The collapse of Zillow Offers — the online real estate giant’s venture into buying and selling homes — announced Nov. 2 can be traced, in one small part, to its over eagerness to invest in Colorado’s red-hot real estate market.
The company bought hundreds of homes in the Front Range this summer, mostly in August and September, often paying more than what sellers were asking. Now the company, as it folds its ill-fated Zillow Offers business of flipping homes with a promise to investors to unload roughly 18,000 homes across the country, is selling more than 500 homes in 10 Front Range counties, and more homes it purchased in October are hitting the market every day.
This story first appeared in The Outsider, the premium outdoor newsletter by Jason Blevins.
Zillow is slashing prices for those homes. Nearly all the properties are priced well below what the company paid only a few months — or even weeks — ago.
“It’s pretty crazy to watch, isn’t it,” said Michael DelPrete, who teaches a class on real estate technology at the University of Colorado’s Leeds School of Business.
But with inventories of for-sale homes at all-time lows and demand still peaking as buyers pay record prices across Colorado, brokers and real estate industry veterans don’t expect Zillow’s fire sale to have much impact on the market, even if the company sells them all in bulk to institutional investors.
“It’s like we won a mini lottery”
Kyle Barnes listed the Castle Rock home he and his wife purchased in 2013 for sale in early August. They also submitted their home to Zillow Offers, as well as instant-buying market leader Opendoor Technologies Inc.
After a detailed in-person inspection by Zillow, a remote inspection by Opendoor and a week on the market, the offers landed. A family using a real estate agent offered $575,000, which was slightly more than the Barnes’ asking price. Opendoor offered $546,500. Both those included fees of around 5%. Zillow’s offer came in at $626,000, with only a 1% fee.
Barnes accepted the Zillow offer and a couple days before they were scheduled to close, the company announced it was abandoning its nascent home buying and selling flipping business.
“Our fear was that Zillow would not close. We were freaking out,” said Barnes, who was closing on a house his family was building the day after closing the sale of their Castle Rock home.
But the deal closed, despite what Barnes called “a lot of last-minute stuff and disorganization by Zillow.” The money landed in his bank on Nov. 4, just as scheduled.
“It felt like this was a rare gold rush moment where we just got fortunate,” Barnes said. “It’s like we won a mini lottery.”
Barnes said he’s chatted with agents and friends about Zillow’s strategy in buying his home for so much more than what he was asking — and even more than the company’s own “zestimate” value.
“I thought either they are so much smarter than I am and they have this magic formula and they are forecasting the market. I mean, maybe Zillow can afford to sit on a home and wait. Maybe they know something is going to happen,” Barnes said. “Or the alternative is that they were making mistakes.”
It turns out, Zillow was making mistakes.
In the three months preceding Sept. 30, Zillow spent $1.2 billion on 3,032 homes, which compared to $186 million for 583 homes in the same period of 2020. With a Zillow Offers loss of $245 million for the third quarter of 2021, the company estimates it lost about $81,000 on every one of those 3,032 homes. (The company reported a net loss of $328 million for the second quarter.)
The company has 1,956 homes in Florida, 1,543 homes in Texas and 1,309 homes in California. Nearly 5,000 more homes across the country make up 49% of its remaining properties. The company says it is under contract to buy another 9,000 homes in the final months of 2021 and expects to sell about 5,000 homes by year’s end, generating up to $2.1 billion in revenue but losing up to $365 million in the final quarter of this year. That will put Zillow’s losses from its home buying and selling business at close to $600 million in the final half of 2021, roughly $10 million a month.
Zillow paid big for those homes, often paying more than listing price. In a Nov. 2 letter to shareholders, the company said “unintentionally purchasing homes at higher prices” led to the failure of its Zillow Offers, which was launched in 2017 with plans to become a heavyweight in the world of home buying and selling.
The company began buying homes in Denver in 2018 and expanded to Fort Collins and Colorado Springs in 2019.
“We have determined that this large scale would require too much equity capital, create too much volatility in our earnings and balance sheet, and ultimately result in far lower return on equity than we imagined,” reads Zillow’s letter to investors announcing the end of its home buying and selling business.
“We have been unable to accurately forecast future home prices at different times in both directions by much more than we modeled,” reads the letter, describing the challenges of global pandemic and the “supply-demand imbalance” that spiked home prices in recent months.
Wall Street is not pleased. Zillow’s stock is trading around $64 a share, down from around $103 a share before the Nov. 2 earnings statement.
“Like Christmas” for some sellers, but not buyers
For those few lucky sellers, Zillow made it “feel like Christmas,” said Brian Anzur, the president of the board for the South Metro Denver Realtors Association.
But buyers don’t see Zillow as Santa.
Anzur would walk home-hunting clients through a Zillow-owned home and they would be amazed, he said. And not with the house.
“They’re going ‘How much are they asking?’” Anzur said. “The market is crazy in Colorado compared to other places in the country, but it’s not stupid. It can see value. If you bring a property to the market that is simply priced too high, the market tends to ignore it.”
Which is what is happening to Zillow as the company steadily decreases asking prices for hundreds of homes it overpaid for across the Front Range. Anzur recently brought clients to a Zillow-owned home in the south metro area that was priced about $75,000 over similar properties in the neighborhood. The property next door, he said, was blighted; no grass, peeling paint and rusting barbecues in the dirt.
“Zillow could not see that. They see beds, baths, square footage and locations,” Anzur said. “Their algorithm really fell short in evaluating other things that are important to purchasers.”
For many years, real estate brokers have had to educate sellers and buyers who click over to Zillow’s zestimate tool that provides often-incorrect values.
“Now we have the company behind the zestimate saying ‘We just didn’t get it right,’” Anzur said.
Milford Adams, the chair of the Denver Metro Association of Realtors board of directors, said he is unaware of a real estate investment trust or other corporation ever releasing hundreds of homes into the Denver market in a matter of months.
Adams said it was hard to determine if Zillow was influencing prices by paying above-listing prices for homes because just about every recent home sale in metro Denver has been above asking price “for a while.”
“So Zillow is certainly not the only buyer paying above asking,” Adams said.
And Zillow was diverse in its acquisitions. Its portfolio of more than 500 homes on the Front Range is spread across many neighborhoods. So selling those, even in bulk, will not likely impact a regional, or even neighborhood market, Anzur said.
DelPrete, with CU’s Leeds School, exp[ects Zillow’s exit from flipping homes to lure institutional investors eager to secure a swath of hot-market housing — either for renting or selling — in a single deal.
“That is not great for consumers or Coloradans,” DelPrete said.
Unless, of course, Zillow plans to sell each of the homes to individual buyers. The company has reduced the price for just about every home it is selling in the Front Range.
“But that’s not what Zillow has talked about,” DelPrete said. “They have talked in public about selling to those institutional investors. Those large investors, they are in a position of power here. They are in the business of buying homes and renting them out and they’ve been doing that for years and they do it profitably. They are not going to overpay for these homes.”
On Wednesday, the Wall Street Journal reported that Zillow had reached a deal to sell 2,000 homes in 20 markets to Pretium Partners, a New York hedge fund that planned to offer the properties for rent. The report said Zillow received “market price for the properties.”
Institutional investment in real estate is common in Colorado. The National Association of Real Estate Investment Trusts, or Nareit, shows 128 REITs owning 8,734 properties in Colorado. Those properties include nearly 3,200 billboards, 1,200 communication towers and a mix of shops, health care facilities, storage facilities, apartment buildings, resorts and office buildings. REITs own 3,139 single-family homes in Colorado, the trade group said.
DelPrete, who studies the online iBuying phenomenon that Zillow hoped to tap with Zillow Offers, said the online company’s high-priced purchases of homes this summer marks “a catastrophic pricing failure.”
“They made a systemic mistake,” he said, noting that Zillow bought more homes in the third quarter of 2021 than it had purchased in the previous three quarters combined.
Other instant buying companies, like market-leader Opendoor Technologies Inc. and its smaller rival Offerpad Solutions Inc., saw the market cooling in July and began reeling in the prices they paid for homes, DelPrete said. Zillow kept buying at a record clip, paying prices well above listing.
“It was like brake lights on the highway, but Zillow was in the passing lane going 80 mph and they didn’t see the brake lights or simply ignored them,” DelPrete said.
Both Opendoor and Offerpad, which offer online tools and programs for swift home buying and selling, this week reported record revenue in the third quarter. Both publicly traded companies are active in the Front Range, with Opendoor owning more than 350 homes in 10 counties and Offerpad owning roughly 20 in the region. Most of Opendoor’s and Offerpad’s purchases in the Front Range, unlike Zillow, were from last year or early 2021.
- Offerpad, which launched in 2015, told investors on Wednesday it was expanding into new markets after buying 2,753 homes and selling 1,673 homes in the three months ending Sept. 30. The company’s third-quarter revenue grew 190% over the same period in 2020, reaching $540 million.
- Opendoor, which launched in 2014 and is the largest iBuying company, with nearly 18,000 homes in 44 markets, told investors on Wednesday it had purchased 15,181 homes and sold 5,988 homes in the third quarter of 2021, with revenue for the three months reaching $2.3 billion, up 91% from the previous quarter.
DelPrete warns against reading the collapse of Zillow’s home-flipping business as a sign that instant buying is a failed enterprise. He’s not quite ready to say Amazon-styled click-to-buy home purchasing is the future though.
“It’s still too early to tell. iBuying is new … and the path to profitability and sustainability is uncertain,” he said. “But just because Zillow can’t, doesn’t mean it can’t happen.”
Patrick Muldoon, whose Muldoon Associates brokerage works in both Colorado Springs and Pueblo, remembers seeing Zillow buying homes in his region this summer and fall.
“They were making offers on properties locally where I was saying ‘What is the game plan here?’ They were in neighborhoods where everything was $475,000 to $490,000 and they come in at $520,000 to $530,000. It just didn’t make a lot of sense,” said Muldoon. “We thought maybe it was just here but, obviously, they were doing that everywhere.”
Muldoon, like DelPrete, doubts Zillow will be negotiating thousands of individual deals for the properties it hopes to sell, and even if it does, it is unlikely to have an impact on the Front Range real estate market.
“We have far higher demand than we have properties for sale so I wonder if even several hundred homes hitting the market is enough property to even make a blip on the housing shortage we have been dealing with for years now on the Front Range,” Muldoon said.
There are a lot of factors clouding the Colorado real estate market right now as demand peaks, prices soar and the inventory of for-sale homes reaches record lows. Inflation, which hit a 30-year high in October, could pinch homebuyer budgets. Interest rates could climb as the Fed maneuvers around that inflation.
If interest rates climb, Zillow might look pretty smart having shed thousands of for-sale homes from its portfolio.
“Sure maybe Zillow lost money and maybe they made bad decisions, but did the company get out when the getting out was good?” Muldoon said. “We could be six months from now looking back and saying ‘Wow, did they see this coming?”