says Zillow's Chief Operating Officer. And so goes Zillow's iBuying momentum.
Do you really buy the reasoning? Sure, it's likely Zillow is experiencing delays renovating and closing sales for their Zillow-owned homes.
What do they see from their vantage point? Is the housing market softening and turning concerningly bearish faster that the rest of us realize?
Or is Zillow telling us that iBuying is really hard, and really dangerous if you don't execute at a world-class level?
Step 1: provide a competitive offer in an already overheated market (iBuyers operate in overlapping markets).
Step 2: close the initial transaction which incurs transfer taxes and recordation fees (closing costs).
Step 3: renovate the property.
Step 4: list the property and facilitate showings.
Step 5: close the sale, bear carrying costs (interest) of credit facility, and risks of buyer falling through.
When all is said and done, iBuyers have shown how hard it is to make a profit on a per unit basis. If the market cools off, you can lose tens of thousands of dollars per property, and that appears to be happening to Zillow, at least in some of their markets.
From our own research across multiple markets, we see Zillow may have done quite a bit of buying high and now they're in a tough spot where they need to sell low.
As you can see from this example, Zillow bought a property, renovated it, and is currently struggling to sell it for 5.8% less than what it bought it for. After closing costs, Zillow will lose tens of thousands of dollars on this particular sale.
AVM means Automated Valuation Model and it's the computer algorithm that determines how much Zillow should offer for a given property. Our guess is that Zillow is taking a pause to improve the accuracy of its pricing models and quality of its operational execution against this challenging business model.
It's less likely Zillow predicts such dangerous market conditions that it would entirely stop its iBuying operations. If market deterioration were predicted, it would simply provide lower offers to build in a larger margin of safety to protect profits. That said, we did see all iBuying come to a stand still in late Q1 and Q2 2020 due to pandemic concerns.
House Zillow bought right up the road from a rental we bought 2 months ago— Joe Cassandra (@JoeCassandra) October 18, 2021
Listed for $269k
Zillow bought for $305k.
Ours has one more bed and one more bath
We bought for $160k.
Comps I ran was $250k at time
Zillow is screwing up values everywhere. pic.twitter.com/WOPMTKI2ee