As I Predicted, The ibuying Business Kinda Sucks - At Least For Zillow

As I Predicted, The ibuying Business Kinda Sucks - At Least For Zillow
Zillow fumbled the ibuying business badly

A few days ago Zillow rocked the real estate world when they announced that they were exiting the ibuying business and firing about 25% of their employees. It would appear that this venture lost them $422 MM in the third quarter. In a nutshell they ended up paying more for the homes that they bought than they believe they could now sell them for.

Of course, now that the final chapter has been written, all the geniuses are popping out of the woodwork claiming that they knew ibuying was a bad idea for Zillow all along. Well, I just want you to know that this genius actually did see it coming. Back in February 2017 when I first wrote about all the venture capital pouring into ibuying I suggested that it was quite possible that these players might find themselves victims of adverse selection. Then again in August 2019 I pointed out, even then, that Zillow was losing their ass on ibuying.

But I digress. What I really wanted to point out was some of the other takeaways from this recent development. For starters, keep in mind that Zillow has been basing their offers on their Zestimate, along with comparable homes nearby and facts the sellers share with Zillow. So is this basically an admission that their Zestimate sucks? I’ll spare you all the posts I’ve written on that topic but this article in The Real Deal suggests that the problem really was their Zestimate: What happened at Zillow? “Drinking your own Kool-Aid,” for one.

However, based upon their public statement I think Zillow wants us to believe that the Zestimate is not flawed for estimating current value. What they seem to want us to believe is that they ran into problems zestimating what the homes would sell for in the future. Hmmm. I’m not buying that story.

So what does this mean for other ibuyers? Well, according to an Inman article about how much ibuyers are paying for homes, OpenDoor has actually been paying more for homes than Zillow so that can’t be good.

ibuyer purchase prices for homes

Opendoor has recently been paying more for homes than Zillow.

On the other hand that same article shows Opendoor (and Offerpad) consistently achieving significantly greater appreciation on their home purchases than Zillow. Is this despite paying more for their homes? If so that would suggest that Zillow had serious execution issues and these other players can somehow pay more for homes and still come out ahead.

ibuyer price appreciation over time

Other ibuyers have been able to consistently achieve better price appreciation on their home purchases than Zillow

The other ibuyer in this game, and the only one operating in Chicago (why do they all avoid Chicago?) right now, is Redfin. I actually contacted them to find out what they would pay for my home a few months ago. Their cash offer was probably at least $200K below what I think my home should sell for and that’s before the fees. But they also showed me how they could sell my home with one of their brokers and net me, after all fees, $160K more. In other words, if I really wanted the convenience of a cash offer they would be more than happy to accommodate that but I was going to pay through the nose for that convenience.

So I’m thinking Redfin is in the ibuying business to skim off the folks that are either dumb enough or desperate enough to take their cash offers and then use the discussion to try to get the traditional listing from everyone else. That’s actually a pretty clever way for them to get their foot in the door.

Of course, in my own case I would sell my home myself, not just because I’m a realtor but because Redfin’s estimate of the selling price through a traditional listing was about $100K lower than I think I can get. I’ve always suspected those guys are looking for a quick sale.

#RealEstate #HomeSelling #iBuyers #ZillowOffers

Gary Lucido is the President of Lucid Realty, the Chicago area’s full service real estate brokerage that offers home buyer rebates and discount commissions. If you want to keep up to date on the Chicago real estate market or get an insider’s view of the seamy underbelly of the real estate industry you can Subscribe to Getting Real by Email using the form below. Please be sure to verify your email address when you receive the verification notice.

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