I’d like to vent my spleen about Zillow before getting to the article. IMHO, Zillow does a fantastic job of appearing to be experts in residential markets across the entire country, but therein lies a large part of the problem.
For the record, my intense dislike of Zillow isn’t just because listing agents have to pay to appear next to their own listing on their website. Although that’s insulting enough for us, I’d bet 99% of the agents who appear next to the home on Zillow have never set foot in it. That’s a huge disservice to the seller who assumes the listing agent will be fielding the calls on their home when someone finds it on Zillow. I’ll relay a story about this in a future blog.
Zillow is also notorious for having inaccurate information. It’s common for listing agents to receive calls from people about homes still showing as available which were sold long ago.
But what really galls me is the way Zillow takes it to another level of hubris when they offer their property valuations. I can guarantee, not one Zillow representative has ever set foot in one of our listings nor any other listing in Dallas, yet they’re providing the public with their opinions of value based on algorithms? Then we agents who actually work in these markets and have actually walked through the home and others around it are left to clean up their mess.
FYI, in the custom home world, no two homes or lots are alike. They are all different in the level of finishout, condition, special features, pool features, lot features and locations, etc. Projecting home values based on algorithms is not only unprofessional, it’s also misleading.
Zillow’s Flips Are Now Flops
By Tom McKay with GIZMODO
Headline: The digital real estate marketplace Zillow bought way too many homes and is now selling some of them at cut-rate prices.
Digital real estate marketplace Zillow has been hemorrhaging cash in the home-buying arms race in certain markets, Bloomberg reported on Tuesday, after the company tweaked its algorithm to jack up the bids it offered on real estate.
One of the more ominous movements in both real estate and tech during the current phase of the covid-19 pandemic has corporate house-buying sprees in response to resurgent demand, using predictive algorithms that try to divine the future of the housing market. The aim is generally to flip the homes for a profit, or in some cases convert them to timeshares or rental units, with unknown long-term effects for the housing market. Throughout the summer and fall, Zillow was urgently pursuing these potential buys via an “iBuying” program called Zillow Offers, which advertise homeowners’ offers in as little as a few days.
As Motherboard observed back in August, companies like Zillow have been more interested in growing as rapidly as possible than making money, with its iBuying program losing money on net since its launch in 2018. Concerns about the whole thing go both ways; actual families trying to buy homes are increasingly having to compete with deep-pocketed tech firms, but Motherboard reported that some studies have concluded Zillow’s instant offers are less generous than claimed.
In August, Zillow raised $450 million from a bond backed by houses it had hired but not yet sold, and CEO Rich Barton said the company was on track to buy 5,000 houses a month by 2024. In its second-quarter earnings call, Zillow blew away revenue expectations, yet raised concerns the company’s laser focus on explosive growth was coming at the cost of actual profit. According to Bloomberg, Barton said the company would be making higher offers to keep up with the pace of the housing market, and it bought more homes than ever in the third quarter.
“Of particular note, our iBuying business, Zillow Offers, continues to accelerate as we offer more customers a fast, fair, flexible and convenient way to move,” Barton said in a press release. “Zillow Offers is proving attractive to sellers even in this sizzling-hot seller’s market. Finally, we expect millennial-buyers, low interest rates, and the increasing adoption of location-flexible work policies, to fuel interest in moving for many years to come. And these movers will increasingly demand e-commerce-like solutions where Zillow excels.”
The market has since cooled somewhat, and in mid-October, the company said it would be pausing purchases as it works through a backlog of inventory. Zillow blamed a labor shortage, saying it couldn’t hire enough evaluators to inspect homes or contractors to repair them.
Bloomberg wrote that the available data shows that Zillow’s appetite had probably been much too big for its stomach:
Zillow put a record number of homes on the market in September, listing properties at the lowest markups since November 2018, according to research from YipitData. It also cut prices on nearly half of its U.S. listings in the third quarter, according to Yipit, signaling that its inventory was commanding prices lower than it expected.
In some markets like Atlanta, Georgia, and Phoenix, Arizona, Zillow losing money on listings is particularly apparent, Bloomberg wrote. Its 250 active listings in Phoenix are about 6% under market price, which University of Colorado Boulder scholar-in-residence and real estate expert Mike DelPrete told Bloomberg was about $29,000 off for the typical home.
In one example cited by Bloomberg, Zillow outbid competitor Opendoor Technologies for a Phoenix home, placing an offer at $531,300 minus convenience fees. Within ten days of the sale closing, Zillow’s price had fallen to $505,900, and after that, $494,900. Another example involved a house in Tolleson, Arizona that Zillow bought for $412,000 and sold two weeks later for $387,000, a $25,000 difference.
Zillow was confirmed to be taking similar losses in the states of Arizona, Florida, and Georgia by Business Insider earlier this month, with one particular potential warning sign being the speed by which it was lowering prices.
“Every key metric I’ve seen from Zillow over the past few months just doesn’t make sense,” DelPrete told the news agency. “It’s like it’s making decisions two to three months too late relative to the market.”
“Prices turned on them and they got a little bit flat-footed and they were probably a little too aggressive on the bidding,” RBC Capital Markets analyst Brad Erickson told Bloomberg. “They probably don’t care so much. It’s not as important at this stage of the game to make money.”