Zillow Offers iBuyer Collapse – What This Means For Colorado Housing

Date Published: November 15, 2021

Unless you have been ignoring the everyday news cycle, you’ve probably heard the story of Zillow’s great rise and recent fall in the iBuyer real estate world. Zillow announced at the end of October that it would be completely closing its “Zillow Offers” division and would immediately stop buying homes. This included a layoff of 25% of their staff and left over 7000 homes on Zillow’s balance sheet that needed to be sold.

This appears to be an abrupt rethink for the recent iBuying business model and also a big win for agents who offer a much more personal approach to selling a home.

If you aren’t aware of what Zillow Offers was, here is a quick recap: If you were looking to sell your home over the last year, you could go the standard route and use an agent, or you could contact Zillow Offers which would give you a cash sum for your home without you having to physically find a buyer. The home would be sold directly to Zillow, who may make modest improvements and list the home themselves in the future. This model was not used by Zillow alone, but Zillow appears to have made some mistakes in its approach.

This is a popular prospect for sellers, who enjoyed less stress, no showings, and an easily scheduled closing date. The catch of course was that the offer that Zillow would send was intended to be “below market rate” for the cost of the convenience.

However, reports stated that the proprietary algorithm based on artificial intelligence used internally by Zillow was overvaluing homes and making move out offers that far exceeded what the market rate of the home was.

Naturally, if you are a seller and you are offered the benefits of an iBuyer program paired with an above-market offer for your home, you are likely to take that deal. Stats over the 2021 summer proved this to be true.

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While Zillow Offers was not available nationwide, it covered many large housing markets in the county including the Colorado Front Range. Most of the markets in which the program was available saw massive price increases in 2021, resulting in a very competitive market for buyers.

However, many other markets without major iBuyer players were experiencing a similar situation. So was Zillow the real cause of this?

While we are not data analysts or deeply studying this issue, we can give you our opinion on what we are seeing every day in the Colorado market. As a large home inspection company, our internal numbers can be an indicator, and we can analyze these numbers to draw some opinions.

First, let’s talk about what we believe some of the takeaways from this story are.

House Selling Is Complex – Agents Are Still the Gold Standard

While it seems like everything in our lives is going digital, a story like this really makes you appreciate having a real person guiding you through some of life’s biggest events, one of which is moving and selling a home. The home selling process is complex with many moving parts, and the average homeowner rarely goes through the process in their lifetime.

The average homeowner only owns 2-3 houses throughout their life meaning they only go through this process 1 or 2 times if they do sell. This means the average homeowner likely doesn’t have a lot of experience in this transaction.

Zillow’s meltdown showed us that proper pricing, knowing the area, and finding buyers is no small task, and even a company with billions of dollars and all the technology in the world can struggle to do this correctly. Pricing of homes can change from street to street and these anomalies can lead to the need for personalization.

A great listing agent can help make the process just as easy as an iBuyer program could, and get you top dollar for your home, all while supporting the local economy and maintaining a healthy housing market.

Zestimates Are Not Appraisals

While we all love to log into Zillow or Redfin and see our estimated home value, Zillow has shown us that the appraisal business may not be ready to go fully digital.

While a Zestimate uses many of the same strategies as traditional appraisals, including comps and recent sales, Zestimates can still be pretty far from reality as Zillow is probably seeing now.

At the end of the day, your house is worth what someone is willing to pay for it, and the best way to understand this is to have an agent run detailed comps or have a professional appraisal completed.

Home Inspections Are More Important Than Ever

If the Zillow Offer’s collapse showed us anything, it’s that, as a buyer, you NEED to have a home inspection completed before the purchase of a home. Their program showed us a whole new side of home buying where you can’t always be sure who the seller is.

With an iBuyer program, the home you are buying isn’t always someone’s longtime family home that they took great care of. It could be a home bought by a company or investor that was quickly turned with minimal care. A house is just a number on their spreadsheets. Some buyers even reported difficulties in post-inspection negotiations with Zillow.

An impersonal transaction such as this can lead to a bigger chance of expensive issues being overlooked before listing. A good seller’s agent can help the seller fix or disclose known issues with a home before it’s time to sell. This may not be the case with a buy it and flip it mentality.

Not only that, but thousands of houses are set to hit the market from Zillow for under-market value prices, and reports state that Zillow has low or no budget for rehabs and repairs before listing. This leaves a lot to be dug up during a professional home inspection.

What Have We Seen Happen In The Colorado Market

The 2021 summer in Colorado was one of the craziest housing markets we can remember. Prices rapidly rising, bidding wars, and low inventory were all reports we kept hearing.

Zillow Offer’s was available in Colorado and many homes were sold through their program. However, the program was not as popular in the state as it was in others. This insulates us from the fallout as fewer of the thousands of houses Zillow still owns will be dumped for cheap prices in our state. It is reported that less than 2% of all houses sold were sold to Zillow in Colorado.

Image found on The Orange County Register: https://www.ocregister.com/2021/11/11/bubble-watch-is-zillows-home-flipping-fiasco-a-warning/

However, the market in Colorado has seen a steeper drop off this fall and year over year the number of home sales in Denver County in October was down over 20%. While this likely has less to do with Zillow and more to do with less affordability and a buying spree over the summer, Zillow’s meltdown may play a part.

Housing prices appear to be leveling off even though supply is dropping – reported by one of our regular agents. While regular seasonality is normal, it appears this fall has slowed down faster than prior years. This is reflected in our company with a mild dip in the number of overall inspections while serving the same areas.

The equalizer in Colorado, which has been present for years is the strong population growth. A growing population typically leads to a strong housing market, regardless of large news stories around the nation. We saw this in 2008 as Colorado came out of the recession faster than many states and again this year as Colorado’s economy boomed as COVID restrictions loosened.

Different counties in the state may be more insulated from issues like Zillow, but overall we believe that the Colorado housing market will continue to stay strong for the foreseeable future. If anything, the leveling off of price growth will pull buyers back into the market.

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About the Author: Chris Scott

Chris Scott is an ASHI certified home inspector with multiple years of experience in home inspections, blower door testing, duct leakage testing, and Boulder Rental License Inspections. Chris is also the Website Coordinator for Scott Home Inspection.

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