Bye-Bye I-Buy
ZILLOW ANNOUNCED recently that it would��cease its algorithm-driven home buying program. Thus ends its three-year experiment to disrupt the real-estate brokerage business with what���s known as ���i-buying.���
Zillow had purchased homes without significant involvement by real-estate agents. Instead, it used its proprietary algorithm���which it calls the Zestimate���to determine a property���s value. It then offered homeowners a percentage of this value, in cash, to buy their houses.
This offer proved appealing to many home sellers. They didn���t have to stage their homes and could be certain of the price they���d get. It also gave them a definitive closing date.
To generate a profit on each home sale, Zillow would keep the commissions usually paid to the seller���s and buyer���s brokers. They would also update the properties cosmetically, when needed.
Ultimately, Zillow erred grossly in anticipating how difficult it would be to turn a profit in the residential real-estate market. There were several problems with its model. Zillow likely discovered what the rest of us already knew���that getting a contractor to show up on time and do a good job is incredibly difficult, and that it���s hard to know whether a house is good value unless you take the time to carefully inspect the property. Of the 1,000 homes Zillow recently listed for sale in its five biggest markets, 64% were being offered for less than the company paid for them.
I wouldn���t fault any company for realizing the error of its ways and pivoting accordingly. What Zillow did, however, was irksome. How so? It announced it was pausing its i-buying program on Oct. 18. But it turned out to be more than a pause. Just��two weeks later, on Nov. 2, Zillow admitted defeat and shut down its home buying program, shedding roughly 25% of its workforce in the process.
Zillow stock actually rose after it paused i-buying. But it took a 40% haircut when management surprised investors by terminating the program. Its stock is now down more than 70% from its February high.
Investors have to wonder��whether management���s sudden decision was a knee-jerk reaction to its home-selling losses. Or did management know, when it announced the pause in i-buying, that it would kill off the program two weeks later? In other words, is Zillow���s management given to rash decisions���or does it lack integrity?
To be clear, the real-estate business model is anachronistic and, indeed, not every i-buying��company is failing. A commission of, say, 6% means that real-estate agents who broker the sale of a $250,000 house earn $15,000. It takes roughly the same amount of work to sell a $1 million home, and yet their take would be four times greater. Make no mistake: This industry is ripe for disruption���but not, it seems, by Zillow.
Zillow had purchased homes without significant involvement by real-estate agents. Instead, it used its proprietary algorithm���which it calls the Zestimate���to determine a property���s value. It then offered homeowners a percentage of this value, in cash, to buy their houses.
This offer proved appealing to many home sellers. They didn���t have to stage their homes and could be certain of the price they���d get. It also gave them a definitive closing date.
To generate a profit on each home sale, Zillow would keep the commissions usually paid to the seller���s and buyer���s brokers. They would also update the properties cosmetically, when needed.
Ultimately, Zillow erred grossly in anticipating how difficult it would be to turn a profit in the residential real-estate market. There were several problems with its model. Zillow likely discovered what the rest of us already knew���that getting a contractor to show up on time and do a good job is incredibly difficult, and that it���s hard to know whether a house is good value unless you take the time to carefully inspect the property. Of the 1,000 homes Zillow recently listed for sale in its five biggest markets, 64% were being offered for less than the company paid for them.
I wouldn���t fault any company for realizing the error of its ways and pivoting accordingly. What Zillow did, however, was irksome. How so? It announced it was pausing its i-buying program on Oct. 18. But it turned out to be more than a pause. Just��two weeks later, on Nov. 2, Zillow admitted defeat and shut down its home buying program, shedding roughly 25% of its workforce in the process.
Zillow stock actually rose after it paused i-buying. But it took a 40% haircut when management surprised investors by terminating the program. Its stock is now down more than 70% from its February high.
Investors have to wonder��whether management���s sudden decision was a knee-jerk reaction to its home-selling losses. Or did management know, when it announced the pause in i-buying, that it would kill off the program two weeks later? In other words, is Zillow���s management given to rash decisions���or does it lack integrity?
To be clear, the real-estate business model is anachronistic and, indeed, not every i-buying��company is failing. A commission of, say, 6% means that real-estate agents who broker the sale of a $250,000 house earn $15,000. It takes roughly the same amount of work to sell a $1 million home, and yet their take would be four times greater. Make no mistake: This industry is ripe for disruption���but not, it seems, by Zillow.
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