Last Monday, Zillow’s iBuying program, Zillow Offers, announced that they would be taking a break from buying a home by the end of 2021.
The company explained that they are working through a backlog of renovations and repairs from homes they have already purchased, and are therefore hitting the break button on new acquisitions.
Zillow offers buying homes directly from sellers (often offering instant cash), making minor renovations and repairs, and then reselling the property a few months later – ideally for profit.
Zillow has repeatedly stated his intention to lead the iBuying space, and prior to this news, they were ready to greatly expand their iBuying program. It bought 3,805 homes in the second quarter of 2021, more than double the number it bought in the previous quarter.
But like everyone else in the real estate industry, Zillow also suffers from labor shortages, high material costs and limitations in real estate services such as valuation. Jeremy Washman, Zillow’s chief operating officer, issued a statement in conjunction with the larger announcement that “we are working with a labor-and-supply-limited economy in a competitive real estate market, especially between construction, renovation and closed spaces.”
It seems that no one is free from the challenges of today’s economy and housing market. Even Zillow, with all the skill of scale and ability to spend, cannot run an effective house-flipping business nowadays. Many real estate agents and investors are probably rejoicing at the news of Zillow’s struggle.
iBuying has long attracted the wrath of real estate agents and investors alike. Over the generations, investors and agents have continued to find the best deals using their knowledge of the local market, personal networks and rush. Often this involves finding “inspired sellers” or offering off-market properties.
But iBuying makes that space much more competitive. When they can go online and get an instant cash offer in minutes, it is much harder to find a seller willing to sell at a lower price in the market. Even if you manage to find an off-market deal, the seller will probably ask for a second offer from an iBuyer and choose a better deal. By all accounts, Zillow is offering very competitive offers and has an easy closing process. As such, iBuying creates a legitimate risk for investors who rely on these strategies to find deals.
But in reality, that threat is still far away. Although Zillow bought 3,805 homes in Q2 2021, this is a small fraction of total home sales. In Q2 2021, approximately 1.99M homes were sold, meaning Zillow’s share in total housing purchases was 0.19% of all purchases. In terms of investor purchases, an estimated 300,000 homes were purchased by investors in the second quarter of 2021, and Zillow’s share was 1.3% of that.
So while the concept of iBuying is worrisome, and may draw attention from the investor community, other iBuying platforms like Zillow and OfferPad and Redfin still do not control a significant portion of home sales.
No matter your investment experience or where you want to invest, contact a local agent who knows the inside and outside of the market and can evaluate the property from an investor’s perspective. Here’s how BiggerPocket’s Agent Marketplace works:
- Choose your market
- Share your investment criteria
- Match the agent!
In addition, According to Housingware, Zillow Zillow is taking a loss on the offer. Their analysis of Zillow’s earnings statement shows that while the iBuying program generated $ 772 million in revenue, the program actually posted a $ 59M loss in Q2.
What should an investor do?
Zillow still seems to have a lot to think about when it comes to being an iBuyer. They obviously didn’t stick to the functional side of the business, which all home flippers know is the real hard part. I wouldn’t rely on throwing them towels entirely. Zillow has repeatedly stated their intention to focus on iBuying, and a few quarters of the push in an unusual economic period is unlikely to deter the real estate giant.
But even if it seems like a terrible threat, independent investors still have big advantages over the big players. We are more clever. We know our markets better than any algorithm (and it’s coming from a data guy!) We can build strong networks and great teams. And most importantly, we can work hard for anyone that Jillo will ever do. So no matter how big Zillow or any other iBuyer is, remember that you have the advantage that they will never be able to compete.