Updated November 21, 2021 with final sale price.
Perhaps the biggest news in the real estate industry since we began testing the NoDiscount® model in 2003 came six days ago when the home valuation Goliath Zillow announced the company will be exiting the instant home buying business. Between 2011 and 2021 Zillow amassed millions of LIKES and FOLLOWERS for its Zestimates on over 100 million homes in the United States.
“The unpredictability in forecasting home prices far exceeds what we anticipated and continuing to scale Zillow Offers would result in too much earnings and balance-sheet volatility,” Zillow CEO Rich Barton said in a statement.
The company lost over $381 million on the business in the third quarter, accelerating the overall business net loss to $169 million.
Out of respect for our colleaque in the industry it would not be appropriate to echo the snarks that have gone viral regarding Zillow’s valuation algorithm and business model. As with any business innovation the less informed or misinformed are quick to scream SCAM without empathizing the years invested on trial and error and millions to develop SOPs and product positioning in a most competitive market. In its attempt to command marketshare and become the de facto for everything real estate and in particular; the place for market values — Zillow strained its muscles and injured many investors — who believed in the Zestimate product.
Real estate professionals with experience in the industry have known all along that real estate values are determined by humans. Real estate was never and could never be valued by a single number displayed on computer screens. Just as stock and crypto prices can fluctuate 5-100% in a day’s time, real estate has a value range. Zillow’s attempt to compress the human desires into binaries has proven there is more to buying low and selling high than placing a listing on the market.
We start with a recent case study:
Property located at 18** Carnelian LN, Eagan, MN
Market Values: $306,240 – $397,760
AVM: $352,000
A quick search of public record confirms the property was acquired by Zillow Hms Prop A De Statutory on June 11, 2021 for $328,300. Thirteen days later Zillow relisted said property through a traditional real estate company at $355,000.
A pricing history reveals a series of discounts:
June 24, 2021 LISTING PRICE $355,000
July 9, 2021 discounted to $349,900
July 24, 2021 discounted to $339,000
August 8, 2021 discounted to $329,900
August 20, 2021 discounted to $326,300
September 3, 2021 discounted to 314.900
September 17, 2021 discounted to $309.900
September 24, 2021 discounted to $304.900
October 5, 2021 SOLD under contract.
UPDATED NOVEMBER 21, 2021 — Sold Price Nov. 12, 2021 $296,100 with Seller Contribution $6,600 ( $289,500 )
_______________________________________________________________
UPDATED: NOVEMBER 21, 2021 — Zillow lost $38,800 ( excluding real estate commission + repairs + holding cost + loan interest ) which could be an additional $15,000 to $25,000. POTENTIALLY A NEGATIVE $53,800 TO $63,800.
In all likelihood Zillow assumed the company could make a purchase for $328,300, spruce up appeal, and relist for $355,000. Had Zillow’s optimism realized the property could have profited $26,700 gross before commission and cost of renovation. Instead the reverse happened and the company today stands to lose at least $23,400 ( $328,300 – $304,900 = $23,400 ). Discount after discount the above property like many Zillow properties across the US did not appeal to buyers. In this scenario a total of seven discounts were taken over a 12 week period and yet without success. It should be noted that the Zillow mistake occurred during one of the hottest real estate market in US history. Further, the above figures exclude real estate commissions to be paid by Zillow, thus final loss could be significantly higher.
We must be mindful that this is one case study with many more across the country. In Phoenix alone, Zillow had 250 listings at the end of October with a median price of 6.2%, or $29,000 less than what they were bought for, according to research from Mike DelPrete – Real Estate Tech Strategist (mikedp.com).
It wasn’t due to Zillow’s algorithm that single handedly ended the Z’s buying business model but the difficulty for the company to create demand for properties and generate offers. Analysts and critics of Zillow completely ignored a 90-day FHA title seasoning requirement which disqualified homebuyers from FHA financing. According to FHA FY 2020 report, FHA insurance on purchase transaction forward mortgages served 817,847 homebuyers, 83.1 percent of whom were first-time homebuyers. On average the current FHA rule disqualifies 13.6% of buyers from home purchases and in some areas as high as 40%. This factor works against Zillow’s business model of buying and reselling properties in 2-3 weeks.
Hundreds of real estate brokers and investors who flipped homes using NoDiscount.com between 2003-2005 understood the FHA restriction better than anyone. Zillow may have overlooked.
When attempting to assign a NoDiscount® score to randomly selected Zillow home listings we identified some of the lowest scores in the industry. A low NoDiscount® score has the highest probabilty of selling at a discount. This fact coupled with our observation that Zillow’s practice of listing with traditionally high priced real estate brokers created the straw which broke the camel’s back.
SO WHAT CAN WE LEARN FROM ZILLOW’S MISTAKE?
There are three:
1) The $300 million lesson the industry should have learned and consumers should take note of is that emotions, wants, and desires play a significant role in what buyers pay for properties. For example the 90-day FHA financing restriction resulted in fewer buyers and fewer offers. 2) The way buyers buy homes today has changed and selling properties the same way from 10 or 20 years ago will force properties to sell at discounts. 3) Zillow typically listed with traditionally high cost Realtors which leaves little profit to offer incentives or assistance for buyers to make offers.
Zillow is not to be pointed for its business model as many industry players were equally involved and responsible for Z’s mistake. As detailed in our WE’RE TAKING THE SCARY OUT OF REAL ESTATE report and book HOW TO BUY OR SELL YOUR HOME IN 1 MINUTE it’s not possible to change the real estate industry without also changing the ecosystem which created the circumstances for Zillow’s mistake.
The real estate industry owes Zillow a well-earned recognition for demonstrating that technology and artificial intelligence with age old inefficiencies cannot sell properties. Zillow gifted the industry the perfect case study illustrating that taking discounts is not the way to sell properties. Alas, discount after discount forced Zillow out of the home buying business because not just Zillow but many agents who represented Zillow played a role in the systematic and synergistic cause of selling at discounts.
Final Thought: A typical real estate owner who sells only one or two properties in a lifetime can benefit by learning from Zillow’s mistake. It is figuratively optimistic to assume that buyers will pay for the same or more for like properties in the same area but it is literally impossible because each buyer in every market brings with them unique circumstances, wants, and needs. With a hot real estate market and lowest interest rate in history Zillow was unable to capitalize using its latest high tech tools. The company purchased and sold nearly 20,000 properties through traditionally high cost ways of selling real estate which took away incentives to generate more offers, higher offers, and faster offers. The discounts killed Zillow’s home buying business.
Reference:
Zillow’s home-buying debacle shows how hard it is to use AI to value real estate – CNN
Zillow’s Growth Prospects Dim as It Exits Home Flipping – WSJ
What does Zillow’s exit tell us about the health of the iBuying market? | TechCrunch
Zillow exits home deals; it had a small presence in Twin Cities real estate – StarTribune.com
Zillow Statistics from Ipropertymanagement
https://www.hud.gov/sites/dfiles/Housing/documents/2020FHAAnnualReportMMIFund.pdf