Zillow is done with the iBuyer business. How its exit impacts the Sacramento home market

Fantasizing about a simple life in the suburbs while scrolling through Zillow is all fun and games, but the company that’s garnered internet fame through such fan accounts as “Zillow Gone Wild” on Twitter got a tough dose of reality earlier this month.

On Nov. 2, Zillow Group announced it would shut down its home flipping business called Zillow Offers. It cited “unpredictability in forecasting home prices” as its reason for exiting the iBuyer business.

“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 in a quarterly earnings report. “While we built and learned a tremendous amount operating Zillow Offers, it served only a small portion of our customers.”

California is in the midst of a severe housing crisis, and Sacramento in the last year has experienced an incredibly competitive housing market. Home sale prices in the region have increased by 14.2% since last year and houses are spending between just six and 10 days on the market, according to data from Redfin.

So what will Zillow’s exit from iBuying do to the housing market in California? Here’s what you need to know:

What is an iBuyer?

Essentially, iBuyers, or instant buyers, are companies that use technology to estimate home values and then purchase those homes quickly with cash. Those companies then resell the properties, making money off any value they add by performing updates to the home and through service fees.

Opendoor, a leading iBuyer, touts its ability to provide home sellers with the “certainty of an all-cash offer and more control over when you move” as well as the ability to avoid months of showings. In addition to Opendoor, home owners can sell to RefinNow, Offerpad and Keller Offers, which is the Keller Williams iBuying arm.

How will the end of Zillow Offers affect California?

Despite the buzz around Zillow’s announcement, experts say the impact of its withdrawal from iBuying will likely have a limited impact on the Sacramento region and California in general.

Josh Stech, the co-founder and chief executive of Sundae, .told The Bee Zillow is ultimately a blip on the radar when it comes to California real estate. Sundae helps off-market sellers who own dated and damaged homes find buyers offering fair prices for those properties.

Stech explained that even in Sacramento, one of Zillow Offer’s most active California markets, Zillow had only purchased somewhere in the ballpark of 500 homes and sold about a fifth of those properties. In 2021 so far, iBuyers have purchased 1.2% of all California home for sale, compared to the 5.3% they’ve purchased in Arizona and 3.3% in Nevada, Stech said .

“Their inventory is going to be absorbed pretty darn quickly and what’s clear is that they way overpaid, even in Sacramento, you look at their median purchase price versus the rest of the market and it was almost 12% above it in September,” Stech said. “It’s not going to depress home prices or, you know, be a flood of inventory. That’s not how it’s going to go down.”

Ryan Lundquist, a certified residential appraiser and housing market analyst in the Sacramento area, agreed: Zillow didn’t own enough properties to unsettle the Sacramento market with its closure of Zillow Offers. And it doesn’t mean much for the rest of the market, he said.

“Basically over the past six months, 90 to 93% of the market has not had anything to do with iBuyers,” Lundquist said, meaning traditional methods for buying and selling homes remain dominant. “Sometimes we look at this and think that it’s everything when in fact it’s not.”

What does Zillow’s announcement mean for other iBuyers?

While it may be too early to say for sure, Stech and Lundquist were split slightly when it comes to the future of iBuying. For Lundquist, reading too much into Zillow’s exit is a folly.

“Zillow failing isn’t about the iBuyer model per se. It’s about Zillow having a flawed strategy,” Lundquist said. Zillow overpaying for properties created a “disaster waiting to happen,” he added.

Stech had an opposite interpretation. While he agreed that Zillow’s implementation of the iBuying model was particularly problematic, he said the idea of using algorithms to buy homes is destined to fail.

Because iBuyers don’t do too much in the way of renovations, they rely on market appreciation in addition to the service fees they collect to turn a profit. But Stech says if home prices plateau, service fees will have to rise so these companies can keep making money.

“Homeowners are going to realize at some point their fee just doesn’t warrant their service,” Stech said.

Plus, Los Angeles is already considering banning iBuyers, amidst fears iBuyers and private equity firms are contributing to increasing housing prices.

Who will buy Zillow’s housing stock?

Both Stech and Lundquist agreed that it’s likely institutional investors will eat up a lot of Zillow’s housing stock, buying properties in bulk. That might ultimately lead to homes being taken off the market, creating frustration in a place like Sacramento where supply is already limited.

“When people start to see that this company has essentially taken properties off the market, I think that’s where some frustration and anger sets in where it’s not just about property being a neat little tool online to check out a value but here we see that this is affecting people in the real world,” Lundquist said.

Properties bought by investment funds — Lundquist specifically mentioned Invitation Homes as a potential buyer — often turn homes into rentals. And while Sacramento needs rental properties, too, home buyers already struggling to compete in a place with less than a month’s worth of housing supply are at a disadvantage when they’re competing against investors buying in bulk, according to Lundquist.

Did you buy or sell a home through Zillow Offers? Send us an email at utilityteam@sacbee.com to share your story.

This story was originally published November 17, 2021 at 6:00 AM with the headline "Zillow is done with the iBuyer business. How its exit impacts the Sacramento home market."