A leading Australian iBuyer isn’t concerned about its position in the market despite Zillow calling it quits on its US homebuying business.
Zillow Group announced in November 2021 that it would wind down its algorithmic-driven home-flipping business, Zillow Offers, and earlier this month said it lost $881 million on the business last year.
When the group announced it would cease operations on Zillow Offers, Chief Executive Officer Rich Barton said rising costs and volatility were behind the move.
“We’ve determined the unpredictability in forecasting home prices far exceeds what we anticipated,” Mr Barton said.
“Continuing to scale Zillow Offers would result in too much earnings and balance-sheet volatility.”
Mr Barton said the wind-down would take “several quarters” and include a 25 per cent cut to employee numbers.
“While we built and learned a tremendous amount operating Zillow Offers, it served only a small portion of our
customers,” he said.
“Our core business and brand are strong, and we remain committed to creating an integrated and digital real estate transaction that solves the pain points of buyers and sellers while serving a wider audience.”
The group launched the instant buying Zillow Offers in December 2019, allowing homeowners to sell their homes to Zillow for cash, eliminating the sales process.
Vendors also didn’t have to worry about renovations or repairs before putting their homes on the market.
Zillow completed the works and then looked to sell the properties for a profit.
Australian-based iBuyer, Brickfloor, has been operating in Australia since 2019 but has not faced the same issues as Zillow Offers.
Brickfloor Founder and Chief Executive Officer Dean Fraser said Zillow ran into problems because of its aggressive approach.
“Zillow was trying to win market share and they were offering well-above market prices for their homes,” Mr Fraser said.
“I think they were trying to take into consideration potential price appreciation that was expected to occur.
“If you think the market is going to go up 10 per cent, then paying 5 per cent too much today might be OK, but it could backfire, and it did.”
Zillow Offers used an algorithm to determine an offer price for a vendor before completing a physical inspection.
Mr Fraser said Zillow Offers needed to pay a fair market price after inspecting the properties.
“What I don’t understand is why they wouldn’t adjust their prices in line with the market when they did a physical inspection, because they should be able to see that they were paying five per cent over, for example,” he said.
“I think they would have had pressure on the business to win market share and I suspect their inspection team were only looking for major red flags rather than forming a view on value, and that’s why they didn’t change their offer price.”
Mr Fraser said pricing algorithms alone, such as Zillow Offers’, are still not accurate enough to make buying decisions.
“We look at 50 data points of information and current home photos provided by the seller and we combine that with comparable home sales, data on market trends and our own pricing algorithm, to form a view around value” he said.
“While we do have a pricing algorithm that we’ve started to build, they’re too far out from what market value actually is so you can’t rely on them.”
Mr Fraser said if you’re trying to flip properties you have to get a lot right, which is not easy to do at Zillow’s scale.
“Zillow’s business model had a lot of pressure on it to sell the property within a three to four month period and if you’ve got your pricing wrong, you’re in a difficult spot,” he said.
“Whereas our model is all about holding for the long-term and trying to institutionalise the asset class.
“If you’re flipping homes then you have a lot of pressure to get your pricing right.
“At Brickfloor, we still have to get our pricing right, but if we’re ever slightly wrong in terms of offering more than the market price, we hold onto our homes for the medium to long-term, so we would ride out any imperfections in pricing. We also adjust our offer price following a physical inspection by our valuation team if we believe our initial offer was too high.”
Other iBuyers in the US, including Opendoor, OfferPad and RedfinNow, continue to do well and Mr Fraser said while they have the same buy and flip business model as Zillow Offers, they tended to price one to two per cent below market value to make money on the sale.
Mr Fraser said the success of Brickfloor’s model is due to the fact that the company is looking to invest in real estate as an asset class and work with sales agents, rather than seek short-term profits.
“Our vision is to institutionalise residential property as an asset class in Australia, and want to build a big fund of homes across a diversified portfolio,” he said.
“We’re not looking to flip, we’re renting them out and will have some of those homes allocated to affordable rentals for those in need.”