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Two weeks ago, Zillow dropped the bombshell announcement that it’s sunsetting Zillow Offers — a decision that not only cast doubt on the strength of the portal giant but the iBuying industry as a whole.
While the public gloats about Zillow’s missteps and cast their lots on who will meet their Icarus-like descent next, real estate analyst Mike DelPrete is pushing industry members to focus on more valuable insights from Zillow’s failed experiment.
The first insight? Both iBuying and Zillow are here to stay.
“I don’t think it’s the end of iBuying,” DelPrete told Inman founder Brad Inman in front of the virtual Connect Now crowd on Tuesday. “I think the biggest danger out of this for the folks listening right now would be to think, ‘I told you so.'”
“Just because Zillow didn’t get it right doesn’t mean Opendoor and Offerpad are not going to get it right. It doesn’t mean disruption is not going to work,” he added. “It doesn’t mean billions of dollars of venture capital is not going to continue to flow in and subsidize new businesses and try new things and stress your existing model.”
DelPrete said Zillow Offers’ failure is unique to Zillow, who in the rush to dominate the iBuying market, made a series of miscalculations about home pricing and purchasing volume just as the market began to come down from a year-plus boom.
“It’s doing everyone a disservice to say, ‘Oh, it’s the Zestimate. It’s an algorithm. It just screwed up,'” he said. “There are hundreds of people [and] there are layers of management making decisions, and the decision they made was was really simple: ‘We need to buy more houses and to buy more houses, we need to pay more money for them.'”
“It just so happened, there was this cascade of failures where they ended up paying a lot more for houses at the worst possible time to be overpaying for houses when the market was just starting to cool,” he added.
While Opendoor and Offerpad exercised restraint in face of a normalizing market, DelPrete said Zillow pushed itself to an untenable pace in the quest to stay ahead of the pack. As a result, Zillow purchased more homes in Q3 2021 than it had done in the previous 18 months combined.
“Imagine doing 18 months or 18 days or 18 hours of work condensed into three,” he explained. “What’s gonna happen? The wheels are going to fall off and things are going to blow up. That’s an incredible amount of scale.”
“For whatever reason, they decided, ‘We need to reach certain volumes and we want those to be really big, and we want to win versus Opendoor. We want to be the category leader,'” he added. “That’s the Zillow playbook, to be the category leader. They understand the power and that’s what they were trying to do.”
Although Zillow’s missteps with Zillow Offers will haunt them for the time being, DelPrete said the portal has a golden opportunity to pivot into power buying, a term he coined to describe companies that back buyers with all-cash offers and help sellers navigate two transactions with buy-before-you-sell options.
“If anyone thinks Zillow is going to put its tail between its legs and just kind of go back to what it was doing before, they’re sorely mistaken,” he said. “I think Zillow 3.0 absolutely should contain a component of this power buying stuff like cash offers or buy-before-you-sell, which companies like Orchard, Knock [and] Homeward are providing to consumers.”
If Zillow were to enter power buying, DelPrete said attaching their mortgage services to the all-cash offer could be a needed buoy. “It’s another Zillow business that’s losing a lot of money and they’re discovering how difficult it is to do mortgage,” he explained. “But if we talk about attaching mortgage [to a power buying business] that’s a great [option].”
Beyond the power buying option, DelPrete noted Zillow will have to resist the temptation to adopt a “pure marketplace partnership approach,” which he said will stretch them thin as they gear up for a competition with Andy Florance’s CoStar Group. Instead, Zillow needs to simply focus on several mergers, acquisitions and partnerships that will place them back on firm footing.
“I’m just not sure that the pure marketplace partnership approach is going to be right for them,” he said. “It’s great from minimizing risk and effort, but am I going to go to Zillow and then shop around for offers? It just gets messy really quick and the consumer experience is poor.”
“I would expect to see a component of Zillow. 3.0, including [merger and acquisition] activity [and] a couple of really deeply integrated partnerships, as opposed to ‘Here’s a whole bunch of spaghetti on the wall, and we’re just going to see what consumers want.'”
Looking forward, DelPrete said Zillow, Opendoor, Offerpad, and other industry disruptors will continue to grow stronger as Wall Street and the public as a whole become more open to alternative transaction and financing models. Instead of ignoring a changing landscape, DelPrete urged agents to embrace innovation and connect themselves to platforms that can help them better serve consumers.
“You know, people love to hate Zillow, and if the Zillow model works for you, give them a call and work with them,” he said. “There’s an incredible value there and it’s good economically and relationship-wise and business-wise.”
“Now would be the wrong time to put your blinders on [and] ignore what’s going on or just go around saying, ‘I told you so,'” he added. “[Zillow Offers’ failure] is a blip in long-term, slow, industry disruption and change.”