UPDATE 11/27/2021: Steven Buccini nails it with a much better review of Zillow’s ignorance. I highly recommend perusing his blog. https://www.stevenbuccini.com/zillow-offers
This isn’t a research article. Please don’t use this as evidence. Read this if you’re too lazy to read the longer articles and you just want to know some basics.
I’m not an expert in the following:
I do know about:
iBuyers: A term invented in 2017 to alleviate press and media from having to say “Instant Buyer”. I will refrain from using it in my own writing. Expect it only in quoted text.1
Zillow got into hot water in October 2021 when they had over invested in a house flipping scheme. For the past few years, Zillow Offers will buy a house meeting a few baseline requirements with a very quick turnaround (a few hours!). This methodology fills a gap in homeowners’ house swapping situation:2
A homeowner is initially matched with a house from which she receives a flow utility benefit of housing services and pays a maintenance cost. With some probability, she becomes unmatched from her current house and begins the process of moving. The homeowner can only own one house at a time. In consequence, she must move sequentially: she first needs to find a buyer for her current house using the listings process, and then looks to buy a new house. Once she has bought her new house, she once again becomes a matched homeowner. Instead of listing her house and wait for it to sell, a home buyer can sell the house to iBuyers who list them for resale. iBuyers are not constrained to hold only one house at a time, which allows them to intermediate. They possess a pricing technology that allows them to purchase almost immediately
The assumption used is that a gap for consumers is open: buy a house quickly so people can get out and move into a new house with their money. Ideally a homeowner would take a small hit, perhaps a few percentage points on the total value of the home in lieu of having money in hand. It was expected that Zillow’s presence in the home data field would give existing competitors a run for their money.
There are constraints on the profitability of this system. It’s easy to see that simply buying and selling a home at face value isn’t reliable. You could easily spend 2-3% of the sale price to get a return of over 5% though – a flipping market has proved this. It seems to work:3
Once an iBuyer owns a home, it works quickly to renovate the property and relist it—in theory for a profit. An analysis of millions of home sales across the US between 2013 and 2018 by academics at Stanford, Northwestern, and Columbia Business School found that iBuyers made around 5 percent profit by flipping homes…
While this seems to be a good indicator for inserting a middleman into America’s home buying marketplace, Bloomberg points out:4
The home-flipping operation, which dates to 2018, has yet to turn a profit. “Prices turned on them and they got a little bit flat-footed and they were probably a little too aggressive on the bidding,” said Brad Erickson, an analyst at RBC Capital Markets. “They probably don’t care so much. It’s not as important at this stage of the game to make money.”
So, no – doesn’t seem to actually work. To me this situation smacks of Uber the ilk. Venture capitalists jump at a hot new technology that is a whole new paradigm. I’m liable to be wrong – very wrong – about this, but I would hazard a guess that turning a profit in a long run house buying gambit is a bit of a doozy. Distilling home buying into an algorithm that performs reliable despite commonly fluctuating variables is an assumption that could only come from the hubris of Silicon Valley VCs.