Zillow Offers: What Went Wrong & What It Means For Home Builders

Zillow Offers: What Went Wrong & What It Means For Home Builders

Nov 4, 2021 | By Kevin Oakley

I knew that consolidation would come to the world of iBuyers soon, but I never imagined Zillow would be the first to drop out. I’m rarely caught off guard because real estate is my job, hobby, and entertainment – whatever you call someone who is beyond obsessed with a topic… that’s me. I’ve let things settle in my head a bit before writing this, but it still may feel more like a brain dump and a bit less coherent than my normal writing style. Having 3 article deadlines this week already and then this bomb dropping means there must be compromises somewhere.

iBuying Isn’t Going Away

                I think the most important place to start is that iBuying itself isn’t in any immediate danger. Pouring through the data available from the three largest public companies in the space makes it pretty apparent that Zillow’s issues with profitability, process, and restraint were unique to Zillow. They were attempting to scale incredibly fast and steal market share from competitors by being aggressive on pricing due to faith in their data and algorithms. Consumers like having the option – even if the majority don’t accept the offer an iBuyer makes, and home builders have formed great partnerships with these organizations to help their customers with homes to sell have a level of certainty not previously possible. Any certainty we can add to our customer’s experiences – especially today – is pretty magical.

                Opendoor is clearly in the driver’s seat (they have been since the beginning) – and now 2022 will be an even big year for them. They’ve already announced major deals with both Realtor.com and NewHomeSource.com – with rumblings of even more exciting things to come. This isn’t a commercial for them, but if you haven’t yet made contact with anyone on the Opendoor team I would make a quick call or email today.

                On the branding angle – I think admitting that “disappointing” most people who asked Zillow to make an offer (according to Rich – only around 10% accepted offers) could have been a negative hit to their brand perception is really insightful. As much as you may enjoy “Zillowing” – if they offered you an offer below what you expected… will you hold a grudge?


The Zestimate Doesn’t Own A Time Traveling DeLorean

                It seems that the largest error by the Zillow Offers team was a belief that historical data could accurately predict a 33+ trillion-dollar real estate market three to six months in the future. Investors were willing to take the ride on this bet, but I’m not sure they ever fully believed it would happen. If they did – the stock price of Zillow should have rivaled that of Tesla or Apple. Zestimates are still incredibly accurate – all things considered – when it comes to a property's current value, but the Zestimate doesn’t have a time-traveling DeLorean.

                Here’s what Rich Barton – the current CEO – said when earnings were released this week. “When we decided to take a big swing on Zillow Offers three and a half years ago, our aim was to become a market maker, not a market risk-taker, and this was underpinned by the need to forecast the price of homes accurately, 3 to 6 months into the future.  We used historical data and countless simulations to test this belief.”

                If anyone was able to predict correctly and routinely six months into the future about anything – we would need to introduce a space / time continuum police force to keep the world from falling apart. A.I. is still mostly a future promise – not a current reality.


Big Data Alone Won’t Save You

Having the largest and “best” set of data alone won’t save you from making big mistakes. Zillow is a technology company – one of the best. The Zillow Offers saga showcases the difference between a great tech company getting deeper into real estate vs a real estate company getting deeper into technology. Right now I would rather bet on someone like Lenx than a pure technology company to disrupt new construction. Also – why aren’t more of the big players doing something like Lennar is? If they’re thinking about it, please tell them to call me.

                Big data is still important, but when the stakes are high algorithms still are losing to humans. They aren’t as smart as many think (or would like you to think) they are. It won’t stay that way forever – but there’s no reason to bet the farm that it’ll happen this year or next year. Keep collecting the right data, keep empowering your teams to use it, and keep testing. Don’t engage autopilot.


An “Existential Threat” & The Return Of The Marketplace

                Those are the words Rich used when he took back the reigns of Zillow. Specifically, he was referencing Opendoor. If that threat remains, how will they pivot and keep fighting against it? Likely they will triple down on the idea of being the best marketplace and service provider possible to their core constituents instead of a fully vertically integrated real estate company.

                Their acquisition of ShowingTime – a service that is the real estate industry's leading showing management and market stats technology provider, serving more than 950000 agents – is a great example. They’ll help smooth out any process they can as a technology company – still with the hope that they can add on ancillary services like mortgages.

                Here’s more from Rich during the latest earnings release on the idea. “Instead of a sole focus on solving the seller’s pain point by purchasing from her ourselves as the primary through Zillow Offers, we will expand our view and explore a marketplace of selling solutions that give her certainty and convenience, all while addressing the broader opportunity.  In solving for her move, however, we plan to focus on solutions that are asset- and capital-light for Zillow.  We can still offer choice, simplicity, speed, and convenience.  We will be open-minded about our exploration into providing these “sell” solutions ourselves and/or through partners.  Both are interesting.  And rather than having to buy her home to help her sell, we are now simply going to help her sell."

                Will it be enough to take care of the threats to their brand dominance? Only time will tell, but they are at least playing to their inherent strengths now. They can still cause quite a ruckus (in a good way for the consumer) – stay tuned.


Rich Barton & Conspiracy Theories

                Some articles and comments floating around are saying that perhaps Rich and his team were caught trying to manipulate the market by a viral TikTok post earlier this year and that’s why Zillow Offers was shut down so suddenly. This doesn’t pass the test of sanity to me. Why would Rich and the entire board cover for a lower-level employee if they tried to manipulate the market – and if Rich and the board did know about it then firing 2,000 employees is not a good way to keep them from talking. It isn’t worth talking about this at any greater length.

                Also – I really admire Rich. He didn’t ignore the opportunity iBuying represented and wanted to take a swing at it. He’s taken many big swings before and been able to come out ahead… he’s someone you generally want to bet on winning. I admire him even more though for failing fast and not betting the health of the entire company on Zillow Offers.

                However, his pivot on how bullish he was on Zillow Offers from Q2 earnings to Q3 earnings is alarming. The voice at the top pivoting that dramatically either means he was ignorant to what was happening below him, or that the team below him was filtering the truth too much and Rich couldn’t sniff it out. Investors are rightly disappointed by the striking reversal– and some are actively calling for Rich to leave. As someone who has essentially a .866 batting average at the plate though – I think he deserves quite a few more pitches.

Kevin Oakley
Managing Partner

Kevin Oakley

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