- Zillow put home buying on hold for the remainder of 2021, which sparked questions about his flipping business.
- We looked at 224 Phoenix homes Zillow sold and found that they were 92.9% less than they paid for.
- The losses could point to bigger problems for one of the biggest players in the hot “iBuying” area.
According to an inside analysis, Zillow lists more than half of the homes it owns in its main cities for less than originally paid for.
The most noticeable numbers come from Phoenix, the birthplace of the iBuyer or “instant buyer” strategy that Zillow pursued until she took a break last week. The iBuyer division called Zillow Offers uses artificial intelligence to determine the price it would pay for homes and has attracted sellers by allowing them to get a quote almost instantly and sell their property almost entirely online.
Insider reviewed all of Zillow’s homes for sale in the Phoenix metropolitan area as of October 27. Of 224 homes, 208 – or 92.9% – were below the price Zillow paid. The potential losses highlight the risks of the iBuyer business, which aims to buy and resell properties for profit in a roller coaster market.
After buying 5,661 homes in 25 metropolitan areas from Austin to Tucson since early 2021, Zillow announced on October 17 that it would stop buying homes for the remainder of 2021. Chief Operating Officer Jeremy Wacksman said the hiatus was due to “an operational backlog” for renovations and closings, “which he attributed to” a labor and supply constrained economy within a competitive real estate market “.
But Zillow has yet to outsource its existing inventory – and the high percentage of homes currently being marketed at a loss suggests challenges for the real estate tech giant.
Of the insider-reviewed Phoenix homes, 36.5% were initially listed for less than the company first paid for it. The remainder received price reductions for the above purchase price in the days and weeks after the initial listing.
Only 16 homes were listed above Zillow’s purchase price, and all of them were listed within the last two weeks, suggesting that if Zillow can’t sell them quickly, those units could also fall into the red in the coming weeks.
Now, if the company sold all of its Phoenix homes at list prices, it would lose $ 6.3 million. Phoenix is currently Zillow Offers’ second largest store after Atlanta.
A spokesman for Zillow said the company would not comment on Insider’s findings. Zillow is expected to announce third quarter results, including performance metrics for its offering unit, on November 2nd.
Phoenix started out as a lucrative epicenter for iBuyers
While Zillow made a household name for creating photo-filled real estate listings that daydreamers love to browse, the $ 25 billion company has promised shareholders that iBuying would represent a lucrative new frontier for the company.
The company launched its iBuying arm in 2017 to leverage its vast pool of real estate data to quickly buy, repair, and sell homes for a profit. The pool of iBuyers getting real estate in the United States for resale is now teeming with competition, including SoftBank-backed Opendoor, residential real estate broker Redfin and Offerpad, which went public in September.
Zillow Offers’ first two markets were Las Vegas and Phoenix. Phoenix is an epicenter of iBuying as its year-round sunny weather, active local economy, and homogeneous housing stock provide reliable data points. Since there are dozens of comparable sales or comps in almost identical newly built subdivisions, the iBuyers’ algorithms can usually predict a fair purchase price. As a result, iBuyers flourished, gaining a 7% market share as of 2019.
Phoenix prices have skyrocketed, making iBuying difficult
Phoenix is now the weakest of Zillow’s five largest markets. This is because Phoenix’s September house price increase is the highest in the country, with prices increasing 33% through August, compared with a nationwide increase of 19.8%, according to the S&P CoreLogic Case-Shiller indices.
Zillow’s average loss per home in Phoenix is nearly $ 29,000. According to iBuying analyst Mike DelPrete, Zillow’s problems are not shared by its competitors as the average open-door home in Phoenix is $ 4,400 above the price the company paid for it.
Why did Zillow stop buying houses?
The company reported that it bought 5,661 homes and sold 4,051 in the first half of 2021. In the second quarter of this year alone, Zillow bought 3,805 homes and sold more than 2,000 homes.
Zillow needs workers to clean, repaint, and lightly renovate the houses it has bought before putting them back on the market. The company cited labor and supply shortages as well as a backlog of houses to be sold as reasons for discontinuing its iBuying program.
However, many suspected that other motives were at play, such as a flawed house buying algorithm as other iBuyers like Opendoor continue to buy houses in the face of the same environmental challenges.