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Last week brought about some insane news for the real estate industry, Zillow’s iBuying program has temporarily failed. For the last three years, Zillow was designing an online platform that would allow homeowners to receive an offer directly from Zillow to purchase their home. The company designed an algorithm, similar to the Zestimate, that would roughly determine the worth of a home, and then Zillow representatives would offer just below that value, often selling homeowners on the idea of an easy and brainless transaction. So what happened?
The Beginning of the Problems
Zillow's plan was to purchase the property for less than market value, handle small necessary repairs, and put those properties back on the market as soon as possible. However, in order for Zillow to compete in the intensely competitive seller's market we are experiencing nation-wide, they had to alter their algorithm to make more aggressive offers.
In the end, Zillow purchased 9,680 homes using their algorithm in the third quarter alone. Quickly, the company began to understand that the iBuyer program was overbidding, and would not be able to produce the profits they were hoping for. Once Zillow decided to shut down the iBuyer program in early November, the resulting loss was already priced over half a billion dollars, and over a quarter of their employees losing their jobs. CEO Rich Barton spoke to where the flaw exists in the algorithm: “What we can’t solve is what the model is going to tell us about how much capital we need to raise, deploy and risk in the future in order to achieve a scale that we think is necessary to offer a fair price to customers for their homes in a competitive way”.
In so many words, it's almost impossible to predict the real estate market shifts in our current climate, especially in unprecedented times following the COVID-19 pandemic. And to make this program advantageous for Zillow, it will need to focus on how to accommodate for potential loss as markets fluctuate by making smarter purchases and investments.
How Does this Impact You?
Is this good news for struggling buyers in the 20 different markets where Zillow now needs to offload over 18,000 homes? Unfortunately, no. The company's plan as of now is to offload as many homes as possible to big name investing companies to turn the Zillow-owned properties into rentals. According to an article in the Detroit News, New York-based investment firm Pretium Partners LLC will purchase 2,000 properties, adding to their portfolio of 70,000 homes across the US, making them the second largest single family home landlord in the country.
If you are considering selling your home with an IBuyer program like Zillow or OfferPad, it would be advantageous to consult with a real estate professional to determine if the amount they are offering is in line with current market trends. If you are buying a home, I would not rely on the homes that Zillow is offloading to become available to average homebuyers just yet.
The Problem with Algorithms
If there’s anything for the average consumer to understand, it is to not rely on technology and Zillow alone when trying to make a decision on buying and selling a home. To illustrate, one of the most useful tools sellers and buyers alike is the Zillow’s algorithms called the Zestimate. It’s simple to type in a property address, take a look at the Zestimate, and base your sale price or purchase price around this number. However, even according to Zillow themselves, there is a large margin of error in the Zestimate algorithms.
On Zillow’s direct website explaining the Zestimate, the median margin of error in North Carolina is stated as 6.7%. Only 83.6% of Zestimates for off market (unlisted) properties in North Carolina landed within 20% of the eventual sale price. To understand what that means, let’s take the average home sale price in Asheville for the month of October of this year, which was $529,000.00. A 20% difference at that sale price equals $105,800, meaning if Zillow claimed your home was worth $529,000, you could actually end up selling anywhere in the range from $423,200 to $634,800. With such a large margin of difference, you would not want to rely on an algorithm alone to determine your home's value.
The Zestimate’s algorithm also includes active listings for sale when determining a home’s value, as well as sold properties. This could potentially inflate the value past the point of a property's true appraised value. When using a mortgage to finance the property, property appraisers use only sold comparable homes to determine the appraised value, which ultimately determines the amount your mortgage lender would be willing to lend on the property. This overinflation of price could lead to financing issues for buyers, which could prolong your home sale significantly. Moxiworks CEO York Baur, who sells software to real estate brokerages, had this to say, "“They invented computer home valuation with the Zestimate 15 years ago, and it’s still not accurate after 15 years of refinement and billions of dollars invested.”
The issue with algorithms like the failed iBuyer program and Zillow’s Zestimate is that they are great to give a rough and user friendly idea on what a home’s potential value might be, but it’s best to trust the local Realtors and professionals on the ground in your community who dedicate themselves to understanding the local market. So many different variables impact property prices, and although Zillow has provided a very streamlined experience for viewers to see photographs and basic information on property, real estate agents have access to much more information in the local Multiple Listing Service. This allows Realtors to make much more informed recommendations on market value, adjust for outlying special cases like foreclosures and short sales, and inform you of potential issues based on remarks that only agents have access to.
All in all, Zillow has definitely filled a gap in the buyer experience to have more access to property information, but when it comes time to understanding value and the next steps after the initial search, a Realtor will be your best bet to ensure the smoothest transaction possible.
Posted by Greg Eskritt on
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