Last Monday, Zillow’s iBuying program, Zillow Offers, announced they would take a break from buying homes through the end of 2021.
The company explained that they are still working through a backlog of renovations and repairs from homes they have already purchased, and are therefore hitting the pause button on new acquisitions.
Zillow Offers buys homes directly from sellers (often by making an instant cash offer), does minor renovations and repairs, and then resells the property a few months later—ideally for a profit.
Zillow has repeatedly stated its intent to lead the iBuying space, and prior to this news, it appeared they were poised to greatly expand their iBuying program. In Q2 2021 it bought 3,805 homes, which was more than double its number of purchases in the previous quarter.
But just like pretty much everyone else in the real estate industry, Zillow is running into problems with labor shortages, high material costs, and constraints on the real estate services like appraisals. Zillow’s Chief Operating Officer Jeremy Washman, released a statement in conjunction with the larger announcement saying “we’re operating with a labor-and supply-constrained economy inside a competitive real estate market, especially in the construction, renovation, and closing spaces.”
It appears no one is immune from the challenges of today’s economy and housing market. Even Zillow, with all its efficiencies of scale and spending power can’t run an effective house-flipping business these days. A lot of real estate agents and investors are probably reveling in the news of Zillow’s struggles.
The draw of iBuying
iBuying has long drawn the ire of real estate agents and investors alike. For generations, investors and agents have been using their knowledge of local markets, personal networks, and hustle to find the best deals. Oftentimes this involves finding “motivated sellers” or making offers on off-market properties.
But iBuying makes that space far more competitive. It’s much harder to find a seller willing to sell for under-market value when they can go online and get an instant cash offer within minutes. Even if you manage to find an off-market deal, it’s likely the seller will seek a second offer from an iBuyer and choose the better deal. By all accounts, Zillow is making very competitive offers and has a simple closing process. As such, iBuying poses a legitimate risk to investors who rely on these strategies to find deals.
But in practice, that threat is still a long way off. Even though Zillow bought 3,805 homes in Q2 2021, that is a small fraction of total home sales. In Q2 2021, approximately 1.99M homes were sold, meaning Zillow’s share of total housing purchases was 0.19% of all purchases. In terms of investor purchases, there were an estimated 300,000 homes purchased by investors in Q2 2021 and Zillow’s share was 1.3% of those.
So while the idea of iBuying is concerning, and does warrant attention from the investor community going forward, Zillow and other iBuying platforms like OfferPad and Redfin are not yet commanding a significant portion of the home sale volume.
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Furthermore, according to HousingWire, Zillow is taking a loss on Zillow Offers. Their analysis of Zillow’s earning statements shows that while the iBuying program produced a whopping $772 Million in revenue, the program actually posted a $59M loss in Q2.
What’s an investor to do?
It seems Zillow still has a lot to figure out when it comes to being an iBuyer. They clearly haven’t nailed down the operational side of the business, which as all house flippers know is the actual hard part. I wouldn’t count on them throwing in the towel entirely. Zillow has repeatedly stated their intent to focus on iBuying, and a few quarters of setbacks during an unusual economic period is unlikely to deter the real estate giant.
But even with what feels like an intimidating threat, independent investors still have major advantages over the big players. We’re more nimble. We know our markets better than any algorithm ever could (and this is coming from a data guy!). We can build strong networks and great teams. And most importantly, we can work harder for anyone deal that Zillow ever will. So no matter how big Zillow or any other iBuyer gets, remember that you possess advantages they’ll never be able to compete with.