iBuying was never a good idea to begin with, and Zillow just proved it
On November 2, 2021, Zillow Group Inc. (Z), headquartered in Seattle, announced that the company would wind down their Zillow Offers program and begin the process of exiting the technology-enabled home flipping business referred to as iBuying amid concerns that its algorithm-driven business model could not accurately determine fair market prices for single family homes. In the wake of the exit of Zillow from the iBuying marketplace, having lost over $1B in the past 3.5 years, what does their colossal failure flipping homes mean for today’s home sellers and home buyers?
The residential real estate marketplace has historically consisted of homeowners selling their homes to owner-occupant home buyers. Over the past decade, as the real estate market has recovered from the credit market collapse of 2008 and the subsequent Great Recession, institutional investors have entered the residential real estate market, using their enormous access to capital to fund the purchase of thousands of single family homes. Many of the investors have utilized a “buy and hold” strategy, where these assets then become rental properties. Another category of investors have utilized similar access to capital to fund the “buy and flip” strategy, in an effort to capitalize on the potential for profit by buying low and immediately selling at a higher price.
“There are very few ways an investor can earn a profit flipping a home,” according to Kevin Cahill, co-Founder and CEO of REALean Real Estate, a growing national real estate brokerage headquartered in St. Petersburg, Florida. “The primary strategy these iBuyers utilize is to pay well below market value for a property and then sell it for fair market value to generate a profit, which Zillow was not able to do in this competitive market. There was too much competition from serious home buyers, so they couldn’t get away with making really low offers to home sellers. Home sellers need to be mindful that investors are looking to pay as little as they can to purchase a property.”
Zillow Offers failed because they were forced by the market to pay fair market value or close to it in order to acquire properties. Clearly, they were unable to generate profit when the labor costs, commissions, title expenses and closing fees, and carrying costs are factored into the business model.
“These investors also try to make money flipping homes by tacking on fees and transactional costs, above and beyond the typical closing costs a home seller would normally pay. As competition for homes increased, these iBuyers were no longer able to get away with charging ridiculous fees,” says Lisa Cahill, co-founder of REALean Real Estate, and a Certified Public Accountant. “The best way for home sellers to get top dollar when they sell is to hire a full-service real estate agent, pinpoint the right price to start the marketing effort, and to aggressively market the property on the open market, and then to minimize the transactional fees. This will ensure that the home seller stays in a position of strength throughout the selling process. The goal is to get as many ready “now” home buyers as possible to be interested in your home.”
Home buyers are unlikely to have an opportunity to buy those homes that Zillow purchased. Zillow announced this week that they have agreed to sell 2,000 homes to Pretium Partners, a New York-based investment firm. “Neighborhoods remain stable and vibrant when homes are owned by the occupants,” says Kevin Cahill. “Moving home equity out of the local market is never a good thing for the long-term benefit of communities,” he says.
About REALean Real Estate
REALean Real Estate is a growing national full-service residential real estate brand that provides concierge-level full service while charging lower fees.
When home sellers work with a local REALean agent, they get their home sold quickly for top dollar while only paying 4% brokerage commission, rather than the typical 6% or more that most brokerages prefer to charge. And if the buyer approaches the REALean agent, and no other agent is involved in the transaction, REALean lowers their fee to just 3%, saving the home seller thousands of dollars of their hard-earned equity.
For more information, visit www.REALean.com
CONTACT:
Kevin Cahill
727–755–1995
Lisa Cahill, CPA
727–755–1995
SOURCE: REALean Real Estate
