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June
15

The real estate market has been on fire for the past few years. Like other industries, a hot real estate market and rapidly evolving technology created the opportunity for new disruptive business models. iBuying (the "i" stands for instant) first started in 2014 with Open door pioneering the concept.

With iBuying, homeowners can sell their home directly to the buying agency without needing a real estate broker or agent. This can save money and avoid the challenges and costs incurred in traditional real estate transactions. Online companies give sellers instant cash offers on their homes, sight unseen. The buyer is offered a price based on a computer algorithm they are not looking to do major renovations. Typically, they want to sell quickly.

In 2018, Zillow jumped into the fray with their Zillow iBuyer Program. But it was not a national program. They originally started in a few carefully selected markets with plans to eventually roll it out more extensively.

Zillow was aggressive in their purchases, relying on the automated price generated by their algorithm. Unlike many other programs, they purchased homes expecting to remodel and flip them for a healthy profit. Zillow invested heavily in this business model and in the first half of 2021 alone, Zillow Offers (their iBuyer program) raked in 1.47 billion in revenue but has yet to turn a profit.

Some buyers were thrilled with their offers, and many received more than expected. In fact, when you look behind the curtain, it appears that Zillow overpaid for many of the homes. They now have a huge inventory they must sell, most likely at a significant loss.

Analysts recently found that of the nearly 1000 homes Zillow recently listed for sale in its five primary markets, 64% were being marketed for less than the company paid. As a result, Zillow could be heading for massive losses in the millions from its iBuying operations.

Zillow entered the iBuyer fray as a way to grow the company. Zillow's original business model was focused on offering consumers a marketplace to sell buy or rent properties. It also marketed properties listed by agents where buyers could reach out to a local agent for information or to schedule a showing. The person reached was not always the listing agent but a Premier Agent who pays Zillow a fee to obtain leads.

Their original model produced mostly buyer leads. Zillow's iBuyer program attempted to generate more seller interest for their Premier Agents. The program was designed to grow their base of Premier Agents and the company's revenue stream.

Using Technology to Remove the Human Touch

Online buyers have existed for several years. While some have success using a computer-generated price and buying homes sight unseen, Zillow's model made a few mistakes.

Their Zestimate data and pricing algorithm was flawed, and this caused the company to overpay for many homes because it failed to take certain factors into account. For example, technology can't determine a property's condition which is a major factor when agents price a home.

While technology was a factor in Zillow's downfall, it wasn't the only one. Global supply chain issues and labor shortages also had a significant impact on the company's business model. When time is of the essence, these factors can be costly when the home needs improvements.

The final nail was Zillow analysis which determined that the iBuyer scale needed to be very large to be as profitable as they had hoped and, in the end, the company decided that this was something they did not want to pursue.

The Impact of the Failure of the Zillow iBuyer program on the Industry

Before Zillow shut down Offers, they tried to offload 7000 homes to an unnamed buyer (or buyer's) for $2.8 billion according to a Bloomberg report. While Zillow Offers was in limited markets, releasing this inventory to investors can exacerbate supply problems in those markets.

Many financial and real estate industry experts have theorized that the shuttering of Zillow Offers may be interpreted as a top to the recent frothy market. As it winds down, we may begin to see supply and demand stabilize. Zillow's business model proposing a national program was too ambitious. While Zillow is out of the game, the pool of local and regional iBuyers is still robust.

Zillow's suspension of iBuyer presented us with some interesting insights. While technology in real estate has helped immensely to educate buyers and improve the search process, the removal of human interaction has proven to be less effective.

Technology has improved our lives in many ways. However, an algorithm cannot replace human knowledge in the real estate process. Brokers and agents have a deep understanding of their local markets that an algorithm simply cannot match. Sometimes, a home that looks great in pictures can have issues that you need to see firsthand to understand. For example, the house might have an unpleasant pet-related smell or be located next to a home with a cluttered yard. These are factors that automated technology cannot factor in.

The bottom line is that Zillow is an excellent place to start your home search, but it should be the first step, not the entire process. The best solution is to reach out to a local real estate professional. They will know details about the local market, including homes not yet listed. They will also understand the nuances of their market or a particular home. It's still the best way to meet your needs as a home buyer or investor!

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