On November 3rd Zillow announced that it would close its' Zillow Offers group. Zillow is closing down their offers program following loses in the third quarter of 2021 of $380 million. Zillow has announced layoffs of 2,000 employees as a result of the division closure.
Zillow offers is an example of an iBuyer program. IBuyer programs are "instant" or technology enabled buyers who purchase homes from consumers without placing it on the open market for price discovery. Zillow Offers purchased residential homes based on the popular "Zestimate" pricing algorithm. Homeowners are familiar with zestimates popping up telling them what Zillow thinks their home is worth. When a home was purchased through Zillow Offers; Zillow charged consumers a fee of about 7.5% of the purchase price.The iBuyer then "flips" the purchased home back on the market attempting to sell it at a profit. Zillow's business model failed to produce a profit.
Where Did Zillow Go Wrong?
Zillow's Zestimate applies market level pricing to a single home. This method works well if you are purchasing a product that is very uniform. Think about products you can substitute for another with little change in its' value. If I purchase 1,000 kernels of feed corn; one kernel isn't remarkable from another. You can easily substitute one for another. Residential real estate is a little different. A single buyer may have a strong preference for your home versus the home directly across the street for lots of incredibly personal reasons.