In a stunning turnaround, Zillow recently announced it would be getting out of the iBuying business and will shut down its Zillow Offers division. Roughly 25% or 2,000 of its staff will be let go as the company takes a $540 million write-off.
“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,” said Rich Barton, Zillow's co-founder and CEO.
In other words, even Zillow can't trust its Zestimates!
Haven't Trusted Zillow For A Long Time Already
If you've been reading Financial Samurai since 2011, you may have read my post, You Can't Trust Zillow And Its Estimates. Back then, I was befuddled by its estimates for my house. They seemed to jump between 7% – 25% on a monthly basis.
As someone who was fighting to get his property taxes lowered after the Global Financial Crisis, Zillow was proving to be unreliable.
Below was the Zestimate of my previous primary residence, which suddenly shot up by 35% in one year. Its historical graph also completely changed from one year to the next.
As a result, the property assessor's office denied my appeal for a lower valuation, even though the Zestimate was clearly too high. I had been successful at lowering my property taxes for two years up to that point.
Given the worst of the financial crisis was over by 2012, I decided to test out the market and list my property. I had just negotiated a severance and thought it might be good to economize. It was just my wife and me in a four-bedroom, three-bathroom house.
I decided that if I got anywhere close to Zillow's estimate, I would sell and rent a two-bedroom apartment. But I received no written offers 20% below the Zestimate, so I pulled the listing after 28 days. Thank goodness, because 2012 marked the beginning of a real estate bull market that has lasted until this day.
What Disappoints Me Most About Zillow
Since Zillow's founding in 2004, it has done little to lower the cost of selling a home. With technology and the internet compressing commission rates in every industry, somehow, Zillow has failed to lower transaction costs.
Just look at online brokerage commissions. They have gone to zero. For a seller to still pay a 5% – 6% commission to sell a home today with a bad real estate agent is aggressive. This is especially true since home prices have risen so much. There would be way more real estate transactions if commission rates dropped by half. For sellers, a flat fee would be even better.
So why hasn't Zillow helped lower real estate transaction costs? It's simple. The majority of Zillow's revenue comes from fees real estate agents pay for customer leads. Therefore, Zillow can't bite the hand that feeds it. The National Association Of Realtors is its main source of business.
On the positive side, continued high commission rates have encouraged homeowners to hold on for longer. The average tenure has gone from about 4.2 years in 2009 to over 8 years today. As a result, homeowners have seen their home equity boom thanks to a bull market in housing.
If it only cost me 2% to sell my house back in 2012, I probably would have sold. Although I got a relatively good price five years later, it still pained me greatly to pay a 4.5% commission.
As a new dad, I just couldn't take being a landlord anymore to that property. Further, there were upcoming maintenance issues I didn't want to deal with. So I bit the bullet and simplified life.
Don't Sell To An iBuyer
In the past, I encouraged sellers to never sell to an iBuyer. iBuyers try to pay below-market-rate in exchange for a quicker, all-cash transaction. With an iBuyer, you can potentially close in under a week. With superior data, their goal is to turn around and sell your cheaply acquired home for a profit.
In exchange for this convenience, Zillow Offers charges a service fee that ranges from 1.5-9%, with an average service fee of 7.5%. The service fee covers Zillow's carrying costs while reselling homes. Paying Zillow 7.5% to sell them your home below the market rate is ridiculous. Waiting 30-45 days to close on a regular transaction is not that big of a deal.
Instead of selling to an iBuyer, list your home on the MLS to gain maximum market exposure. You can also try pocket listing your home with a large brokerage first before going on the MLS. In a strong market, selling to an iBuyer like OpenDoor makes little sense. In a bear market, selling to an iBuyer could be more attractive, depending on the price they offer.
But Zillow's fumble shows that you can take advantage of iBuyers as well. Zillow paid above-market prices for thousands of homes and now it is trying to offload thousands of homes over the coming quarters at likely below-market prices. Buy high, sell low!
Therefore, if you're ever approached by an iBuyer, be open to what they have to offer. Because they tend to be mass buyers, they might not have the manpower to properly check whether each offer price is reasonable. Their algorithms sometimes are way off.
That said, expect less attractive offers from iBuyers going forward since there is less competition with Zillow Offers going away.
How To Profit From Zillow's Mistake And Buy Bargain Homes
Zillow actually has a page that lists all its owned properties. If you're looking to snag a deal in this strong housing market, it's worth taking a look.
If you're browsing Zillow randomly you can also look for the “Owned By Zillow” icon.
Where Does Zillow Own Homes?
Below is a snapshot of the cities and states in which Zillow owns homes it plans to sell. Zillow owns homes in 25 metro areas across Arizona, California, Colorado, Florida, Georgia, Minnesota, Nevada, North Carolina, Ohio, Oregon, Tennessee, and Texas.
The Best Cities To Look For Zillow-owned Bargains
We can now compare where Zillow is planning on offloading homes and cities that have the lowest upcoming supply and that are also up the least since the prior peak.
The most attractive cities to look for Zillow bargains are:
- Miami, Florida
- Tampa, Florida
- Orlando, Florida
- Los Angeles, California
- San Diego, California
- Riverside, California
- Sacramento, California
- Las Vegas, Nevada
- Portland, Oregon
- Minneapolis, Minnesota
In other words, these cities are in the green, lower-left quadrant where Zillow plans to get rid of inventory. Given Zillow is also in Austin, Dallas, Nashville, Houston, and Raleigh, where potential housing supply is greatest, these cities could be at most risk of a housing downturn.
That said, Texas, Tennessee, and North Carolina are still seeing strong job growth and demographic trends. Therefore, it's still worth checking out these states for real estate bargains.
Here's a chart that shows how the vast majority of homes Zillow is selling in Dallas, Minneapolis, and Phoenix are selling for a loss.
How To Invest In Real Estate In Opportunity Cities
The first way to invest in real estate in cities where Zillow will be barfing out supply is by flying to these cities, checking out the deals, and making an offer with a local agent. You can always make an offer online without visiting the properties in person thanks to pictures, videos, and Google maps. But that’s always a little iffy if you don’t at least have someone you trust visit the property.
The other way to invest in some of the cities about is through real estate crowdfunding. You can log onto your favorite real estate platform and see if there are new deals within the desired cities above. The sponsors will have done extensive due diligence for you. From there, you can do your due diligence and invest accordingly.
From multifamily, to hospitality, to office, and industrial, real estate crowdfunding platforms like Fundrise have a good variety of deals that enable you to diversify your exposure. It's what I did after selling once expensive San Francisco rental in 2017 and investing $550,000 in 18 different deals via a fund. The fund focused mainly on properties in the Heartland.
Growing A Business Is Hard
I'm assuming Zillow got into the iBuying business because it saw other competitors get in as well. Further, Zillow was probably looking for new streams of revenue growth to boost shareholder value.
If you believe in your product, then you should certainly try and maximize its value. The same goes for deciding whether to work for someone or become an entrepreneur. If you truly believe in your abilities, you should see what you can do on your own.
In Zillow's case, it believed in its pricing algorithm, which ultimately cost it billions in shareholder value. At least Zillow tried to evolve, which is commendable. It's just that Zillow, the company, will likely go through a lost year.
As a business owner, it’s often best to focus on your core competency. Be careful of shiny object syndrome.
Use Real Estate Mispricing To Your Advantage
If there's one lesson to be learned by us real estate investors, it's that we must continue to not trust Zillow's estimates. It’s worth downgrading your property’s statistics to make it seem not as nice as it really is.
I've found Redfin's pricing estimates to be consistently more accurate. However, there is continuous revisionist history with both Redfin and Zillow's estimates to make them seem less off. For a decade, I have diligently tracked final home sales prices and online pricing estimates for homes I care about. Many of the estimates continue to be way off.
As a result, in 2019, I came up with the FS20 Property Leading Indicator to give potential buyers a signal to help them buy with more confidence. Buying or selling a home can be a nerve-wracking experience. The concept behind FS20 should still be very helpful today.
As savvy real estate investors, we need to utilize poor online real estate pricing estimates to our advantage. The way we do so is by knowing the market better than the pricing algorithms. We then exploit the pricing difference with buyers and sellers who naively still believe in Zillow.
The real estate market is inefficient, which is one of the reasons why I like it so much. Now it's time to look for some Zillow-owned deals!
Achieve Financial Freedom Through Real Estate
Real estate is my favorite way to achieving financial freedom. It is a tangible asset that is less volatile, provides utility, and generates income. Real estate is also a great play on inflation as inflation helps push up rents.
Even though you can't trust Zillow's estimates, you can trust that real estate will continue to be a coveted asset class. Take a look at my two favorite real estate crowdfunding platforms.
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. For most people, investing in a diversified eREIT is the way to go.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends. If you have a lot more capital, you can build you own diversified real estate portfolio.
I've personally invested $810,000 in real estate crowdfunding to diversify away from my expensive SF real estate holdings. As a father of two, I also love that I'm earning 100% passive income instead of dealing with tenants and maintenance issues.
Readers, what are your thoughts about Zillow entering and exiting the iBuying business? What are some good reasons for selling to an iBuyer at a big discount and a huge fee? Are you planning on taking advantage of a Zillow deal as it offloads thousands of homes?