Zillow had built its core business primarily on the concepts of a) displaying existing residential real estate listings, and b) utilizing robust computer algorithms to produce home value estimates, called Zesitmates. The majority of their profit had been generated by connecting agents with potential clients. But in 2018, Rich Barton, one of the company’s founders, reclaimed the role of CEO and pivoted Zillow into the home-flipping business via tech, called “iBuying.”
Boldly using their own in-house property value estimating technology as their guide, Zillow began purchasing homes in massive quantities. The overall plan was to acquire residential properties, make light repairs, then them sell for a profit. Essentially flipping the house, Barton set a goal to buy 5,000 homes per month by 2024. This was a massive bet on both the reliability of their in-house technology and the continued strength of the US housing market.
In early-2021, Zillow borrowed more than $1 billion through two bond offerings, making it the first iBuyer to tap the securitization market. It has also lined up $50 million credit facilities with Credit Suisse Group AG, Goldman Sachs Group Inc., and Citigroup Inc. In August of 2021, Zillow had began touting the success of the program, claiming that the old way of selling homes was outdated and that home sellers would prefer to skip the hassle of the conventional listing process and sell directly to Zillow.
What went wrong with Zillow Offers
If this all sounds too good to be true, even in this Zizilling-hot housing market… then your gut instinct is correct. In addition to overpaying for homes, Zillow’s proprietary software also failed to accurately predict the resale value of the homes once repairs were completed. The company’s efforts were also negatively impacted by external factors, as material costs and supply chain issues skyrocketed. The combination of factors has left Zillow with a significant inventory of homes that they cannot sell for a profit.
Some have speculated that the biggest mistake Zillow made was a failure to recognize the human element in real estate sales. Despite all of the world’s technological advances and the collection/organization of Big Data, residential real estate remains a boots-on-the-ground, local industry reliant on experienced professionals. There are simply too many elements at play to fully and effectively automate the process of real estate transactions.
What it Means for You
If you happen to be a seller who was recently overpaid by Zillow, then congratulations! But if you are currently a home buyer considering a purchase from Zillow’s remaining inventory, then buyer beware. Zillow proved once again that, even in the year 2021, the most reliable method for understanding current market value for real estate is to recruit the services of an experienced, local appraiser, Realtor, or both.
So if you are considering selling, start by hiring an independent, unbiased appraiser to analyze the most likely sale price for the property if it were to be formally marketed for sale. And if you are considering purchasing one home (or 5,000 homes) in the coming months, consider recruiting a local Realtor to represent your best interests throughout the process.
P.S. What if your Realtor were also an appraiser? That could be extremely helpful...
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