The Collapse of Zillow Offers is Not Indicative of Significant Housing Market Trends

Authored by Ruben Izgelov, Co-Founder & Managing Partner of Nationwide Private Lender, We Lend.

Zillow’s Exit From iBuying

Zillow’s departure from the house flipping market has dominated headlines since the real estate platform announced its exit in October 2021. 

Zillow has since confirmed that it is slashing its workforce by 25% and offloading $2.8 billion worth of houses as it abandons the Zillow Offer arm of the business. This abrupt exit has led to extensive commentary from all sections of the real estate industry as to what went wrong and what this tells us about Zillow Offer’s business model of flipping properties at scale.

However, while Zillow’s technology and business strategy proved a costly failure, this is far from representative of the success of other volume buyers operating in today’s real estate market. Institutional investors such as Invesco, KKR, and Pretium continue to acquire residential real estate across the nation, generating excellent returns. Meanwhile, other rival iBuyers (companies using technology to buy real estate from private owners for re-sale directly) have reported strong earnings for the previous quarter.

In other words, Zillow’s woes result from factors specific to Zillow. And while as an industry, it’s important to learn from Zillow’s mistakes, the outlook for real estate investors, institutional buyers, and even rival iBuyers continues to be strong.

Algorithm and Blues – The Factors that Led to Zillow’s Failure  

With average housing prices increased by 19.7% over the last 12 months, Zillow Offer’s business model seemed like a sure bet. Using big data, Zillow automated and scaled the tried and tested house flipping formula beloved by so many small and medium-sized real estate investors. 

But while algorithmic trading has become the default (and highly successful) trading method used across many financial markets, the emotional nature of buying a house has always made it difficult to value and trade real estate like financial assets. 

Or, in other words, is using algorithms instead of local knowledge to value homes and then profitably trade them an inherently risky business? Using additional iBuyers in the market as a model, the answer is a resounding no. 

Opendoor’s shares jumped 16% in early November, off the back of better than expected earnings in Q3, seeing its revenue increase by 91% from Q2. Meanwhile, Offerpad increased YoY gross profit in Q3 of this year by 169%.

The problem, therefore, had more to do with Zillow Offers’ specific strategy versus the iBuyer model. Much of this comes down to Zillow Offer’s aggressiveness in pursuing market share growth. It entered the market in 2018, already on the back foot versus Opendoor, which was founded in 2014. 

This meant that Opendoor had the luxury of time on its side, which enabled it to take a cautious approach, expanding gradually as it refined its algorithms and trading strategy. And the data reflects this. It took seven years for Opendoor to expand into 44 markets, while Zillow grew to the same size in just half the time. 

Not only does that mean that Zillow Offer likely expanded too quickly, but it also lacked sufficient real-world trading experience in many of its markets, which may have fueled overly generous offers.

A telling statistic was the company’s target conversion rate of offers accepted by homeowners. The target was reportedly 50%, yet as many as 74% of offers were accepted over the last few months of the venture. These numbers strongly suggest that Zillow offered above what other instant buyers or house flippers would have paid for the same property, with sellers eagerly taking advantage.

Investors are Thriving in the Buy & Hold Space

Looking beyond iBuyers, other volume home buyers have been investing heavily in portfolios of rental properties. This enables them to acquire inventory at a much faster rate than many iBuyers with their house-flipping business model.

For institutional investors, the strategy of acquiring rental properties has proved profitable, and we’re witnessing extensive interest and growth across the nation. For example, in July, investment heavyweight Blackstone agreed to buy Home Partners of America in a $6 billion deal, signaling a strong future for the market. 

The list goes on. KKR firmly focused on single-family homes after it was reported to invest in a platform called My Community Homes that buys and manages US rental properties. Elsewhere, Invesco Real Estate partnered with Mynd to secure a $5 billion deal to buy 20,000 single-family homes across the nation in the coming years. 

It speaks volumes that some of the largest institutional owners of single-family rentals are now bidding to acquire a slice of Zillow’s inventory. The group includes the nation’s largest rental homeowner, Invitation Homes Inc. This response shows that buying residential real estate offers stability at scale. 

What Does This Mean for the Future? 

Zillow’s unexpected exit from the home-flipping business has undoubtedly caused a stir. And, as other institutional landlords eye a takeover of residential properties, it seems like the Zillow saga is bound to face some more twists and turns before the dust settles. What remains to be seen is what this collapse may mean for Zillow’s image as a reputable housing data platform.

The takeaway is this: Business is booming for firms buying residential assets at scale.

Major investment firms continue to acquire residential real estate to build large portfolios of rental properties across the nation. What’s more, with Zillow retreating from the house flipping business, this will help the likes of Opendoor, Offerpad, and other iBuyers continue with their more cautious approach of expanding their house flipping operations over time.

Author Bio:

Ruben Izgelov is the Co-Founder & Managing Partner of Nationwide Private Lender, We Lend, and a Founding Member of the National Private Lenders Association.

www.welendllc.com