Did Zillow get out over its skis?

Company is selling homes for less than it paid for them

By: - November 10, 2021 6:06 am

Zillow has slashed the price on this home by 18% since buying it Sept. 8. (Zillow advertisement)

Zillow, the website originally known for one thing — ‘Zestimating’ the value of real estate it’s never seen — and more recently, for sending ripples of disruption through the industry — is proving challenged to do both.

“We’ve determined the unpredictability in forecasting home prices far exceeds what we anticipated and continuing to scale Zillow Offers would result in too much earnings and balance-sheet volatility,” Zillow Group co-founder and CEO Rich Barton said during an earnings call last week. 

Zillow reported $1.7 billion in third quarter revenue. The $1.2 billion derived from ibuying and selling was below the company’s expectation of $1.45 billion, and due “primarily to renovation and resale capacity constraints,” Zillow said in its earnings report.  

The company announced last week it’s getting out of the ibuying business and laying off 2,000 employees, an estimated quarter of its staff, after purchasing properties in the third quarter for more than they are likely to sell, Zillow says. 

Zillow’s Las Vegas inventory is largely priced below the purchase amounts the company paid for the properties in recent months, according to records reviewed by the Current.  

A property at 10309 Junction Hill Dr, Las Vegas, NV 89134 sold on the traditional market in Feb. 2019 for $258,000, or $198 a square foot. 

In September of this year, Zillow ponied up $406,700, or $312 per square foot — a whopping 57% increase from two years ago. Zillow has lowered the price four times since listing the home at $406,900 on Sept. 17. It’s now priced at $334,900, a decline of 18% from what Zillow paid.  

Nevada Association of Realtors vice-president Tom Blanchard says Zillow is still in the black, after deducting fees from the sometimes-inflated amounts they paid sellers. 

“They may have paid $520,000 but by the time they deduct their convenience and other fees, the seller may have been paid $425,000,” he said. 

“At this time, they are just recovering their invested capital which is stuck in their current stock of homes purchased over time,” Dr. Vivek Sah of UNLV’s Lied Center for Real Estate said via email. “They probably believe that the market may be stabilizing after a year of frenzy and hence want to exit through these sales.”

On average, the 58 Southern Nevada homes owned by Zillow as of Nov. 9 are listed about 5% lower than Zillow paid, with some slashed by 10% and as much as 18%. 

“We are continuing to sell our remaining inventory the same way we always have, which includes on the open market and listed traditionally,” a Zillow spokesperson said via email. “Zillow-owned homes listed on the market are priced based on current market conditions.”

Las Vegas Realtors, however, report no dip in Southern Nevada home prices, which are setting new records each month. 

The median price of a home sold in October was $410,000, up 20.5% from a year ago and up 0.9% from the previous month.  

“Our home prices are still increasing, but they’re going up more gradually,” LVR President Aldo Martinez said in a news release last week.

In Reno, where Zillow has no presence in the ibuying market, the median price of an existing home in October was $540,000, up 1.9% from the previous month and the average property was under contract after nine days on the market, according to the Reno/Sparks Association of Realtors.   

A year ago, the Current’s review of public records indicated the nine properties in Southern Nevada owned by Zillow were listed for an average of 7.1 percent more than the company paid to purchase them just days earlier.  

Is the failure of Zillow’s algorithm to remain above the fray of the buying frenzy indicative of a flaw in its algorithm?

“In a normal market, algorithms will work for their business model, but the last eighteen months or so were abnormal by any standards,” says Sah. 

“The challenge we faced in Zillow Offers was the ability to accurately forecast the future price of inventory three to six months out, in a market where there were larger and more rapid changes in home values than ever before,” a spokesperson for Zillow wrote in response to questions from the Current. “We remain confident in the ability of our Zestimate given its median error rate for on-market homes is currently 1.9%, and 6.9% for off-market homes, and we continue to improve it every day.”

Sah says both ibuyers and conventional buyers “paid a premium due to the COVID impact (constrained supply pushing the market up by 20% in a short-period of time), and made bulk purchases which won’t be able to be sold at a considerable profit over a short-period of time, and hence the exit strategy.”

Does Zillow’s retreat from the market spell a reprieve for traditional agents, some of whom complained the ubiquitous platform would render them irrelevant? Or vindication for realtors who railed at what they called the one-size-fits all aspect of Zillow’s business model? 

“It validates the fact that you can’t have a computer buy and sell properties,” Blanchard said. “Yet.” 

Sah says he doesn’t think traditional agents are “drastically impacted” by Zillow or any ibuyers.  

The Las Vegas Realtors Association agrees, according to a spokesman, who says Zillow’s holdings represent a small share of the market. 

A year ago, Zillow Offers sought to be “… a one-stop shop, buy, rent, sell, lending and closing service,” spokeswoman Jordyn Lee told the Current at the time, based in large part on the strength of its Zestimate.

Today, the company appears unconcerned about retaining or regaining its credibility when it comes to divining home values for properties it’s never seen. 

The company, according to its spokeswoman “leveraged the Zestimate in our Zillow Offers operations the same way we encourage the public to use it: as a starting point.” 

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Dana Gentry
Dana Gentry

Dana Gentry is a native Las Vegan and award-winning investigative journalist. She is a graduate of Bishop Gorman High School and holds a Bachelor's degree in Communications from the University of Nevada, Las Vegas. Gentry began her career in broadcasting as an intern at Channel 8, KLAS-TV. She later became a reporter at Channel 8, working with Las Vegas TV news legends Bob Stoldal and the late Ned Day. Gentry left her reporting job in 1985 to focus on motherhood. She returned to TV news in 2001 to launch "Face to Face with Jon Ralston" and the weekly business programs In Business Las Vegas and Vegas Inc, which she co-anchored with Jeff Gillan. Dana has four adult children, two grandsons, three dogs, three cats and a cockatoo named Casper.