"It was a spectacular 'train wreck.' An explosion of artificial intelligence, computer analysis, and too much human optimism resulted in Zillow's iBuyer business, named Zillow Offers, falling to Earth in a heap of smoldering and broken dreams," stated Clay Murray of Dr. Cash Home Buyers based in the Denver metro area. "The company had to lay off 25% of its workforce, and its stock price was hammered. On October 25, 2021, Zillow's stock price was $103. Seven months later, it is sitting at $39. Home sellers in Denver were the winners because they sold their homes at above-market prices to Zillow. The losers are the local real estate investors who were out-bid by Zillow."
Although other divisions of Zillow, such as the home-listing and advertising, have been profitable, the Zillow Offers division racked up an $881 million loss in 2021. Zillow declared a consolidated net loss in 2021 of $528 million.
Zillow has become a huge factor in the real estate business in the United States. It is an "aggregator" in that it combines data from different sources and presents the data in their format. They are the largest residential real estate coverage business in the country with a huge and well-known internet presence. They also estimate the value of houses across the United States using their algorithms and machine learning, but Denver real estate experts have little confidence in these estimates.
What Was Zillow Offers?
Zillow Offers was a house renovation and resale company commonly referred to as "flippers" or "home-flipping." Their goal was to buy houses, make the repairs and renovations, and then sell the homes to retail buyers at a profit. Unfortunately for Zillow, they owned thousands of houses worth less than their investments in the houses. Real estate investors who find themselves in this position usually have three options as follows.
- sell the house at a loss
- rent the house and hope that house values improve over time
- hold a vacant house hoping that values improve while having to pay for taxes and insurance
So What Happened With Zillow Offers?
There are some very obvious reasons Zillow Offers was losing money. Real estate investors and realtors could see the three-year train wreck in slow motion. The significant flaws in their strategy are as follows.
The Business Plan
It was either a poor plan or a good plan that was poorly executed. Most real estate critics believe it was a flawed plan from the start.
They Paid Too Much For The Houses
They purchased many houses in Denver. Making the highest offer for a house usually will result in a contract for sale, but it is no guarantee for a house-flipping profit. Local real estate investors know that their success in having a profitable real estate deal begins with a purchase price that has room for at least six months of holding time plus a realtor's commission at the time of sale.
They Underestimated The Cost Of Repairs And Renovations
Every city in the United States has a different "Cost of Living," and real estate costs in Denver are additional to other towns.
Difficulty Of Hiring Contractors
They underestimated the difficulty of hiring contractors in local markets. Finding reliable and fairly priced contractors is one of the keys to the success of a real estate investor. Every city, including Denver, is a challenge because contractor relationships are usually built over time.
Seasonal Trends
They failed to account for the seasonal nature of the real estate industry. For example, the last six weeks of the year are the slowest because people are busy with Thanksgiving and Christmas.
Trying To Sell Over-Priced Houses
With their higher purchase price and generally higher repair/renovation expenses, they had to sell their houses at higher prices than the market. Home buyers in Denver were not interested in buying over-priced houses.
What Is Next For Home Sellers and Home Buyers in Denver
According to Clay Murray, Denver's residential real estate market will continue to experiment with artificial intelligence to "standardize" the home selling and home buying process. However, the list of variables is long, and a successful real estate transaction that includes repairs and renovation requires individuals with a history of home buying experience and renovation experience. There are many "moving parts," and any one of them can turn a profitable scenario into a losing one. House-flipping is not easy, and many people have lost money and left the profession.
