I call it strange because it’s happening at a time when the real estate market has never been hotter.
You would think that any entity or individual who purchased a boatload of residential real estate over the past year would make out like a bandit.
But I guess that’s not the case, at least when it comes to Zillow. The company addressed the move in a lengthy shareholder letter tied to their third quarter financial results.
Among the reasons were COVID-19, a supply-demand imbalance, and the sheer inability to accurately forecast future home prices.
Why Zillow Offers Is Being Shuttered
Zillow is a publicly-traded company, and as such their main motive is turning a profit and rewarding their shareholders.
Ultimately, their iBuying unit wasn’t profitable, and I suppose wasn’t looking like it was going to be anytime soon.
They also determined that “further scaling up” would be even riskier, and “too volatile” to their earnings/operations.
And the only way to make money was by scaling the business. Simply put, not a risk they wanted to take.
All of this was exacerbated by COVID-19, which turned the housing market on its head, then created a supply/demand issue with regard to things like skilled labor.
Since the company fixes up the homes they buy before flipping them to a new buyer, it’s a problem.
Zillow also point blank said they were “unable to accurately forecast future home prices at different times in both directions by much more than we modeled as possible.”
And added that “Zillow Offers economics swinging approximately 1,200 basis points from Q2 to an expected -500 to -700 basis points in Q4 2021.”
In other words, they were going to lose money on their flips in the fourth quarter, and possibly beyond.
Lastly, they noted that most homeowners just weren’t interested in the product. They were only able to convert 10% of “serious sellers” who requested a Zillow Offer.
The other 90% decided not to sell to Zillow, which meant a lot of resources were chasing few leads.
And since they have other competing products that they can sell and make a profit on, like Premier Agent, why bother?
Unfortunately, the move will result in layoffs, with an estimated 25% reduction in the unit’s workforce over the next three quarters.
Instead of Buying Your Home, We’d Rather Help You Move…
Zillow basically wants to help you move rather than buy your property.
They said they were spending too much time and energy convincing folks to sell their homes to them instead of going the traditional real estate agent route.
This is ostensibly great news for real estate agents as they’ll no longer face competition from Zillow itself.
And it could mean even more referrals to real estate agents via Zillow Premier Agent, which connects agents with home sellers.
“Going forward, rather than having to buy a customer’s home to help her sell, we are now simply going to help her move,” the letter read.
This frees up capital, and allows Zillow to further expand its winning IMT segment, which stands for (Internet, Media, and Technology).
Ultimately, they are a website that provides free house values via their extremely popular Zestimate.
That results in greater than 220 million average monthly unique users, who can then be sold other products quickly and relatively easily.
Services like a home loan (via their mortgage marketplace or even Zillow Home Loans), or escrow/title stuff via Zillow Closing Service, or as mentioned a real estate agent via Premier Agent.
All of those things are scalable and based in the virtual world, where it appears Zillow wants to stay.
What Does This Say About iBuying at Large?
The Zillow letter referred to iBuying as a “capital-constrained, risk-heavy solution.”
Yes, purchasing single-family homes at volume, fixing them up, and attempting to quickly resell them can be difficult and uncertain.
For me, this means iBuying is here to stay, and Zillow’s decision is a more personal one. And perhaps driven by Wall Street not being OK with them taking chances in the real estate market.
It also tells me iBuying will experience growing pains as the business model figures itself out.
Somewhat reminiscent of ride sharing companies like Uber and Lyft, which were super cheap before getting pretty expensive.
For the iBuyers, this could mean a lower offer for your home if you decide to sell. Perhaps Zillow was offering too much to sellers to gain market share.
If this happens, it kind of brings you back full circle to the traditional list with an agent model. Because why would you accept significantly less money for your home?
But I do see them gaining market share over time as they get better at what they do. And individual homeowners embrace the idea of a quick, easy sale.
These days, convenience is king, even if costs you a little money. And a company that can make real estate liquid will surely be valuable to many.