Zillow exits home deals; it had a small presence in Twin Cities real estate

The Zillow Group got a foot in the door of the Twin Cities residential real estate market before deciding to end the iBuyer program which it hoped would help revolutionize the real estate industry.

The Seattle-based online real estate company said late Tuesday that the complex algorithms it uses to determine the current and future resale value of homes aren’t working well enough to keep a business called Zillow Offers going.

The company lost approximately $ 381 million in the July through September quarter, bringing the overall business down to a net loss of $ 169 million.

“The unpredictability of forecasting house prices far exceeds our expectations and further scaling Zillow offerings would result in high revenues and balance sheet volatility,” said Rich Barton, CEO of Zillow.

Although Zillow Offers was launched in the Twin Cities in early 2019, the model had only captured a small market share. On Tuesday, 166 Zillow properties were up for sale in the Twin Cities metropolitan area.

And in the first six months of the year, there were a total of 377 purchases in the Twin Cities by the four largest iBuyers, including Zillow Offers, Opendoor, RedfinNow and Offerpad. Around 29,300 apartments were sold in the 16-district metropolis of Twin Cities.

As a rule, iBuyer buy real estate outside the market directly from sellers at market prices, make necessary improvements and quickly put them up for sale again. The model differs from traditional “home pinball machines” in that the houses bought for refreshment have never been listed on the open market, which creates a direct connection between seller and buyer.

Leading real estate agents in the Twin Cities have long said that while iBuyers gives a place in the market for such innovations, it does little to jeopardize the traditional brokerage model.

“It’s a difficult model to scale,” said Sharry Schmid, president of Edina Realty of Twin Cities. “A straightforward iBuyer model is too ‘one size fits all’ and doesn’t take into account local market dynamics and individual houses exactly.”

She said local agents take many things into account when determining a market value for a home, something that algorithms in the past have not been able to achieve with accuracy.

“This underscores Wall Street’s difficulty in getting involved in housing, which is so much more than just stocks and financials,” said Schmid. “Homes are not as easy to buy and sell as stocks, and the market cannot be predicted by algorithms. If you remove the agent from the process, too many local and subjective considerations are simply lost or overlooked.”

As a sign of trouble, Zillow announced two weeks ago that it would stop home buying until the end of the year. The company cited labor and material shortages that made it difficult for the company to buy, renovate, and resell homes fast enough to make a profit.

With Zillow still involved in active transactions, it will take several quarters to close the deal, a process that includes reducing Zillow’s workforce by approximately 25%.

Twin Cities residents who want the instant offer model still have options, including Opendoor, which launched in the Twin Cities ahead of Zillow in 2018. The company has worked with approximately 2,000 buyers and sellers in the area, said Jim Lesinski, Opendoor’s regional general manager.

Unlike Zillow, the company is a licensed broker who works with both its own agents and partner agents.

Zillow will continue to publish frequently watched “zestimates” calculated in real time using complex algorithms that include public property records, recent sales, and feedback from individual homeowners.

Brenda Tushaus, CEO of Remax Results, based in Eden Prairie, said she was surprised by the decision to pull out of the iBuyer business entirely, but not a shock that the company has not been able to make profitable use of its Zestimates.

“I’ve always viewed Zillow’s house price zestimates as borderline,” she said, noting that Zillow made his median error transparent on his website. For example, in Minneapolis, Zillow says his margin of error is 2%.

“I think iBuyers will stay, but they will only make up a small fraction of the market share,” she said. “Some consumers will always need this option.”