Just as Zillow exits dealmaking business, RedfinNow puts down roots in Twin Cities

As Zillow Offers packs up its operations in the Twin Cities, RedfinNow is moving in.

Just days after Zillow announced its plans to shutter the division of the company that offers sellers nearly instant cash offers, Redfin said it was expanding its own version of the service to the Twin Cities.

Both moves highlight the challenges — and opportunities — that these tech companies face as they try to disrupt the way houses are bought and sold across the country.

Zillow initially launched its iBuying division in the Twin Cities in early 2019. Typically, iBuyers purchase homes directly from sellers at market price, quickly make improvements and then list them for sale. Unlike traditional "home flippers," these houses were never listed on the open market.

When Zillow announced earlier this month plans to shutter the operation, the real estate tech company had just 166 homes for sale in the Twin Cities metro area.

Just a few days later, Redfin announced plans to bring its iBuyer service to the Twin Cities — a move scoffed at by many traditional brokers and real estate agents who say that while there's a place in the market for such a model, the traditional model will remain dominant.

"There are so many variables when it comes to pricing a home, plus all the personalities," said Todd Urbanski, former president of the Minneapolis Area Realtors and a sales agent with Fazendin Realtors in Wayzata. "I don't think it's possible to price a house using technology or an algorithm that's beneficial to the consumer."

Companies that pay sellers cash on the spot for a quick sale have been around for decades, but these new iterations of the model are operated largely by well-funded tech companies that bring a tech-centric approach. The idea is to streamline the home buying process by wooing sellers who have become accustomed to buying everything online, from groceries to cars. The concept has also been embraced by Offerpad and Opendoor, which also has an established presence in the Twin Cities.

Generally, the iBuyers profit model is based on the assumption that the company will make a profit after the quick fix-up and resale of the property. In some cases, companies also profit from agent referrals and other affiliated services including mortgages and titles.

So when Zillow announced last week that it was shuttering its iBuyer operations nationwide because it hadn't found a way to make the model profitable, some traditional brokerages said it was no surprise given that the company was buying and selling properties based on proprietary estimates that used its oft-watched "Zestimates."

While Zillow has said that the error rate of its Zestimates can be about 2%, the company's CEO, Rich Barton, said in a statement that its software was unable to account for fluctuations in the market, and that a shortage of labor and supply-chain issues made it difficult for the company to quickly relist the properties after they'd been acquired.

For example, in early September Zillow paid $277,400 for a 1,308-square-foot house in Minneapolis and, after a quick refresh, listed it with Twin Cities-based Kris Lindahl Real Estate (KRLE) a month later for $274,900.

Those Zestimates, many agents say, weren't able to accurately replicate the kind of analysis that can be done by a local agent. And while both Zillow and Redfin embraced a similar iBuyer model, the companies differed in their approach.

Redfin employs its own locally licensed brokers and agents who are able to work directly with people that want to buy and sell in the traditional way, but they also represent the company in the resale of properties it buys. Zillow worked with local "partner agents" such as KRLE to handle the resale of the acquired properties.

Chris Prescott, Minnesota market manager for Redfin's brokerage, said the company's ability to offer sellers the option of a traditional listing situation or an instant offer gives the company a competitive advantage over Zillow Offers, he said.

He said Redfin's iBuyer Twin Cities division will have its own staff, including a district manager, that will be tasked with handling those transactions. Prescott said the expansion to the Twin Cities was driven in part by constant queries from local sellers asking for an instant-offer option, which he relayed to the Seattle corporate headquarters.

"There's no such thing as a one-size-fits-all consumer, which is why it's so important that we offer Minnesota homeowners a variety of selling options to meet their needs," said Prescott. "While many sellers will still choose to work with their Redfin agent to sell their home on the open market, we know there are plenty who would prefer to avoid the listing process altogether and sell their home as-is to RedfinNow."

The Twin Cities metro is the 12th new market for RedfinNow this year. The service is being offered in 30 markets in 15 states and the District of Columbia.

Like Zillow Offers, RedfinNow uses local insight and its proprietary machine-learning algorithms to make a cash offer based on the home's location, condition and the cost of repairs. Like other iBuyers, RedfineNow sellers are able to pick their closing date after accepting RedfinNow's offer. Once RedfinNow owns the home, it makes updates and then lists the home for sale on the open market.

Prescott said that RedfinNow will initially be available within the 13-county metro, but expects to expand to the 15-county metro by the end of the year, and possibly Rochester and St. Cloud in 2022.

He said that even as the company is assembling its local team, response to the announcement has been positive.

"We've already been sending bids to sellers," he said. "About a half dozen so far."