Zillow offers a cautionary tale on “iBuyer” market

Before the COVID-19 pandemic upended the global economy and housing market, we were watching the trend of “iBuyers,” or instant buyers, entering the scene. iBuyers use computer algorithms to make an initial offer online, then send an inspector to take a closer look. Sellers can complete the transaction without worrying about staging or hosting open houses, as the iBuyer will fix up the home and resell it. In early 2020, these types of transactions were on the rise in a handful of U.S. markets.

As the pandemic picked up steam in March and April of that year, many iBuyers pressed pause, which was in line with the rest of the economic slowdown. However, we’ve documented that real estate powered through and had a strong year despite the challenges presented by COVID-19. With the market still humming, iBuyers got back to work.

Zillow’s iBuying platform, Zillow Offers, recently tried to make a big splash by purchasing nearly 10,000 homes between July and the end of September of this year, more than double what it bought in the previous quarter, as Barron’s notes in the article below.

However, the hot housing market was showing some signs of cooling toward the end of summer, and Zillow ended up with a number of homes purchased for more than they expect to get back in a sale. The company ultimately shuttered the platform as it reported nearly $400 million in losses for the third quarter.

As Barron’s notes, this experience has not necessarily been shared by other iBuyers, as companies such as Redfin and Opendoor have been more successful recently. In fact, Opendoor reported strong third quarter numbers and expects to charge ahead in the market with Zillow out of the way. However, the Zillow story does show some of the inherent risk iBuyers face. “These are large purchases with leverage attached to them, and ultimately, if you buy incorrectly, you’re going to end up with results like Zillow’s,” Ed Yruma, a managing director at KeyBanc Capital Markets, told Barron’s.

As I noted back in early 2020, there is also some risk for home sellers that choose to go the iBuyer route. Plus Home Sale Counselor Sherrie Witte pointed out that in going for a quick and easy sale with an iBuyer, a seller risks losing some value in the deal, since they don’t expose the home to the full market and potentially see better offers come in. For relocating employees going through a corporate home sale program, a “traditional” sale is still generally the best bet if the seller is patient enough to market the home in a more conventional sense.

iBuyers figure to keep chugging along, as there will continue to be an appetite for faster sales that can largely be done online. However, the Zillow example does offer a cautionary tale when it comes to this real estate trend.