Holmes on Homes

The implosion of Zillow’s home-buying program

What happened and does this signal an end for iBuyers?

WHAT HAPPENED TO ZILLOW?

October 27th - Zillow announces they are pausing their home purchasing program for the remainder of the year due to a myriad of challenges. They chalked it up to a lack of human-power and said there was a backlog of homes they needed to sell with delays in renovations and prepping the home for sale. Sounded like a bunch of BS at the time and turns out, it really had nothing to do with people power. The announcement was to pause home buying and sell off the remaining 3,800 homes they had in inventory.

If you know me at all, it’s safe to say I was smiling ear to ear. I joke often that Zillow is the bane of my Realtor existence. Maybe it’s the zestimates that are off by a long shot.. maybe it’s the fact they’ve upended our

MLS system.. maybe it’s because they’ve done everything they can to eliminate the Realtor from the home buying & selling process. Yup.. all of those things are the reason I was smiling on October 27th.

The company that wanted to remove human interaction (and Realtor) from the home buying and selling process had to pause because of what.. wait.. what? Did they pause because they needed people to execute the process? Yes, that’s part of it but the aftermath in the last couple of weeks has been extraordinarily fun to watch and eye opening on what really happened.

THE FLAWED ZESTIMATE

It’s no industry secret that Zilllow has been buying and selling homes at a loss since their iBuying program Zillow Offers started years ago. I remember reading stats that they were losing $10,000 per home sale at one point. That was simply transaction numbers only – buy vs. sell. However, if you

factor in what it took to get a seat at the table with the consumer in the first place – advertising dollars, cost of offices, staff, etc the loss was calculated to be $75,000 - $100,000 per home sale. There were many versions on this and articles to read but that was the range of what was on the backend of their losses per sale.

Back to the $10,000 loss per home flip and it doesn’t sound so bad. Capture the market.. perfect the formula.. reduce the losses with the next few thousand homes sold and so on. Soon the $10k loss per flip would be $5k.. then $0.. then profit. It’s a good formula in theory but when you’re buying homes with a flawed algorithm that creates your purchase price, it’s bad from the start and it got really bad as the market changed.

Has anybody ever looked at the zestimate for their home value? Of course, we all have. It’s fun to see what your home is worth at a click of a button but how accurate is it? On Zillow’s own website you could check the accuracy of the zestimate per market area. I remember looking at the Mpls/StP market not long ago and it said that the zestimate was within 10% of the market value 60% of the time.. within 20% of the market value 80% of the time. Whoa.. slow down a minute and read that again. You’re telling me that if the market value of my home is truly $500k – that Zillow would give me a range of $450,000 - $550,000.. and they were right only 60% of the time! Yes, ladies and gentlemen – the zestimate is crap and their own website will give the accuracy ratings. You have to dig deep though, several clicks and a rabbit hole or two and you’ll find it.

Zillow wanted to ramp up convenience in the home selling process. Hats off to them by the way and I applaud them for doing so. But when you create a billion-dollar business model with 10% swings in actual value, you have a recipe for disaster.

As a Realtor, we have access to tax data and recent sales numbers at our fingertips. It was oddly fascinating to watch them lose time and time again. We’d see them purchase a home for $375,000.. list it for $390,000 and end up selling it for $360,000. I would smile every time! In Phoenix, 93% of their homes are being sold at a loss. In the Twin Cities, 65% of their homes are being sold at a loss. They’re in 20 + market centers and none of them are going well. Remember that loss is simply based on purchase vs. resale numbers. Transactional only numbers if you will but don’t forget the marketing budget, office space, staff and hard costs to get there and the losses are massive. Depending on what article you read and what day it came out – their losses for this year alone will tally upwards of $550,000,000.

From October 27th until November 15th Zillow stock has tumbled nearly 40%. They’re currently hovering around $64 per share- down nearly 70% from their high price early this year at nearly $200 per share. Not only are investors the casualty of the zestimate but they’ve announced they’ll lay off 25% of their staff due to this implosion. That’s 2,000 people out of a job and a company that’s lost $20B (that’s billion with a “B”). Well played Zillow.. well played.

PROJECT KETCHUP When Zillow abruptly shut down its home-flipping business, blaming labor and supply shortages it was only a matter of time until the flawed zestimate got the spotlight. Current and former employees described an internal initiative called Project Ketchup that turned the flawed zestimate into a cash-burning extravaganza. That’s not a joke. Project Ketchup was real.

They wanted to catch up (yes, pun intended and how they named it) to their rival Opendoor and capture market share. It turns out when you’re backed by Wall Street cash and building a business, profit isn’t as important as market share. So back to the “we’re losing $10k or so per home flip” conversation a few paragraphs back. The idea was to capture the market, reduce the losses into gains and “boom” you’ve got a viable business and cracked the code.

Depending on what article you read, they were averaging 3,500 home purchases and sales per year. In the beginning of this year, they implemented Project Ketchup and in the 2nd quarter of the year they purchased over 9,000 homes with another 3,000 in the 3rd quarter. In just a few short months, they purchased more than twice as many homes than they had in the previous 2 years combined. So they took a losing formula and decided it was the time to steal market share and went off on a bender of purchases. Insert a few laughs, some eye rolls and an “I told you so” and we’re back to the current day watching the aftermath.

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