates popping up telling them what Zillow thinks their home is worth. When a home was purchased through Zillow Offers; Zillow charged consumers a fee of about 7.5% of the purchase price.The iBuyer then “flips” the purchased home back on the market attempting to sell it at a profit. Zillow’s business model failed to produce a profit.
Where Did Zillow Go Wrong?
Zillow’s Zestimate applies market level pricing to a single home. This method works well if you are purchasing a product that is very uniform. Think about products you can substitute for another with little change in its’ value. If I purchase 1,000 kernels of feed corn; one kernel isn’t remarkable from another. You can easily substitute one for another. Residential real estate is a little different. A single buyer may have a strong preference for your home versus the home directly across the street for lots of incredibly personal reasons.
A home in one neighborhood could be the same model from the same builder as another neighborhood. Consumers can still exhibit a strong preference for one neighborhood over the other. It might be something as small as the way you turn into the neighborhood from the main road. Algorithms are good a picking up macro level trends, they struggle to understand micro level trends at the home and neighborhood level that consumers display. These are things that human beings excel at. It’s the area where emotional intelligence excels over artificial intelligence.
The cumulative result of these consumer preferences and algorithmic pricing is that the consumers willing to sell to Zillow were those with the least desirable homes. Zillow’s algorithm did a poor job distinguishing these less desirable homes and overpaid. Great for those owners, terrible for Zillow’s shareholders.
Are iBuyers Going Away?
No, iBuyers are not going away. I think iBuyers are a valuable participant in a healthy housing market. There will always be a segment of the housing market for sales that are distressed or people who just don’t want to deal with selling a home on the regular market. iBuyers are a new twist on wholesaling and other forms of off market home buying that real estate investors have done for decades on a small scale. I think adding better tools through technology to an old trade is a good thing for both consumers and investors over the long term.
Are iBuyers for Most Consumers?
iBuyers and selling to a real estate investor is probably not the right choice for most residential home sellers. In the State of Delaware, residential home sales are closed at an attorney’s office. The attorney will conduct a title search and other due diligence for the buyer to make sure you have the ability to transfer a clear title and title insurance can be issued. As of November 2021, real estate attorneys in Southern Delaware are rather busy. They need time to complete their work so even if you receive an immediate offer you will need to wait at least 30 days for the closing attorney to finish their work.
The Southern Delaware residential home market currently favors sellers. October 2021 current days on market for Sussex County Delaware residential sales was 35 days according to Bright MLS data. The short time on the open market limits the benefit a seller receives by agreeing to an immediate sale before the open market can determine what a home will really sell for. With iBuyer charging fees to purchase a home that are competitive with a traditional real estate agent, the appeal of an iBuyer is limited in the current marker.