Zillow exits home deals; it had a small presence in Twin Cities real estate

Zillow Group got a toe in the door of the Twin Cities residential real estate market before deciding to end the iBuyer program it hoped would help revolutionize the real estate industry.

The Seattle-based online real estate company said late Tuesday that the complex algorithms it uses to determine the current and future resale value of houses weren't working well enough to continue a business it called Zillow Offers.

The company lost about $381 million on the business in the July-through-September quarter, pushing the overall business to a net loss of $169 million.

"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 CEO Rich Barton said in a statement.

Though Zillow Offers launched in the Twin Cities in early 2019, the model had captured only a small share of the market. On Tuesday, there were 166 Zillow-owned homes for sale in the Twin Cities metro area.

And during the first six months of the year, there had been a combined 377 purchases in the Twin Cities by the four largest iBuyers including Zillow Offers, Opendoor, RedfinNow and Offerpad. There were about 29,300 homes sold in the 16-county Twin Cities metro area in that time.

Typically, iBuyers purchase off-market homes directly from sellers at market prices, make needed improvements and quickly re-list them for sale. The model differs from traditional "home flippers" in that the houses it bought to refresh had never been listed on the open market, creating a direct connection between sellers and buyers.

Leaders at real estate brokerages in the Twin Cities have long said that, while there's a place in the market for such innovation, iBuyers presented little threat to the traditional brokerage model.

"It's a difficult model to scale," said Sharry Schmid, president of Twin Cities-based Edina Realty. "A straight-up iBuyer model is too 'one size fits all' and doesn't accurately account for local market dynamics and individual homes."

She said local agents take a lot of things into considerations when coming up with a market value for a home, something that algorithms have not historically been able to accomplish with accuracy.

"This serves to underscore the difficulty of Wall Street getting involved in housing, which is so much more than just stocks and financials," Schmid said. "Homes cannot be easily purchased and sold like stocks, and the market cannot be predicted by algorithms. When you remove the agent from the process, there are simply too many local and subjective considerations that get lost or overlooked."

In a sign of the difficulties it was encountering, Zillow two weeks ago said it was halting home purchases through the end of the year. The company cited labor and material shortages that were making it difficult for the company to buy, refresh and resell houses quickly enough to make a profit.

With Zillow still involved in active transactions, it will take several quarters to wind down the business, a process that will include the reduction of Zillow's workforce by approximately 25%.

Twin Cities residents who want the instant-offer model will still have options including Opendoor, which launched in the Twin Cities in 2018, ahead of Zillow. The company has worked with about 2,000 buyers and sellers in the area, said Jim Lesinski, regional general manager for Opendoor.

Unlike Zillow, the company is a licensed brokerage that partners with its own agents as well as partner agents.

Zillow will also continue publishing oft-watched home "Zestimates," which are calculated in real time using complex algorithms that include public property records, recent sales and feedback from individual homeowners.

Brenda Tushaus, CEO at Eden Prairie-based Remax Results, said that while she's surprised by the decision to pull out of the iBuyer business entirely, it's no shock that the company wasn't able to use its Zestimates profitably.

"I've always considered Zillow's home price Zestimates as borderline," she said, noting that Zillow is transparent about its median error on its website. In Minneapolis, for example, Zillow says its error rate is 2%.

"I think iBuyers will remain, but they will only be a small portion of the market share," she said. "Some consumers will always need this option."