Editor’s note: This story was updated on Oct. 19 with additional insights from industry practitioners.
The supply chain challenges that are straining the housing market are having the same effect on iBuying giant Zillow.
The real estate platform announced on Oct. 18 that its home-flipping business, Zillow Offers, will be taking a break from signing new contracts as the company addresses a backlog of its properties still in its renovation pipeline.
“We’re operating within a labor- and supply-constrained economy inside a competitive real estate market, especially in the construction, renovation and closing spaces,” said Jeremy Wacksman, Zillow’s chief operating officer, in a statement.
According to Wacksman, Zillow hasn’t been exempt from the mix of challenges straining home builders and real estate professionals over the past couple of years.
“We now have an operational backlog for renovations and closings,” he continued. “Pausing new contracts will enable us to focus on sellers already under contract with us and our current home inventory.”
While Zillow plans to halt new acquisitions for at least the rest of 2021, the company noted that it would continue purchasing homes that already have signed contracts but haven’t closed yet.
Zillow Offers lets homeowners sell without having to coordinate repairs or host open houses or showings. After buying the home, Zillow prepares it for sale by doing the same type of projects a typical seller would, then lists it on the open market.
According to reports from Wall Street Journal, the real estate platform acquired more than 3,800 homes in the second quarter, after expanding into the home-flipping business in 2018 through its Zillow Offers unit.
Since making its announcement, Zillow shares took a hit, falling as much as 11.4% in early trading on Monday, according to Reuters reports, which indicate their lowest since September 2020.
While Zillow addresses its backlog, the company also said it would connect prospective sellers from Zillow Offers with a local Premier Agent partner.
That could present an opportunity for agents in markets where iBuyers like Zillow have been most active, according to Jennifer Wehner, CEO of the Wehner Group with eXp Realty in Arizona.
Wehner, a Zillow premier agent, indicates that Zillow had addressed plans to slow purchasing in a summit meeting with other partnering agents and brokers.
“It’s a possible opportunity for us, but we are going to have to run a tighter ship with agent accountability, and the best converters need to be answering the phone so as we grow, we’re are growing deeper, not wider,” she says.
“For us, the opportunity is we are leveling up our training to make sure that the highest converting agents are answering the phone, which means internally, we have to change to adapt that, but it’s only going to make us better in the long run.”
As Zillow sorts things out with its backlog of properties, Wall Street Journal reports indicate that the pause may prove to be a boon for the company’s iBuying rivals.
A recent statement from Opendoor following Zillow’s announcement insists that the company is still “open for business and continues to scale and grow.”
“We know how important certainty and convenience are to homeowners seeking to move, and we’ve worked hard over the past seven years to ensure we can continue to deliver our experience at scale,” said an Opendoor spokesperson.
A Redfin spokesperson echoed similar sentiments, adding that RedfinNow, its iBuying business, continues to make offers in all 29 of its markets as the company moves forward with expansion plans.
“We are confident in our ability to meet demand from our customers who want a convenient and flexible home-selling option, despite challenges with the construction labor market and supply chain,” said a Redfin spokesperson. “We’re building our iBuying business in the same methodical way we’ve grown our brokerage over the past 15 years, focusing on sustainable expansion, financial discipline and great customer service.
Zillow’s announcement also gained mixed reactions from real estate brokers, who speculated and even criticized the iBuying activity and strategies that have been occurring in recent years.
“When an iBuying business model relies heavily on the same trades who are also struggling to keep up with new construction demands, then you have a recipe for disappointment, delays and higher costs,” says Josh Harley, CEO of Fathom Realty, adding that he understands Zillow’s decision to pull back on home-buying.
“I believe it was a very wise decision on their part,” Harley continues. “Other iBuyers such as Opendoor are struggling with the same issues and no amount of capital can remedy this. What we do not hear about is the fact that many of these iBuyers are being forced to overpay for homes and then selling many of them for less than they paid. It’s a perplexing way to run a business, but they are under a lot of pressure to show that their business model has merit.”
Gary Scott, president of Long & Foster Real Estate, echoed similar sentiments, adding that while supply chain challenges have impacted most businesses to some degree at this time, they have worked to avert those effects.
“At Long & Foster, we stay up to date and focused on many factors that will have a potential impact on the real estate market—today and in the future,” Scott says. “Our experience is that companies start and stop specific initiatives for multiple reasons, not just a singular event or an external factor.”
Ryan Raveis, co-president of William Raveis Real Estate, Mortgage & Insurance, suggests that Zillow’s move serves as a sign that iBuying could be a fad that’s destined to fizzle over time.
“The economics just aren’t there in the long run; the increased cost of inputs is a convenient excuse to put the brakes on a poor business model—the iBuying fad will lose its breath as market absorption rates normalize,” Raveis says. “In the meantime, brokerages will have deepened their relationship with consumers and closed the tech gap to deliver value to home sellers and buyers through their agents.”
This is a developing story. Stay tuned to RISMedia for updates.
Jordan Grice is RISMedia’s associate online editor. Email him your real estate news to firstname.lastname@example.org.