Zillow Offers: Flipped it, then Reversed it

It’s all over now,  gone faster than a reasonably priced home when it hits the MLS.  For a while this year,  it looked as if Zillow and it’s ibuyer program Zillow Offers were flipping awesome.  They were number one in 35 markets across the country, buying nearly 10,000 homes in Q3.  But, two weeks ago, Zillow “paused” buying homes through that iBuyer program, and this week Zillow closed its iBuyer’s digital doors.  They laid off 25% of their workforce overnight and shuttered the website and api. While I feel terrible for the individuals who lost their jobs, I am curious. What happened? And did Zillow leadership really lose their direction?

HGTV has like 47,000 shows about flipping homes.  Buy low, improve, sell high.  They make it look fun- like easy money.  But those of you in the trenches know the reality.  It’s really hard work, and real estate is hard.   Zillow went to the school of hard knocks  to find out.  That school tuition cost roughly $1 Billion.  

Last month Zillow was buying more homes than any other iBuyer program by a significant margin. In fact, they were accelerating the number of homes they purchased while second place Opendoor and third place Offerpad  were slowing down theirpurchases. They were also reducing the average price they paid, while Zillow continued to accelerate the prices they paid.  In hindsight – Zillow had it wrong.  

According to real estate tech strategist Mike DelPetre, “ In Q3 of 2021 — the three months that broke the business — Zillow purchased more houses than in the previous 18 months combined.”

In Q3, they seemed to have  a mandate to buy more, rather than to buy correctly. By contrast, Opendoor and Offerpad shifted with the market.

Looking back, Zillow’s playbook was the opposite of what Blackstone did during the housing recession.  Blackstone was ruthless in its search of purchasing a very specific type of property, at a specific price and one that fit their long term model.  That strategy has paid huge dividends for Blackstone.

Zillow seems to have deviated from what worked. By a long shot.  We now know Zillow was overpaying for homes, and selling them for less than they paid. Sort of a reverse flip.  

Anecdotally, I learned yesterday of a Zillow employee who sold her home to Zillow Offers at a very high price.  She was very pleased to get so much more than the current market price. Fast forward to today and the same house is now for sale for $20k under what she sold the home for – and then she lost her job.  Is that sad and ironic or what?

Zillow really got it’s badonkadonk kicked.  But it made glaring mistakes that are clear.  I’m betting on Opendoor to make waves in the wake of the demise of Zillow Offers.