It’s fall in Arizona. Colors are changing, the heat is pretty much gone and we are settling into our most enjoyable season of the year. In the world of real estate, we saw national news focusing on Zillow and their Zillow Offers program. I’ve been watching corporate activity in residential real estate over the last six years and will focus this month’s update on the ramifications of news about the Zillow Offers shut down and what that means for the industry and the public.
History of Zillow Offers
Zillow has had a pretty massive footprint in the real estate information and technology world for many years. Relying on syndication from multiple listing services listings across the country, the online platform has been a popular resource for home buyers, home sellers, and curious people looking for information on housing prices and markets. Along the way Zillow created an algorithm to assign values to properties based on statistical data and the Zestimate was born.
Real estate professionals like myself have struggled with Zestimates, which cannot confidently represent an accurate market value for a specific property. The Zestimate’s inability to calculate non-statistical qualities like condition, views, finishes, and features makes accuracy elusive. Nonetheless, the Zestimates were a popular feature of the website. Many homeowners and some Realtors relied on them to gauge market trends.
In April of 2018, Zillow launched a new pilot program called Zillow Offers. This was the tech giant’s entry into the iBuyer realm. iBuyers is the accepted industry term for large, well-funded institutions or organizations that raise capital from investors and purchase residential homes in large quantities in select markets. Metro Phoenix is the preferred playground for these companies and they have a significant footprint in our local markets. No doubt you’ve seen advertisements from them offering to buy your home for cash. These companies start operations in metro Phoenix due to our rising home values and similarity of homes within a specific neighborhood.
Our tendency to build large-scale residential housing neighborhoods with one builder and limited floorplans creates plenty of comparable property sales to establish general value via algorithms. Most of these companies have expanded operations to other markets across the sunbelt, chasing migration and increasing housing values. Their need for accuracy is diminished as they typically charge a pretty hefty convenience fee to offset risk.
Zillow’s move to start buying properties directly from sellers, then resell them for a profit was not a surprise to industry experts like myself. It was only a matter of time before they jumped into the fray.
Impact of Zillow Offers on Gilbert Real Estate
The introduction of iBuyer activity in our local markets has created both opportunities and challenges for local real estate professionals. We like having options for our home sellers that rely on us for solutions and good agents have mastered how to evaluate options from the iBuyers and represent their sellers in the transaction. On the flip side, the iBuyer process can be predatory and Realtors have lost the opportunity to provide counsel and guidance to some sellers that would have had much better results on the open market. In these cases, the seller sells to the company without ever consulting a local expert.
Over the last couple of years, I have had a front row seat to the purchases and sales that iBuyer companies, including Zillow, were participating in. Sometimes their purchase strategies were baffling, sometimes they clearly made money, sometimes they clearly lost money. As margins tightened up for these companies they started to branch out into lending and title/escrow services, looking for additional ways to be profitable and control the process.
After a little over 3 years of actively buying homes directly from sellers, Zillow announced last week that it is shutting down the Zillow Offers program and getting out of the iBuyer business. Although Zillow Group remained extremely profitable in other ventures, it turns out the Zillow Offers program was hemorrhaging money.
Looks like statistical analysis of properties may not be the best approach to obtaining value.
Since the introduction of the iBuyer into our markets, I have felt that the value of skilled, personal, and professional counsel has diminished in the eyes of the public. Zillow’s departure from iBuying confirms that valuing properties requires local expertise and industry experience.
Zillow Offers is out and I’m not sorry to see them go.
I share many of the concerns my colleagues have regarding the institutional purchase of residential real estate. Disruption of market values and increasing market share by companies/institutions are boxing out first time home buyers and average families and at times it has been painful to watch. I feel strongly that the best opportunity for young people to build wealth is through homeownership.
Part, though not all, of our inventory problem that is killing affordability of housing, is due to large players seeking profit in our residential markets. While I’m confident the tried and true method of local expert representation will win out in the long run, for now, we will continue to see big time investors trying to capitalize on residential housing here in metro Phoenix, including Gilbert and Queen Creek.
The bottom line is Phoenix has become the proving ground for real estate innovation. Sometimes that innovation is a benefit to the public and sometimes it is a detriment. Regardless, the best way to understand the current options available to you is to consult with an experienced, trusted, local expert to guide you through them. A good Competitive Market Analysis from a competent Realtor will be of far greater value than a Zestimate every time. A well-counseled buyer will make better decisions and have better results every time.