Zillow paused buying homes for the rest of 2021, leading to questions about its flipping business.We examined 960 Zillow-owned homes for sale in Atlanta, Phoenix, Dallas, Houston, and Minneapolis.About 64% of them were listed for less than Zillow paid, signaling major issues for the iBuyer.Zillow Group has listed hundreds of homes that it owns in key markets for less than it originally paid for them, an Insider analysis of the company’s listings found.
The $25 billion property giant has purchased thousands of homes through Zillow Offers, its instant buyer, or iBuyer, arm.The much-hyped division uses artificial intelligence to help determine the price it would pay for homes and has attracted sellers by allowing them to shop their property to the company online and receive an offer almost instantly.
Zillow Offers makes modest improvements on the homes it buys and relists them to try to fetch a profit.
It collects additional fees by offering mortgage and insurance services.
But that strategy for raking in revenue now looks to be in peril.
Zillow announced on October 17 that it would stop buying homes for the remainder of 2021, with Jeremy Wacksman, its chief operating officer, saying it was because of “an operational backlog for renovations and closings” that he blamed on “a labor- and supply-constrained economy inside a competitive real estate market.”
But it appears that the company is sitting on an inventory of hundreds of homes it’s listing for less than it paid.
In five markets where Zillow’s iBuying business has been most active, almost 64% of the Zillow-owned homes for sale were being marketed for less than what the company bought them for, found an Insider review of Zillow’s inventory of homes for sale on October 27.
Insider reviewed 963 homes that Zillow recently acquired and is now reselling in those five major metropolitan areas: Dallas, Houston, Phoenix, Minneapolis, and Atlanta.Insider found that 616 of the homes were listed below their purchase price by a median amount of almost $16,000.
Homes in the five metro areas represent about a third of the almost 3,000 homes that Zillow owns.
Insider’s team collected publicly available data from Zillow-owned listings in those cities and compared the purchase prices of the homes to their most recent asking prices.Some of the markets showed even starker losses.
Of the 208 homes that Zillow owns in Phoenix, for instance, 93% were listed for less than what it paid.
In Dallas, where Zillow owns 168 homes, about 81% of its properties were listed for less than what the company bought them for.
About 67% of the 155 homes Zillow owns in Minneapolis and 63% of the 155 homes it owns in Houston were listed at a loss.
In Atlanta, Zillow’s largest single area of inventory, almost 28% of its homes were being offered at a loss.
The data presents the most comprehensive picture yet of the fortunes of Zillow’s iBuying business, a unit that has become a key source of revenue for the company, and that senior executives have described as central to its future growth.The losses suggest a setback in Zillow’s effort to make its iBuying arm into a profit center; they also highlight the risks it faces after scooping up thousands of homes in a hot market that may be cooling.
If Zillow were to sell all of the homes Insider analyzed at their current offering prices, it would lose a total of $7.6 million.That’s almost enough to wipe out the company’s $9.6 million in net income in the second quarter.
A spokesperson for Zillow said the company wouldn’t comment for this story.Zillow is scheduled to announce its third-quarter earnings on November 2, including performance metrics for its Offers unit.
Zillow banked on growth but now faces obstacles iBuying has been a booming sector for major real-estate players such as Zillow, Opendoor, and Offerpad.Those firms and their competitors in the field bought a total of more than 15,000 homes for a combined $5.3 billion in the second quarter of 2021, Zillow’s own estimates indicated.
In 2020, Rich Barton, Zillow’s CEO, promised investors that the business would be a major revenue driver.
Leading iBuyers, including Zillow and its chief iBuying rival, Opendoor, have attracted home sellers by offering convenience and certainty.The companies can tour and evaluate a home virtually, pay all cash for a property, and arrange a streamlined closing process that’s done digitally.This is all far more “instant” than the standard homebuying or -selling process.
After modest improvements, such as a fresh coat of paint or new kitchen countertops, iBuyers typically put the properties they buy back onto the market in the hopes of fetching a quick profit.They seek to earn additional proceeds by bundling services into the transaction, such as sourcing mortgage financing for a buyer and providing title insurance.
“We see it’ll drive a ton of opportunity,” Barton said on February 10, during an earnings call announcing Zillow’s financial results for the fourth quarter of 2020.
For the first half of 2021, Zillow reported that its iBuying division reaped almost $1.5 billion in revenue, a 20% gain over the first half of 2020.
The company bought 3,805 homes in the second quarter, more than twice the number it purchased in the first quarter of the year.
Barton has said the company aims to buy and sell 20,000 homes a year and earn $20 billion in revenue annually from iBuying as soon as 2024.
As the real-estate market roared over the past year, home flipping has seemed, at times, like a can’t-miss revenue machine.Data from the S&P CoreLogic Case-Shiller US National Home Price Index showed that in July, home prices nationally rose by a record 19.7% year over year.
But a suddenly decelerating residential market in many areas of the country has pitched a curveball to Zillow’s nascent flipping business, which it launched in 2018.For months, buyers had to offer loftier sums to compete in the nation’s hottest markets.Now, a cooling in some of those areas has left Zillow with inventory it suddenly can’t offload without cutting asking prices.
“Zillow could be facing a potential demand issue and is thus attempting to clear inventory before trends worsen,” a Bank of America research report said on Thursday, referring to the company’s recent iBuying pause.
“It also suggests that at least in the near term margins could turn more negative.”