After losing $380 million, Zillow is closing its iBuying business arm and laying off 25% of its workers. What does this mean for homebuyers?
Zillow made headlines recently after losing $380 million, laying off 25% of its employees, and closing its iBuying business.
What most regular home sellers and buyers are wondering is how the news affects the housing market, and more specifically, their real estate goals.
The good news: it probably doesn't.
IBuyers – companies that buy homes in cash from individuals, planning to sell them for a profit soon after – have grown in popularity in the past few years.
Zillow launched its iBuying platform, called Zillow Offers, in Phoenix in 2018 and expanded to many U.S. cities in the years that followed.
The program offered a way for homeowners to sell with "no surprises" and without fixing up the home, according to the Zillow Offers site. Now that the service is gone, buyers and sellers may wonder if Zillow exited the iBuyer game because it foresees a housing downturn.
That does not appear to be the reason at all.
Data suggests that Zillow was paying a premium for homes during times of peak demand, not only seasonally but historically.
CNN reports that the company purchased 3,805 homes in the second quarter – the months of April, May, and June, some of the hottest homebuying months – in hopes of selling them for higher prices later. Additionally, housing supply averaged around 2.5 months in the second quarter, according to the National Association of REALTORS®, some of the lowest inventory levels in history.
Related: Housing Market Forecast 2022: Housing Authorities Predict Near-10% Price Gains
Even if Zillow was paying market prices for homes, there was a good chance prices would cool toward the end of the year when they could offload them.
But it appears Zillow didn't pay market price – they paid above market price.
A separate CNN article describes Zillow paying $616,700 for a home purchased for $360,000 two years earlier. Home prices had risen, said the couple who sold, but not this much.
Looking beyond anecdotal cases, data seems to confirm that Zillow was overpaying for properties. Real estate tech strategist Mike Delprete calculates that Zillow is selling Phoenix properties at 6.2% below what it paid, prices at which it would lose $29,000 per house sold.
"Zillow got outside of their core competency and made an expensive mistake," says Phil Ganz, a senior loan officer at Fairway Independent Mortgage Corporation, which owns Home.com. "Home estimating and core buying are completely different."
Brian Coutu, a mortgage advisor with Fairway, added that other miscalculations were also at play.
"Zillow underestimated supply chain and labor issues when buying these homes," he says. "My understanding is that many of these homes needed 'soft remodels,' but they had a hard time finding contractors to do the work in a timely manner."
So no, the market is not going under. As the old adage goes, you make money when you buy, not when you sell.
The iBuying idea was launched in 2014 by a company called Opendoor. Though the model has been around for a while, it only accounts for 1% of nationwide home sales, says CNN.
And Zillow was only a slice of that 1%.
As a home seller, it may cause anxiety that a major buyer has exited the market. Won't that cause demand to fall?
Even without Zillow buying homes, sellers still have plenty of opportunities to sell, with individual buyers and investors lined up for the chance to buy.
Zillow's exit likely won't hurt buyers, but it probably won't help them either.
The company did not pose much of a threat as a competitive buyer. Its system was designed to buy homes before they hit the market. While fewer homes made it to market, a buyer was unlikely to go up against Zillow on a home that was already listed for sale.
Unfortunately, there's not much benefit to buyers, either.
There won't be a Zillow garage sale where you can buy the homes they need to offload. The company plans to sell its remaining housing stock to investors, not individuals, according to Fortune.
So as a homebuyer, you likely won't notice Zillow's departure from iBuying.
Home sellers, and even buyers looking into the future, might fear that iBuying is dead.
The model is attractive: sell your home quickly for cash with no buyers marching through your home.
The good news is that there are plenty of remaining companies in the iBuying space that appear to be in it for the long haul. Zillow's exit is likely just "survival of the fittest" playing out.
Opendoor, mentioned earlier, is the biggest iBuyer platform currently. Redfin runs its RedfinNow program, which reported that it is selling homes at 101.1% of forecasted prices, signaling sustainability. Other platforms like Offerpad and eXP Realty's Express Offers are still in the game.
For those who want the convenience and speed of working with iBuyers, it appears the movement is just getting started.
"IBuying will be bigger in 2022 than in 2021," Ganz predicted.
Those who are nervous about what Zillow's exit means for the housing market, or their situation, shouldn't be. It is big news for the company and many in the industry, but not so much for the typical buyer or seller.
Most will move along with their homebuying or selling plans as normal, with nearly all the options they had before.