Zillow Offers

Nov 9, 2021

On Nov 2, 2021, the Zillow Group announced the decision to exit from their Zillow Offers (iBuying) program. I was very disappointed and disturbed by this decision. I've been a fan of Zillow for a long time. The more time I spend working in the real estate industry, the more I love what Zillow was/is trying to accomplish. It also happens to be the company that most real estate agents hate, which makes it even more attractive for me to research. Zillow has the potential to disrupt the entire housing industry by providing an one-stop shop for home buyer/sellers with a more streamlined system which eliminates some of the flaws in the traditional commission based system.

If Zillow can't even succeed with all its resources and its superior position in the housing market, what does this mean for us, the small time investors? Here are some of my personal thoughts about Zillow's decision, the overall housing market for investors and where we go from here.

Zillow's Shareholder letter to Investors.

I highly recommend reading this. I always like to get information from the source rather than reading interpretations from the media:

https://s24.q4cdn.com/723050407/files/doc_financials/2021/q3/Zillow-Group-Q3'21-Shareholder-Letter.pdf

Richard Barton: "Ultimately, we determined that further scaling up Zillow Offers is too risky, too volatile to our earnings and operations, provides too little opportunity for return on equity, and serves too narrow a portion of our customers."

It's interesting to me how a lot of people automatically blamed their failure on their lack of expertise, too much confidence in their AI (Zestimate) which caused them to overpay for homes, not listening enough to "local experts" (realtors and appraisers), etc. While Zillow definitely had some execution/management issues with their program, I don't believe Zillow's problems are just Zillow's problems. I also don't think that it was their AI that failed them. Their Zestimate is very accurate for some homes and neighborhoods but can be way off in other places. I believe Zillow knows this already and they did not purchase the homes based on their Zestimates alone, it was only a starting point.

Despite record breaking home prices and historically low interest rates, 2021 has been an extremely tough year for a lot of real estate investors. I've certainly had my own share of problems and I know that my problems are not unique from discussions with other investors. I find that it's been increasingly harder to make a profit in the real estate industry. Investors often need to find more "creative" ways to make a profit which increases risk. Many states are becoming more tenant friendly which makes long term rentals a challenge. Home flippers have been dealing with bidding wars, supply chain shortages, and an overall unmotivated workforce which ultimately result in razor thin profit margins. I used to think that real estate investment is one of the safest investments out there but I'm not sure if it is anymore given the current environment. This is actually the reason why I've been more focused on multifamily investments rather than single family. Multifamily allows for more efficient operations which translates into less overall risk, in my opinion.

As for Zillow, I don't think this is the end for them. They took a huge risk and they lost. That's what happens in business: sometimes you win, sometimes you lose. It's better to exit an unprofitable business and cut losses immediately rather than slowly bleed to death. They have other profitable sectors and they can focus more on improving their technology including their AI to better serve the community. Perhaps they can form more partnerships with other companies such as OpenDoor. I'm looking forward to what the future holds for them and hope that they eventually do succeed in Zillow 2.0.

Overall, I am still optimistic on real estate investments. I am definitely not discouraging people from investing but I want everyone to be aware of the risks and some of the current challenges. I hope we can resolve these issues overtime to we can get back to a more stable, predictable housing market for investors, home buyers/sellers, and renters.