In early November, the Zillow home buying program known as Zillow Offers announced its departure from the iBuying sector. What happened with Zillow Offers? And does this mean iBuying is a thing of the past?
What is an iBuyer?
iBuyers are a relatively new phenomenon in the real estate market. An iBuyer (instant buyer) is a large firm that buys and sells properties quickly. These companies use algorithms and other technology to predict market trends, attempting to purchase multiple properties in emerging markets. Many of these companies will “fix and flip” homes, intending to make a quick profit.
Sellers choose iBuyers because they are convenient. Most iBuyers, including Opendoor, Redfin, and the now-defunct Zillow Offers, presented offers to the sellers within 24 hours. The sellers don’t have to deal with staging, showings, and the hassles of traditional selling methods. While there is some debate over the prices offered by iBuyers, these businesses insist they pay sellers fair market value.
iBuyers represent an easy way for homeowners to sell their properties. However, it makes first-time homeownership much more difficult. In a competitive market, like we’ve seen in 2021, buyers often enter into multi-offer scenarios. Those with little capital for a down payment or FHA loans – that is, most first-time homebuyers – are passed over for the sure-thing iBuyer.
Zillow Offers: The iBuyer That Was
As corporate buyers returned to the real estate market, Zillow devised a plan to throw its hat in the ring. The Zillow home buying program “Zillow Offers” launched in 2018.
The premise was simple: purchase homes at or below market value, do some cosmetic repairs, then sell the house for a small profit. In essence, Zillow Offers became a corporate “fix and flip” operation. Zillow would pay all cash for homes in emerging markets, offering owners an easy and sure-fire way to sell their homes.
What Happened to the Zillow Home Buying Program?
Even before the pandemic hit, critics predicted Zillow Offers wouldn’t last. In early 2020, before the pandemic rocked the real estate market, one report accused Zillow of essentially playing chicken with its competitor Opendoor. The company’s ability to tolerate “sustained unprofitability” meant it could survive an initial growth period – as long as the market stayed solid.
Then, COVID hit, and everything changed.
Two things happened to the real estate market during COVID. Initially, everything came to a screeching halt. Businesses shuttered, people lost their jobs, and home buying and selling slowed to a crawl. Some experts predicted we would see a significant downturn in home sales. And for a few months, they were right.
But then, as businesses shifted to a work-from-home model and the Fed lowered interest rates, people began moving from urban areas to single-family neighborhoods. Buyers desired more space, with outdoor areas to safely escape the rigors of living under a pandemic. Demand soared. Supply waivered. Prices began steadily increasing, and competition was fierce.
The market’s whiplash happened fast. And for a company like Zillow, which relied heavily on algorithms to determine its buying practices, the data was a step behind reality.
Soaring Prices Mean Failure for Zillow Offers
Prices soared in summer 2021. iBuyers dominated the market, paying tens of thousands over asking price, all in cash. Corporate buyers snatched up properties left and right, while individuals and families lost bidding wars over and over. These practices drove up prices, leading to an inflated market. It wasn’t sustainable.
As the market rapidly cooled this fall, Zillow Offers was left with a surplus of homes, now worth about half a billion less than the initial purchase price. This sudden shift led to failure for the Zillow home buying program and massive layoffs.
In a letter to shareholders published on November 2, Zillow explained the drawdown, saying:
Ultimately, we determined that further scaling up Zillow Offers is too risky, too volatile to our earnings and operations, provides too little opportunity for return on equity, and serves too narrow a portion of our customers.
The mistake cost Zillow an estimated $400-$500 million, leading the real estate giant to reduce its workforce by 25% over the next three quarters. As of this writing, Zillow Offers is looking to sell some 7,000 homes to institutional investors. The company will likely take a loss on all of them.
Zillow Offers is Gone, but iBuyers Remain in Real Estate
An interesting trend emerged during the pandemic: Zillow surfing. With little else to do but stay home and dream of better times, the American people took part in an unusual phenomenon. We would spend hours looking at homes for sale on Zillow, all over the nation, taking virtual tours, and dreaming of what it would be like to live inside.
This was a harmless trend, but the shift to virtual homebuying highlighted the iBuyer market. As the market heated up in Q2 of 2020, homeowners began looking for an easy and safe way to sell their homes. Enter the iBuyer.
iBuyers were around long before the pandemic. But COVID seems to have thrust corporate buyers into the mainstream conversation. During the 2020 and 2021 housing boom, iBuyers represented about 1% of all home purchases in the nation, but as high as 6% in some metro areas.
Zillow didn’t survive the most recent real estate boom and slowdown. But other iBuying services like Redfin and Opendoor did. That’s because these companies had algorithms that shifted with the downward market trends faster than Zillow. When the market started to cool in late summer, Zillow’s competitors adjusted. Zillow did not.
In October, statistics showed that Zillow homes in Phoenix were selling for 6.2% less than Zillow paid. Opendoor properties were priced 1% above the purchase price. This discrepancy simply wasn’t sustainable, and Zillow ultimately folded.
Corporate Buyers Are Here to Stay
While Zillow Offers is gone from the iBuying conversation, it’s certainly not the end of corporate buyers. Many corporations, hedge funds, and other investment conglomerates are entering the residential market. That means we can expect iBuyers to continue infiltrating markets across the U.S.
While these corporate buyers currently represent only a small percentage of buyers, it’s enough to make homeownership even more challenging for individual buyers. The bottleneck of supply shortages and increased demand mean homeownership is harder than ever, even without the corporate buyer swooping in and paying cash.
iBuyers aren’t going anywhere. Sellers appreciate the ease at which they can offload their properties. But buyers seem to be on the losing end. Only time will tell how this trend plays out.
What Does This Mean for Real Estate Agents?
Real estate agents aren’t immune from the iBuyer trend.
Buying agents report difficulty getting their buyers – particularly first-time buyers – into affordable homes. It’s an endless cycle of seeing the buyers’ excitement, writing a bid, then getting rejection. Some buyers agents will write multiple offers for each client, only to have those clients decide not to continue pursuing homeownership.
For sellers agents, the iBuyer trend represents a significant challenge. iBuyers essentially cut out the middle man in the selling process – the real estate agent. A traditional selling experience requires staging, listing, marketing, and showings. For some homeowners, an instant offer from an iBuyer means less hassle. But it also means less business for real estate agents.
Some agents are embracing the iBuyer trend. These firms work with local agents to sell the homes after they are refurbished. For those agents, working with an iBuyer can be lucrative.
iBuyers vs. First Time Homebuyers
While iBuyers make life a little easier for home sellers, the influx of cash buyers into the market makes first-time homeownership that much more difficult.
The market is already saturated, even without the iBuyer. There are simply not enough homes to go around. And when sellers accept cash offers from a corporate buyer over a first-time FHA loan, that only complicates the process.
First-time homeowners are feeling discouraged. In today’s market, affordable homes for sale often receive multiple bids. First-time buyers can’t possibly compete with big companies like Opendoor, which make cash offers that the sellers simply can’t refuse. First-time buyers report bidding on five, ten, or more houses, being turned down at every turn. After so much rejection, some buyers are giving up, leaving the housing market even more wide open to iBuyers.
Is iBuying the future of real estate? What are your thoughts? Share your experience or comments with us below!