Real Estate Round-Up: Z is for zestimate, the sequel
Last updated 11/18/2021 at 12:37pm
The week after I wrote my column on zestimates, Zillow, the creator of the zestimate, discontinued their i-buyer program because they owned 9,790 homes at a value of $3.75 billion, with two-thirds of them underwater. Zillow is trying to unload 7,000 homes with a value of approximately $1.8 billion. Their CEO, Richard Barton, cited price forecasting volatility as the main reason that Zillow had been overpaying for homes. Turns out that their very own zestimate program was not projecting an accurate price for the properties they were purchasing.
Digging deeper. The Zillow Offers, i-buying program, began in 2018. Zillow quickly expanded across the U.S. With the zestimate being highly respected by many consumers, as a reasonable valuation tool for their homes, it was a natural for Zillow to use the tool to financially benefit the company. Zillow’s CEO touted it as a key to their future growth. Turns out, it was anything but that.
This is how it worked. Sellers would complete an application online. Sellers would provide information on their home, which Zillow would then apply to local sales data. Zillow would present an instant “cash” offer to the seller. Zillow would then schedule an in-person evaluation by one of their salespeople at the property with the seller and finalize the cash offer. Seller could choose their close of escrow date and decide to accept or reject the offer. Zillow’s fees for this instant offer ranged from 1.5% to 7.9% depending on the marketplace, plus commission and taxes. As I write these fees, I am astonished that anyone took advantage of this program, since Realtor commissions are much lower, and consumers push back on those.
But I digress. If you evaluate every step within the instant offer process, the one thing that is missing is the personal involvement with a local specialist. Even Zillow’s sales specialists are not local. They are part of the Zillow machine and, just as appraisers and lenders, are not geographic specific. Zillow’s sale specialists, who were determining the value of a property, knew none of the subtleties of the neighborhood, the schools, the community. It took three years for this ridiculous program to implode.
This is the thing. Real estate is local. Local Realtors understand their local markets. They understand and can explain pricing trends, the pros and cons of different geographic locations, and the suitability and desirability of the amenities in a home, to the consumer.
The other thing is this. Forecasting housing prices is difficult. Remember, Zillow’s CEO cited price forecasting volatility as the main reason they are discontinuing the program. Forecasting housing values is not scalable, and that was the only way the program could work for Zillow. Algorithms and non-local salespeople cannot accurately determine the value of a home.
Zillow took a write down of approximately $340 million in the third quarter and anticipates another write down of $240 to $265 million in the fourth quarter. Zillow’s stocks have fallen 70% since mid-February, at a time when real estate is soaring. Two other companies offering the i-buying program are experiencing adjustments as well. Opendoor’s stock has slipped 14% this year. They continue to pursue this program and purchased 15,181 homes in the third quarter, up 79% from the second quarter. Offerpad bought 2700+ homes in the third quarter and reported a net loss of $15 million.
I don’t know about you, but sometimes what seems like a good idea may be telling you that it’s not so good. We couldn’t sustain our business if an idea we had was losing money at this kind of scale, could you? But what’s the real message here? I hope you heard it, loud and clear. No algorithm, no out of area salesperson, is going to replace a knowledgeable, experienced local Realtor. You have worked hard to maintain your home. You have planned well. The marketplace is still red hot. If you’re going to sell, be smart, and list with a local Realtor.
Kim Murphy can be reached at [email protected] or 760-415-9292 or at 130 N Main Avenue, in Fallbrook. Her broker license is #01229921, and she is on the board of directors for the California Association of Realtors.