Zillow first launched about 15 years ago as a company that connected real estate agents with potential clients. It’s primarily known for publishing online real estate listings and “Zestimate” home price estimates. In 2019, Zillow introduced Offers, a high-tech home-flipping business. Utilizing a technology called iBuying, Zillow used pricing algorithms to purchase homes from their owners. The homeowners would sell to Zillow as-is and for cash, streamlining the traditional sales and closing process. Zillow would hire local contractors to make light repairs and renovations to the home and then put the property back on the market. Competing companies Opendoor, Redfin, and Offerpad have a similar online homebuying model.
Zillow recently announced that it’s shutting down Offers. Offers was supposed to streamline and revolutionize the homebuying process. But an unpredictable housing market, coupled with a tough supply chain and problematic sales algorithm, led to the downfall of this ambitious business. Zillow’s announcement raises questions about the iBuying business model, as well as red flags for similar companies like Opendoor, Redfin, and Offerpad.
In mid-October, Zillow issued a statement that it wouldn’t be making any new offers on homes for the rest of 2021. The company was struggling to find local contractors to work on the properties already under contract. Then, in early November, Zillow announced that it was looking to offload approximately 7,000 homes for $2.8B to institutional investors. Zillow will soon be closing down Offers altogether; the company is reducing its workforce by 25% and taking a writedown of as much as $265M in the final quarter of 2021. Zillow’s third-quarter results showed that the company lost more than $380M in Offers’ house flipping operation.
What caused these issues? Zillow executives blame the unpredictability of the housing market, in addition to tight labor and supply markets. For a home-flipping business to be profitable, it must sell a home for more than its purchase price and have enough remaining funds to cover other costs like repairs, fees, and sales/marketing expenses. Earlier in the year, Zillow tweaked its purchasing algorithms to make more aggressive offers, which led the company to overpay for homes, just as the US housing market began to cool. Zillow CEO Rich Barton said that Zillow’s ultimate failure was being unable to predict housing prices. The company is also dealing with labor and supply-chain shortages as a result of the Covid-19 pandemic. Due to the capacity issues, the company quickly developed a backlog of renovations and closings.
In addition to its economic woes, Zillow may soon be facing a major lawsuit. A San Diego law firm recently announced that it is building a class action lawsuit against Zillow. The suit alleges that Zillow’s top executives violated the Securities Exchange Act by making false and misleading statements to investors about Zillow Offers’ operations.
Zillow’s announcement about Offers makes it clear that the company misjudged the housing market. It may also raise questions for other iBuying companies who were looking to disrupt the traditional process of buying and selling homes. Perhaps the lesson learned here is that “traditional” doesn’t necessarily mean “broken,” and that it’s beneficial to work with local firms and companies who are more familiar with the local market and construction chains. If you have additional questions about Offers, or need help with a real estate law issue, please reach out to Brian M. Douglas & Associates at (770) 933-9009 or via our online contact page. We’d be happy to help.