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Zillow is listing more than half of the homes it owns in its key cities for less than it originally paid for them, an Insider analysis found.
The most striking numbers come from Phoenix, which is also the birthplace of the iBuyer, or “instant buyer” strategy Zillow embraced until putting it on pause last week. The iBuyer division, called Zillow Offers, uses artificial intelligence to help determine the price it would pay for homes and has attracted sellers by allowing them to receive an offer almost immediately and offload their property almost entirely online.
Insider reviewed all the homes for sale by Zillow in the Phoenix metropolitan area as of October 27. Out of 224 homes, 208 — or 92.9% — were priced below what Zillow paid. The potential losses highlight the risks of the iBuyer business, which aims to buy and resell properties for a profit in a roller-coaster market.
After purchasing 5,661 homes across 25 metropolitan areas from Austin to Tucson since the beginning of 2021, Zillow announced on October 17 that it would stop buying homes for the remainder of 2021. Chief Operating Officer Jeremy Wacksman said the pause was because of “an operational backlog for renovations and closings” that he blamed on “a labor- and supply-constrained economy inside a competitive real estate market.”
But Zillow still has to offload its existing inventory — and the high percentage of homes currently being marketed at a loss points to challenges for the property-tech giant.
Of the Phoenix homes Insider reviewed, 36.5% were listed for less than the company first paid for them from the outset. The rest received price cuts in the days and weeks after initially listing for above purchase price.
Only 16 homes were listed above Zillow’s purchase price, and all of them were listed within the last two weeks, suggesting that those units too could fall into the red in coming weeks if Zillow is not able to sell them quickly.
If the company were to sell all of its Phoenix homes right now at their list prices, it would lose $6.3 million dollars. Phoenix is currently Zillow Offers’ second-largest market, after Atlanta.
A spokesperson for Zillow said the company wouldn’t comment on Insider’s findings. Zillow is scheduled to announce its third-quarter earnings on November 2, including performance metrics for its Offers unit.
Phoenix started out as a lucrative epicenter for iBuyers While Zillow became a household name by compiling photo-filled property listings that daydreamers love to browse, the $25 billion firm has promised shareholders that iBuying would be a lucrative new frontier for the company.
It launched its iBuying arm in 2017 to use its vast trove of real-estate data to quickly buy, fix up, and sell homes for a profit. The pool of iBuyers snatching up properties across the US to resell is now teeming with competition, including from the SoftBank-backed Opendoor, the residential brokerage Redfin, and Offerpad, which went public in September.
Zillow Offers’ first two markets were Las Vegas and Phoenix . Phoenix is an epicenter of iBuying because its sunny year-round weather, active local economy, and homogenous housing stock provide reliable data points. Because there are dozens of comparable sales, or comps, across almost identical newly built subdivisions, the iBuyers’ algorithms can usually predict a fair purchase price. As a result, iBuyers thrived, picking up 7% market share as of 2019.
Phoenix prices have skyrocketed, making iBuying difficult Phoenix is now the worst-performing of Zillow’s five largest markets. This comes as Phoenix home price appreciation for September is the highest in the nation, with a 33% price increase through August, compared to a 19.8% increase nationwide, according to the S&P CoreLogic Case-Shiller Indices.
Zillow’s median loss per home in Phoenix is almost $29,000. According to iBuying analyst Mike DelPrete, Zillow’s woes aren’t shared by its competitors, with the median Opendoor home in Phoenix priced $4,400 above what the company paid for it.
Why did Zillow stop buying homes? The company reported that it purchased 5,661 homes in the first half of 2021 and sold 4,051. In the second quarter of this year alone, Zillow bought 3,805 homes and sold more than 2,000 homes.
Zillow needs manual laborers to clean, repaint, and do light renovations to homes it buys before putting them back on the market. The company cited labor and supply shortages, as well as a backlog of homes that need to be sold, as reasons for halting its iBuying program.
But many suggested there were other motives at play, such as a faulty algorithm for home purchasing, as other iBuyers like Opendoor continue to buy homes in the face of the same environmental challenges.