After 3.5 years, Zillow announced this week that it is shutting down Zillow Offers and exiting the iBuying business. The news was not entirely unexpected, as the company had previously admitted to pausing home buying through the end of the year and was reportedly seeking investors to purchase 7,000 homes it had in its inventory.
Still, the retreat shocked the market: Zillow’s stock fell more than 20% on the news and fears around the iBuying market drove shares of competitors Opendoor down by about 15% and Offerpad about 6%. Those stocks have recovered a bit since, but there still seems to be some trepidation around iBuying as a business model.
Zillow basically confessed that its pricing model is at best a lagging indicator and really no good in a market that isn’t aggressively moving up and to the right.
We’ll know more about the impact of slowing housing sales and price appreciation on the broader market when Opendoor and Offerpad announce their third-quarter earnings next week. In the meantime, there’s plenty of anecdotal evidence to suggest that Zillow’s big loss wasn’t necessarily a business model problem with iBuying as a whole as much as it was a problem with Zillow’s algorithm.
At their most basic level, iBuyers seek to purchase homes at a slight discount to their market value, offering the convenience of a cash offer to sellers in exchange. They then make any necessary repairs or renovations necessary, list the property and attempt to sell it for more than their initial purchase price, making money on the spread.
The fundamental problem Zillow ran into, and the reason it decided to exit the business, was that in the third quarter the company was paying above market value for homes and selling them for less than their initial market price.