In this video we’re talking about the big Zillow crash and how it’s going to affect the Utah Real Estate Market.
Have you seen the recent headlines about Zillow? No, let me share a few with you…
This one is from the New York Times: Zillow, facing big losses, quits flipping houses and will lay off a quarter of its staff.
CNN reported: Zillow to exit it’s home buying business, cut 25% of staff.
As the housing market started heating up because of the pandemic, Zillow perceived an opportunity. That opportunity was in flipping houses. About 18 months ago they decided to start purchasing homes with plans to renovate them and resale them at a higher price.
Zillow’s business model has always been a lead generation site for real estate agents. When buyers and sellers come to the site, they enter their personal information and Zillow sells that information to a local real estate agent. Instead of selling the listing leads or people interested in selling their home, Zillow decided to make offers on those homes and their new home flipping program “Zillow Offers” was born.
Now, let’s talk about where Zillow went wrong…
First of all, they changed lanes and got into a space they didn’t know anything about. Keep in mind, Zillow is a website, not a real estate company. Now, don’t get me wrong it’s a great website, I’ve personally used it to check the value of my home, and you’ve probably done the same. In fact, when I’m meeting with potential clients about selling their home, I bring a copy of the Zestimate, but it’s not the only data point I bring to those appointments. I also bring real, accurate data of similar homes that have sold in their specific area.
Zillow has made a great, user friendly website that’s designed to connect the public with real estate agents. They are a software company, not a real estate company and they should have stayed in their lane.
Putting a value on real property is part art and part science, and at the end of the day a home is worth what someone will pay for it and what a bank will lend on it. In the scientific method, the more data points you have, the more accurate your valuation will be and that’s where Zillow went wrong. The prices they were paying for homes were based off their Zestimate and they failed to accurately account for the renovation costs, resources and time needed to flip the home. Buying a home with cash can be a benefit and a downfall. If you buy a property with cash you’re not obligated to get a third-party independent appraisal, and if you don’t get an appraisal, you could very well overpay for a home.
Here’s a quote from the Co-founder and CEO of Zillow, Rich Barton on why they decided to end their Zillow Offers program.
He said “We went into the business on the bet that we could actually predict the price of a home six months into the future and do so with a very narrow margin of error and have our hold times be shorter. Being an iBuyer was too risky, too volatile, and ultimately, addressed too few customers. The pandemic has made predicting the price of a home six months into the future really difficult.”
In summary, Zillow went wrong in these three areas…
1. They over estimated the value of homes based on their algorithmic valuations or Zestimate.
2. They under estimated the costs associated with the renovation work.
3. They under estimated how fast they could renovate and flip the homes.
You may be asking “How many homes did they buy?”
Well, Zillow’s CEO, Rich Barton reported that they have about 7,000 homes that they need to get off their books. That may sound like a bunch of homes, but it’s actually not that many when you consider that 7.1 million homes are forecasted to be sold in 2021. Even if they listed all 7,000 homes at once, it likely wouldn’t make enough of a difference in the inventory that prices would drop. Zillow is planning on selling them in groups to investment firms, in fact the Wall Street Journal has reported that a New York based firm has 2,000 homes in 20 markets under contract. Their plan is to rent them out.
If you’re a Utah home owner, the Zillow Offers flop will have very little, if any affect on your property value.
I did some searching around to see how many homes Zillow owns along the Wasatch Front. I checked the county records of Weber, Davis, Salt Lake and Utah Counties and couldn’t find a single home. If they don’t own any homes in this market, they aren’t going to be selling any homes in this market, so I think we’re all safe for now.