It all started with the Zestimate. Launched in 2006, Zillow created an algorithm that they believed accurately predicted a home’s value based on comparable neighborhood sales. In the next few years, millions of people used Zillow as a resource for real estate data. In 2018, Zillow took a gamble that their captive audience would be willing to hire them as real estate agents and started an iBuying program or instant buyer program. The program used the algorithm to determine a price that the company could pay for a home and still make money reselling it. They paid homeowners cash and offered a quick close with low fees.
Zillow wasn’t the only one interested in this model. They found multiple competitors including Opendoor and Offerpad. To capture more market share, they paid more money for properties. So much more money that at Zillow’s recent shareholder’s meeting they predicted losses of $500 million in the second half of the year. Some other reports indicate their total losses will exceed $1 billion. At the same shareholder’s meeting, Zillow announced the end of their iBuyer program. “We’ve determined 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 co-founder and CEO Rich Barton said Nov. 2 in the release.
Some other interesting information included in the reports is that the average iBuyer pays 7% in fees, down significantly from 11% in 2020. The average commission charged by a traditional real estate agent is less than 6%. Also, according to Redfin, iBuyers have never accounted for more than 1% of home sales in the US. Time will tell if the competitors left in the market can capture more market share.
So what does this mean for the Colorado market? For one, Zillow currently has 180 homes on the market in Colorado Springs, Denver, and Fort Collins. More importantly, though, it proves algorithms cannot properly price homes on a large scale. Unless there is a company willing to lose money doing it, your real estate agent and their ability to appropriately price and successfully market your home is invaluable.
This story serves as a cautionary tale for Zillow’s surviving competitors. The closing of Zillow’s iBuyer program suggests that for iBuyer programs to succeed, they must prove their value while paying a fair price for properties. If these instant buyer programs can only attract sellers if they grossly overpay, they will never settle on a sustainable model.