In the wake of Zillow’s announcement that it’s pausing its iBuying business, other companies that make all cash offers say they’re moving full steam ahead — and in some cases are baffled at the online giant’s move.
The gist of what’s going on at Zillow is that the company says it has a backlog of thousands of homes to close on, renovate and eventually sell. However, thanks to labor and supply shortages, as well as high demand from consumers, Zillow can’t keep up. In response, Zillow Offers — the company’s iBuying program — won’t be signing any new contracts at least through the end of the year.
However, other iBuyers uniformly told Inman Monday they weren’t facing similar problems.
Right off the bat Monday morning, Opendoor — the largest dedicated iBuyer and arguably Zillow’s biggest rival — sent Inman a statement noting that “we’ve worked hard over the past seven years to ensure we can continue to deliver our experience at scale.”
“Opendoor is open for business and continues to scale and grow,” the statement added.
Soon thereafter, Redfin also said via a statement to Inman that its iBuying program, Redfin Now, is still up and running.
“RedfinNow continues to make offers in all of our 29 markets and we’re moving forward with our expansion plans,” the statement noted. “We are confident in our ability to meet demand from our customers who want a convenient and flexible home-selling option, despite challenges with the construction labor market and supply chain.”
Offerpad also told Inman it continues to move forward. An email from a company spokesperson noted that “operations are running as smoothly as ever.”
The email also pointed to an announcement from Monday that Offerpad is now planning to expand into Riverside, Sacramento and San Bernardino — all three in California. The expansion announcement included a comment from CEO and Chairman Brian Bair noting that Offerpad’s growth “is fueled by our company’s operational excellence and our strong real estate background enables us to buy, renovate and sell homes across many markets in changing real estate cycles.”
Opendoor, Offerpad, Redfin and Zillow are the four biggest players in the iBuying space, but Inman has reached out to others to see if they are facing any supply or labor constraints.
In the meantime, though, observers were speculating about what is happening at Zillow. Among them was Kathy Rainwater, a Century 21 agent based in the iBuyer-dense Phoenix metro area. Rainwater told Inman Monday that earlier this month she had a client who wanted to sell a property that needed repairs. The client didn’t have the cash to make the repairs, and opted to pursue offers from iBuyers. Opendoor responded within a day, and quickly got the house under contract.
Rainwater added that she had expected the property to fetch between $315,000 and $320,000, but Opendoor actually offered $348,000.
Zillow, however, took weeks to get back to Rainwater.
“He had forgotten he had done it,” Rainwater said, referring to her client’s request for an offer from Zillow.
Rainwater said the Zillow representative she spoke with explained that “they were really swamped.” And the entire experience led Rainwater to believe Zillow is facing staffing issues.
“I think Zillow jumped in too fast,” Rainwater added.
Zillow on Monday stuck to its official statement, which mentions labor constraints. But Rainwater’s observations highlight how the company may be facing the same type of hurdles that are impacting numerous other industries. In construction, for example, shortages of things such as lumber and steel have sent costs soaring. In the automotive and cellphone industries, a shortage of computer chips have drastically reduced supply. Meanwhile, companies across the U.S. are struggling to hire employees amid a phenomenon known as the Great Resignation.
On top of those issues, consumer demand has spiked, meaning there is more interest in spending money at precisely the same moment there are fewer things to buy.
IBuying potentially suffers from this situation on multiple fronts. Demand for housing has risen during the coronavirus pandemic, after all, while iBuying firms also need access to construction materials to carry out renovations. Simultaneously, iBuyers need significant office staff to handle logistics — something companies in many fields are struggling with.
On the other hand, not everyone was satisfied with that explanation; an employee of another iBuyer who spoke to Inman on background Monday described being “baffled” by Zillow’s move.
“If it were us, we would have seen this coming,” the person said.
Either way, others speculated about additional facets of Zillow’s move. For instance, Bloomberg opinion writer Matt Levine on Monday framed Zillow’s pause in iBuying in terms of computerization, and the inability at this point to fully automate housing transactions.
“Computerization has come into the housing market, but it hasn’t taken it over yet,” Levine wrote in his newsletter Money Stuff.
Matt McGill, a team leader with Realty ONE Group in Sacramento, speculated the pause could also have to do with “retrenching and reevaluation.”
McGill’s area is an active iBuying market for both Zillow and Opendoor. In the past, both companies often bought homes under their market value and sold them at a profit. However, more recently, the companies have been paying higher and higher costs, McGill told Inman.
During his call with Inman, McGill looked up a home that Zillow bought in his area for $595,000 in July. The home then soon went back on the market for $599,000, but has languished since and is currently for sale for just $525,000.
McGill noted that even at $599,000, the home would have been a money loser for Zillow. But the problem has becomes worse the longer the home sits on the market. McGill has noticed more and more similar instances, and speculated Zillow wants to minimize further losses.
“I just see it as them accumulating inventory,” he added.
Independent numbers confirm that Zillow has been making competitive offers. In an email to Inman, Stefan Peterson — co-founder and chief operating officer at iBuyer marketplace startup Zavvie — said Zillow has been “paying 103 percent of market value based comparison with [automated valuation model] prices.” In other words, the company is paying top dollar for houses.
The result, then, may be that Zillow has become a victim of its own aggressive and successful expansion strategy.
“Strong offers coupled with lower service fees (lately averaging 5 percent) caused many sellers and their listing agents to accept Zillow’s offers, and it appears they need a quarter to digest all those homes,” Peterson said. “That’s understandable and most likely just a blip.”
Speaking to Inman Monday, real estate analyst Mike DelPrete characterized Zillow’s decision as a “relatively drastic move” that could send mixed signals to consumers looking for instant offers. However, he also said these kinds of things happen in fast-growing sectors.
“They grew too big, too fast,” DelPrete said. “That’s not an uncommon story in the world of startups and new business. Sometimes you go fast and break things. And Zillow went really fast on iBuying and it looks like it broke something.”
DelPrete ultimately concluded that “the biggest takeaway here is a reminder to everybody how difficult it is to scale an iBuyer business.”
“Because it’s real estate, it’s really complicated. It doesn’t take days or weeks to buy and sell a house it takes months. You can only automate so much. You can only do so much. Real estate is hard, iBuying is hard.”
Update: This post was updated after publication with addition commentary from analyst Mike DelPrete.