Exclusive: Inside the collapse of a tech-fueled real estate phenomenon in Sacramento

In the middle of what was likely the most competitive real estate market in Sacramento’s history, iBuyers, or instant buyers, made bold promises.

The concept was simple. Tech firms such as Zillow, Redfin and Opendoor would buy your home with cash, practically sight unseen. No open houses. No real estate agents. No hassle.

By the time the phenomenon hit its peak in 2021, iBuyers owned hundreds of homes in the Sacramento region. They’d flip their investments quickly, often selling to buyers who wanted to avoid tense bidding wars. And there was money to be made, the companies wagered, in a market defined by record-setting price increases.

Was the model too simple to succeed?

Less than two years after its peak, the iBuying model appears to be collapsing in Sacramento and other pandemic-era real estate hot spots.

Zillow closed its national iBuying arm in November 2021. Redfin followed suit one year later. And Offerpad, which entered the Sacramento region in March 2022, has stopped purchasing homes in the market, the company confirmed to The Sacramento Bee last week.

iBuyers’ narrow margins benefited homebuyers

The iBuying trend was undone by a series of flaws that were exposed as a spike in mortgage rates caused the market to slow in the middle of last year, real estate experts said. Companies appeared to pay too much for properties they later offloaded or sold homes for less than what a traditional homeowner could have fetched, leaving thousands of dollars on the table. Instead of making huge profits, Zillow and others reported losing tens of millions of dollars.

“It’s impressive that there could be a model that comes to town and buys so many properties and have 5% of pendings and listings; I don’t want to understate that,” said Ryan Lundquist, a Sacramento appraiser and real estate market analyst. “But real estate is really easy on paper and is difficult in real life. This model has made really big claims and so far has not been able to follow through. It’s a reminder that it’s not easy just because you’re a big tech company with billions of dollars.”

Montell Johnson believes he was among the homebuyers who benefited from the offloading of an iBuyer home. He was looking for a new home for his family in the summer of 2021. Johnson is a realtor with experience in navigating the homebuying process and was drawn to an iBuyer for multiple reasons, most notably his desire to avoid a fierce bidding war that is more likely to take place with a private seller who is deeply invested in drawing out the highest possible bid.

In late 2021 and early 2022, multiple homes in the region each week were selling for $100,000 or more over the asking price, and most properties in Johnson’s price range were attracting multiple offers.

Johnson found the home he wanted, a four-bedroom house on a large lot in South Natomas owned by Zillow, which at its peak owned about 500 homes at a time in Sacramento.

“We really liked the property, the location of the home and the fact it was an iBuyer,” Johnson said. “They typically are going to be more negotiable than a (traditional) homeowner. It was just like a business transaction, as if I was just buying something from a company and not a person.”

There was another benefit as well. Johnson paid just $25,000 above the list price. Had the home been owned by a private seller, he predicted he would have been dragged into a bidding war and paid far more. Essentially, Zillow left money on the table.

“I’m surprised (iBuyers) have been operating the way they have for as long as they have,” Johnson said.

Tightening market choked iBuyers

Opendoor is credited with launching the national iBuying trend in 2014, eventually growing into the largest instant buyer in real estate. Offerpad, Zillow, Redfin and a handful of other companies followed, sending letters or emails to residents throughout the nation with offers to buy their homes.

“The model worked when prices were going up,” said Selma Hepp, the chief economist at national real estate research firm CoreLogic. “But the margins were pretty narrow.”

Some companies appeared to miscalculate the market. After peaking in May, median prices and buyer demand have dropped. Now, roughly 70% of the homes owned by Opendoor in Sacramento are on the market for less than what the company paid, in some cases tens of thousands of dollars less, according to data from the multiple listing service, a database of real estate transactions.

“The market changed so sharply that (iBuyers) weren’t able to be profitable,” Lundquist said. “The margins were razor thin already and when you add a quick downward price change, it was a death blow for the system.”

Thomas May is surprised the model is failing, “with all the data analytics they have.” He and his wife were hunting for a home in 2021, “when things were at their craziest,” he said. They were getting outbid on homes before they had even finalized an offer.

Then they found a half-plex in South Natomas owned by Zillow. The home was move-in ready and May landed it for about $19,000 over the asking price, a relative bargain for that time. May said it was obvious Zillow had sunk a fair amount of money into the home, including installing new high-end windows.

“I looked at the numbers, what they bought it for and counted up the things they spent money on,” he said, “and there’s no way Zillow made any money on our house. They had to be underwater on it.”

What’s the future of iBuying?

Zillow left the national iBuying market in November 2021 after reporting a loss of more than $500 million. Redfin closed its instant buying arm a year later after acknowledging a loss of more than $22 million in 2022 alone; the company also laid off 13% of its workforce.

Offerpad arrived in Sacramento in March 2022, but is already backing out.

“In response to the broader real estate market slowdown, we reduced the pace of our acquisitions and the size of our team,” company spokeswoman Juliana Vasquez-Keating wrote in an email to The Bee. “As part of this reset, we will not be acquiring homes in Sacramento at this time and will instead focus on our more established markets.”

Opendoor entered the Sacramento market in 2018 and appears to be the last company with a significant presence here.

The company “continues to operate in Sacramento, as well as in more than 50 other markets across the country,” Jessie Smith, a regional general manager wrote in an emailed statement. A company spokeswoman wrote in an email that Opendoor does not provide a more detailed overview of the state of the organization close to its quarterly earnings report, which is scheduled for Thursday.

“Opendoor is still trying to crack the code and we’ll see if they’re profitable or not,” Lundquist said. “Clearly the model is more successful on the way up than on the way down. The irony is that this model has made such big claims about changing the real estate game and offering this new efficiency but it wasn’t able to survive.”

This story was originally published February 22, 2023 at 5:00 AM.