Last week Zillow announced failure as a home flipper and there were no candle vigils. But there has been so much talk and I’ve heard everything from “This means the market is going to crash” to “The iBuyer model is dead.” Let’s talk about what this failure really means. Any thoughts?
Skim topics of interest or digest slowly.
Failure despite massive price increases: We are coming out of one of the most aggressive markets ever and Zillow was not able to succeed despite massive appreciation. Just think how much more difficult it would have been to flip in a declining market.
Zillow losing isn’t about the market: Lots of people have said things like, “Zillow must know the market is about to implode, so they got out before it was too late.” But here’s the thing. Zillow overpaid, so of course they are selling at a loss. Zillow losing money isn’t about what the housing market is doing right now. It’s the byproduct of a flawed strategy. As a side note, I have a friend who was the recipient of an offer nearly $100,000 over market value and I now joke with him that his transaction is what pushed Zillow over the edge into failure… Keep in mind Zillow’s own economists have been predicting price growth next year, so backing out due to a looming market collapse goes against what their brand has even been saying. Look, I’m not giving credibility to Zillow’s predictions, but keep in mind mostly every data company is predicting price growth next year.
Operation Catch-up: It’s almost like Zillow wanted to catch up to Opendoor rather than being sure their acquisitions made sense. It’s like Zillow was so zealous to be the number one iBuyer that they didn’t prioritize making the numbers work. In Sacramento Zillow caught up to Opendoor a few weeks ago, but then they announced their flipping exodus. So… congrats on being #1?
This is NOT enough to crash the market: Some YouTubers are making a mountain out of Zillow having seven thousand properties to sell, but these are a drop in the bucket for the housing market. As of this week there are 400,688 homes for sale in the United States according to Altos Research, so it’s absurd to talk about Zillow’s holdings being enough to turn the market. Remember, these units are spread through many locations too. In Sacramento Zillow owns 413 units and 185 of them are currently either active or pending. In other words, 44.7% of what Zillow owns is listed for sale right now. In contrast 54.2% of Opendoor units are on the market and 40% of what Redfin owns is listed. Ultimately Zillow’s ratio of what they own verses what is listed looks pretty normal compared to other iBuyers. And Zillow only has 55.3% of their units left to list locally, so it’s hard to imagine this amount could change the market.
The new doom flavor of the week: Zillow’s failure is the latest sensational headline used to predict the demise of the market. Over a year ago it was the pandemic, then it was forbearance, and then it was the end of the eviction and foreclosure moratoriums. A few weeks ago it was Evergrande in China. And now it’s Zillow. My advice? Be careful of sensational voices that use headlines to continually promote doom. Look, at some point the market will go down because that’s what markets do, but don’t get caught up in sensationalism until that happens. Instead, pay attention to stats and try to be objective about issues instead of getting swayed by the flavor of the week. I advise avoiding negative-only narratives as well as positive-only narratives. Both are problematic.
Offerpad is stepping up as in iBuyer: Zillow failing isn’t the deathblow to the iBuyer model. It’s easy to say that, but let’s remember Zillow failing was likely more about their strategy rather than the model. In other words, Opendoor and Redfin are still in business and Offerpad is another iBuyer with a huge presence in other states that will soon be expanding to California. Last week I saw a Sacramento position with Offerpad advertised on LinkedIn and I even know someone who interviewed for the job. I’ve been told they are hoping to be active by January, but we’ll see.
The school of hard knocks: The real estate community didn’t hold any candle vigils for Zillow’s failure and there was no sad violin music. The message is simple, “Welcome to what we already knew. Real estate is difficult.” There is certainly a place for different models in real estate, and I suspect over time some tech companies are going to make better inroads, but technology companies ought to exercise humility. In other words having brand recognition and millions of dollars doesn’t guarantee you success in real estate.
Public perception: Zillow is a big brand and while their failure as a flipper has no power to sway the actual real estate market, we do have to wonder how the public will respond. Last week Bill McBride of Calculated Risk said, “It is possible this will have an impact on buyer psychology, and make some buyers more cautious, but that is impossible to measure.” I agree on all points. We need time to tell. For now it seems like the real estate community is much more fixated on the demise of Zillow than the public. I’ve yet to personally hear of buyers and sellers making real estate decisions because of Zillow’s failure. Let’s keep watching.
Not all iBuyers are the same: This visual comes from Mike Delprete. I recommend signing up for his email list. In short, Zillow has been losing big-time, but it looks like Opendoor is starting to figure out how to make a profit. I’m not sure anyone has really cracked the code, but these companies are trying.
Growth was rapid: In Sacramento Zillow owned fewer than 50 homes in June, but less than five months later they owned over 400 units. Not only did they overpay for many of these properties, but on a practical level I wonder how they were going to quickly repair these homes with a deep shortage of skilled laborers.
Integrity from agents: One thing that maybe hasn’t been covered much in media is honesty from real estate agents. Quite a few real estate agent contacts told their prospective sellers to sell to Zillow instead of list on MLS. The sentiment was, “There is no way I can get you that amount because they’re paying way above what the market will give you.” In short, props to these agents for integrity.
Not telling the truth: One of the things that bothered me about Zillow’s public narrative in recent months is they said they were paying market value for the homes they bought when in fact everyone in the trenches of real estate knew they were overpaying. This breaks down trust in my book.
Will institutional investors buy these units? There has been talk about institutional investors purchasing some of Zillow’s inventory. Maybe that will happen. Maybe it won’t. In Sacramento I wouldn’t be surprised to see Invitation Homes pick up some of Zillow’s inventory, but then again this investment fund is strategic about what they buy, so it’s not like all 413 units in Sacramento would even make sense for Invitation Homes. By the way, since May Invitation Homes has purchased 126 units in the region.
Will these homes be rented? I’ve heard some say Zillow’s units are going to be rented, but I’ve yet to hear any official source affirm that. In my mind becoming a property manager would be another new venture for Zillow and I suspect they need to convince shareholders they’re not going to do anything new after flopping so hard as a flipper. If you hear otherwise, let me know.
Dude, every listing is owned by iBuyers: Last week an agent friend emailed me to say it felt like almost every active listing she was showing her clients was owned by Zillow, Opendoor, or Redfin. I get it because technically right now these three companies have a 9.97% share of all active listings in the Sacramento region. That’s a whopping stat, but it’s also a bit sensational for a few reasons. First, we have about half as many listings as normal, so these companies having 213 active listings during a severe housing shortage sounds bigger. Secondly, when considering both pendings and actives (instead of just actives) these companies have a 7.7% share of the market. These days with properties moving so quickly it’s important to not just focus on active listings. Lastly, these companies are going against the seasonal trend, so it makes sense to see them gaining market share during the fall. Let me explain. It’s normal to see fewer listings around this time of year as people start to hibernate and think about the holidays. But iBuyers purchased hundreds of homes in recent months and they need to get them on the market, so they’re listing now despite the slower season. On one hand this is good for consumers because there are more listings, but it’s odd too because there is a rhythm to the market where we just see less activity at this time of year. In other words, even consumers aren’t as interested in real estate during the fall.
Quality issues with iBuyer flips: I’ve heard quite a few complaints about various iBuyer companies doing really low-quality work (and being difficult to reach). I’ve heard some prospective buyers say they would basically have to redo the so-called improvements iBuyers made. On a related note I shared some thoughts with CBS Sacramento last night about an Opendoor property with squatters.
Cannot smell the cats: I gave a quote to Money.com last week and I was especially excited they used my “Zillow cannot smell if 20 cats live there…” line.
Zillow isn’t finished: Zillow is said to be finished as an iBuyer, but be careful about calling them the new Purplebricks. They are still here. They just won’t be an iBuyer (presumably).
Thanks for being here.
Questions: What stands out to you most above? What do you think of Zillow failing and the iBuyer model? I’d love to hear your take.
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You know there’s a problem when listing agents try to convince appraisers to use Zillow purchases as comps…LOL
Haha. Yeah, those lofty sales could’ve come in handy for some transactions I’m sure… 🙂
I own rentals in the Sacto
area and would like to know if the Zillow estimates are high or low?
I’ve had some agents tell me that Zillow is behind the market as they base values on closed sales, not rising values.
Your thoughts,
Ron,
Hi Ron. I find it’s hit and miss. I wouldn’t characterize it one way or another. I find sometimes they are low, sometimes they are high, and sometimes they are spot on. It’s hard to know what their algorithm really uses, but theoretically it should be considering listings and pendings in addition to sales. I do know Zillow uses the list price on some level because in many cases the Zestimate will match the list price after a property goes live. This of course helps their accuracy rate (I have a different blog post about that). All that said, I tend to check Zillow and Redfin when doing appraisals because I have so many clients bring up these values. At the least this helps me be prepared for conversation with clients just in case. The last few I’ve done, I’ve noticed Redfin was closer. But like I said, this is sincerely hit and miss. Ultimately, I think Zillow is a neat tool and a very general ballpark (said with a grain of salt). I would never encourage someone to make financial decisions based on an algorithm that hasn’t seen the property. In other words, I would never buy or sell by an algorithm alone. We need to have confirming knowledge through some sort of other party. This isn’t an argument for appraisers. I just think this is what wisdom looks like. But I would say at the least to check Zillow, Redfin, and Realtor.com to get a sense of a few algorithms. Okay, I’m rambling…
Ryan,
Your not rambling. I like as much information as I can obtain. I purchased 29 homes during the 2009-2012 and have kept and rented all of them so I’m very happy.
However with the economy, inflation and rising interest rates I’m thinking it might be smart to sell some homes and lock in the profits from the appreciation.
Just found your blog and enjoy the information.
Thanks,
Ron,
I’m guessing you have some equity. 🙂 Good luck, and keep me posted if you have any questions or need any connections. Buyers are hungry for inventory, so you shouldn’t have any trouble selling in today’s climate as long as the price is right.
Great analysis. I agree, Zillow isn’t finished. I think they have learned and they will be back bigger and stronger when they start buying again. There is more to their strategy then just the flip. Zillow is getting in on the purchase of the seller’s next property, their mortgage, and probably other aspects.
Thanks Gary. Yeah, there are likely going to be more tricks up their sleeve. They didn’t buy a mortgage company and make all these moves to own more of the real estate process for nothing. I am still baffled at their acquisitions though. I just wonder what Zillow HQ was telling all the local real estate brokerages it was working with for acquisitions.
Great post Ryan! I agree with you that this situation with Zillow in no way indicates that the housing market is about to crash. I don’t believe Zillow owns any significant amount of properties in my area. People give way too much weight to Zillow on many levels. They’re not a bad company, but they don’t seem to have appreciated just how complicated real estate, and real estate values can be. Thanks for another great post!
Thanks Jamie. Now if they owned 7,000 properties in each market I would be concerned. I don’t know where The Big Z went wrong, but clearly they lacked focus and real strategy. It almost seems like they were willing to buy anything rather than target a very specific type of seller that would sell at a discount so the numbers worked.
It is strange. They have a lot going for them. Ironically, if they had hired appraisers to value the properties they were going to buy, perhaps they would have made better decisions. Zing!?
If they had hired appraisers and offered true value minus costs and a margin they wouldn’t have been able to purchase nearly so many properties. In the real estate office I work the only reason sellers bypassed their Realtor friends was because the bottom line was so much better. And where the bottom line was better Zillow ended up selling for a loss, pretty consistently.
That’s a great point Dave! It seems like they shouldn’t have purchased so many properties. When it comes to their margins, one thing to think about is that appraisers usually charge hundreds of dollars. Agents charge many thousands in the form of a percentage if the sales price. Hiring an appraiser would not have had as much of an impact on their bottom line and it would have been better educated about the value of homes they were buying. Either way I know their margins are tight, and the larger they scale, the tighter those margins become. Valuation seems to have only been one of the issues. I focused on that because valuation is my profession. Thanks for writing in! I always appreciate and respect the views of others.
I’m a CRE guy, not residential, and maybe that is why I could never understand these razor thin margins we often see in house flips. There’s got to be an easier and less risky way to earn $6k.
Thanks. Yeah, I guess the only way it works well if they are doing bulk. It does seem like so much work to get there though.
Anyone making $6k per flip isn’t going to be around for long.
Thanks Tom. Part of me wonders if they are actually making money yet. It’s all about the details. Does the $6K account for pure profit or is it simply the difference between acquisition and resale? Those are two different things and I’m not clear on the details yet with this figure.
Hi Ryan!
Great article! I think most of us have said from day 1, this works in a sellers market, but what happens in a buyers market where they have the leverage? the IBuyer program, I believe is here to stay because they do fill a small niche. However, the ones that survive are going to have to hone their game even more if they expect to remain viable.
Thanks Paula. Yes, the real test will be surviving in a down market. That’s where these tech companies are going to have to anticipate future declines and pad that into their offers. We’ll see what happens. What a time we are living through.
In a down market, one of two things will likely happen. The IBuyers with close their doors like they did last summer and cash out. The second and more likely one, is that they will push the declining market as key point, to scare Sellers/homeowner to sale to them now before the market goes lower and at the same time justify they lowball offer.
Thanks Matt. I’m anxious to see how they perform in a down market at some point. I suppose like anyone they’ll have to adjust their message. But they’d really have to buy at a further discount to make the numbers work. Presumably.
Hey Ryan, great post as usual. I don’t think Zillow has failed at all here, this was them learning the iBuyer model. With 1.74B in revenue for Q3 (https://ycharts.com/companies/Z/revenues) these losses are nothing but a write off and a TON of free advertising.
You could be right. I wouldn’t say Zillow has failed as a company, but their iBuyer pilot absolutely flopped. I’d really like to know where they went wrong and why they did what they did. I wouldn’t be surprised to see them go for Round 2 at some point. Their stock prices have taken a beating and they’re going to have to figure that end of things out.
Thanks Ryan! Great analysis. Curious about your thoughts on the homes that were purchased by Zillow Offers that were listed by local agents (there are two in the Folsom area that have sold multiple listings to Zillow, significantly over list price, even after the home had sat on the market for months). Will appraisers use these as comps, knowing that the home was purchased by Zillow? There are certain neighborhoods I’ve seen this in…Seems like they were trying to artificially inflate the value in those specific neighborhoods. Thoughts?
Interesting to hear. Why in the world would anyone including a tech buyer make a purchase like that for properties that were clearly not moving? This is maybe one of the problems with not having skin in the game. If it’s not your money, stuff like this can more easily happen because of deep tech pockets. Nobody in their right mind on the open market would do something like this. It makes me wonder if we’ll understand this strategy a bit more in the future and if there really is a bigger reason for this. I can’t really speak to inflating the market. I do know it would take more than a few sales to truly move an entire market. Case-in-point. Zillow bought some stuff at inflated levels and then buyers ended up paying less. This shows buyers are discerning and they don’t necessarily feel like they have to pay at least the previous purchase price.
All that said, appraisers have to weigh each comp and won’t arbitrarily consider any sale as a comparable. Just because a property closed at a certain level doesn’t mean it’s an indicator of value. Maybe the property closed too high. Or too low. Appraisers need to think through these things and sometimes either not use certain sales or maybe use them but give them less weight because they aren’t truly reflections of the market. Frankly all year long appraisers have needed to not use certain sales because buyers paid way above the appraised value. I recall a property where the buyer paid $50K cash above the appraisal and the final price stood out like a sore thumb. It was basically $50K above anything else. I actually used it in a report, but I gave it very little weight and explained that it was more or less an outlier.
I think any home owned by Zillow and Opendoor for that matter has to be viewed as an outlier and approached with caution. In Folsom in the neighborhood you you referenced Zillow purchased a home for 100K more than an identical adjescent property owned by Opendoor that hasn’t moved in nearly 2 months. I’m really curious to see what will be the final disposition of these properties, and how they will impact the broader market as a whole.
Thank you Justin. It’s so wild that any investor would pay that much more, but that’s not the only example of Zillow overpaying by six figures in Sacramento County. I’m always reminded that one sale doesn’t make or break a market. So one low sale doesn’t damage the entire neighborhood and one high outlier doesn’t always pull everything up either. I think about it this way. There was a $7M sale in El Dorado County recently, but this major outlier on 500 acres is in no way going to mean every other property is now worth $7M. I realize this is an extreme example, but on the neighborhood level I would be surprised if a lone ranger sale that is so clearly an outlier was able to pull up the rest of the market. I find buyers are not in the habit of overpaying by that much in the vast bulk of cases, so theoretically they should be discerning enough. Theoretically. We’ll see what happens. Please keep me posted if you see anything interesting. Ultimately if stuff like this keeps happening with other iBuyers I suspect the market as a whole will have to more closely scrutinize the sales and say, “Oh, that was a (iBuyer) sale. Yeah, that probably sold for too much then.”
I advise my buyers to avoid their listings because of their one-sided purchase agreement. If CAR won’t touch it, I won’t pay a lawyer to advise me or my clients.
Thanks Jay. So you feel their purchase contract creates more liability for you and your clients maybe?
Once again Ryan you know how to put things in perspective with the good, bad & ugly facts.
Such a painful move that resulted in 2,000 employees losing their jobs, a $304 million third quarter write-down (Ouch), a spiraling stock price (maybe time to buy Zillow stock? LOL), not to mention that Zillow has damaged their brand.
Keep up the great blog Ryan!
That’s important context. I feel for people who lost a job and it’s tough to start having to look around the holidays also. Thanks for sharing Andrea. Hopefully these people will land somewhere else soon. I suspect some will start working for Offerpad or Opendoor if they wish to stay in the same space.
Ryan – great blog…
Let’s remember the DARK underbelly of this story…
” Zillow will shutter its home buying business and lay off 25% of its workforce over the next few quarters, the company announced Nov. 2. Company CEO Rich Barton tweeted”
The Human element of 2000 workers forced out is real…
From our Appraisal perspective : The ZILLOW Brand has been “weaken” — this is vital, because up till now… The company, in the eyes of the general public , could do no wrong.
Thank you Bruce. It seems like Zillow had been escaping scrutiny from the public. It’s as if they’ve had a pass and could do no wrong. So I think it’s good for the public to offer critique. I suspect if Zillow does sell to institutional investors that’s only going to invite more critique. We’ll see what happens.
Excellent post as usual Ryan, I believe there is a place for iBuyers, and so it is just another facet of being a real estate professional we need to be aware of. I also believe that the local Realtor who stays well informed and communicates regularly with their SOI will be the number one option for Buyers and Sellers.
Thanks George. I agree with you. There is a place for other models and different models can coexist.
I agree that it seems most of the people concerned with Zillow’s demise are real estate agents. There is not a lot of love lost there. It is definitely not good P.R. for their Zestimate. First, the president of Zillow sold his house for much less than its Zestimate several years ago and now they fail at the flipping game when they presumably have the secret sauce to help them. Makes you really question the accuracy of AVM’s in general.
Thank you Tom. I always appreciate your thoughts. I wonder what really matters to the public here. Will this really have any effect on people using Zillow to search for properties or to rely on Z for market information? I’m doubtful because the public loves The Big Z. We’ll see though.
Thanks for your reporting on this. As a hopeful homebuyer I have a different perspective on this. All I can say is good riddance to Zillow. I hope all iBuyer groups close shop too. I can’t believe that as future homebuyer, that’s what I will be competing against. Disturbing to say the least. No wonder home prices continue to stay out of control despite a pandemic, it’s all starting to add up.
Thanks for sharing Shannon. I really appreciate you pitching in. Now that you have an approved comment too you can share without moderation. Please do so anytime. I think lots of people feel similar to you. CBS 13 did a piece this week about an Opendoor house with squatters and the comment section is livid. People are really harping on the reality of Opendoor owning just over 350 homes right now in the Sacramento region.
Thanks for such a great blog. In Arizona we see a lot of Offerpad / Opendoor sales. Recently they have consistently been selling homes at a loss. Also have an AMC that is constantly filling my inbox with requests for desktop appraisals for Offerpad at ridiculously low fees. It will be fascinating to see how these ibuyers function (or don’t) in the future market. Many commenters mentioned using ibuyer sales as comps – doesn’t the sale from the homeowner to the ibuyer immediately contradict the definition of a comparable (not exposed to the open market)?
Hi Kelli. Very interesting to hear Offerpad using watered-down desktops for acquisition. I’ve yet to hear any other iBuyer doing something like that. On one hand I appreciate the use of appraisers, but hearing of low fees isn’t a huge encouragement to get most appraisers involved. I totally agree with you about using iBuyer acquisitions as comps. In my mind the biggest issue here is the lack of being able to verify the transaction and understand the details. Moreover, if we know some iBuyers are overpaying, it’s just a dangerous sale to use because there’s a good chance it doesn’t mean anything for value. Case-in-point. We see so many of these iBuyer properties sell for less when they hit the market. On top of all of this sometimes an iBuyer acquisition might be padded with a fat credit that boosts the acquisition price. It’s just a bad idea all around to use these as comps.