How the Zillow Estimate almost broke Zillow

You may have been recently reading some of the information about Zillow and the complete meltdown of their iBuyer program.  Zillow’s Zestimate of home valuation has been around a long time as a tool for buyers and sellers to get an estimate of a home’s value.  But when Zillow tried to use its algorithm to buy and sell homes, it badly misread the market. 

The company’s iBuyer (or “instant buyer”) arm, where it used its algorithms to quickly value, buy, and sell homes, launched in 2018 in Phoenix.  The principle behind iBuying is simple: Buy homes directly from sellers, flip them quickly and resell for a fast profit. They tend to offer lower prices than traditional buyers, but attract sellers by promising faster, all-cash deals. Due to the high number of cookie-cutter homes, Phoenix is the type of market that lends itself well to computer valuations, apparently not if you’re Zillow. While Open Door and Redfin scaled back their iBuyer purchasing and offered lower purchase prices during the last year, Zillow did not. 

Using their Zestimate, Zillow kept steaming ahead and wound up purchasing too many homes at too high  prices and had to sell them at a loss, at on average of 6.5%. 
Subsequently Zillow has lost 30.5 Billion in market value from its February 2021 peak and will be laying off 2000 employees and shutting down the iBuyer program. 

So, do electronic valuation tools have a place in Real Estate? Yes, but with extreme caution. They are a blunt tool at best, especially here in the Bay Area where we don’t have cookie-cutter homes and it’s much harder for the algorithms to predict housing value. 

If you’d like to talk more about the housing market or know someone buying or selling, please don’t hesitate to reach out. I always appreciate your referrals and would be happy to help!

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