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Business
ZILLOW JUST GAVE UP ON IBUYING. WHAT’S THE DEAL WITH THE ALGORITHMIC HOME SALES?
The Aguayo family in their yard in Duarte. Hazel and Ruben Aguayo recently
purchased their house from Opendoor, a so-called ibuyer.
(Francine Orr / Los Angeles Times)
By Andrew KhouriStaff Writer
Nov. 3, 2021 4 AM PT
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Last spring, Duarte residents Marsha and Todd Johnson decided they were ready to
exit the California dream.
They wanted to cash in on the meteoric rise in the value of their home and start
retirement as they long planned, in Washington state, to be near family and the
beach. But the couple, in their 50s and 60s, didn’t want prospective buyers
traipsing through their house in the middle of a pandemic and dreaded the hassle
of making repairs and managing offers, even with the assistance of a real estate
agent.
So instead, they tapped an algorithm for help: On the website of a San Francisco
company named Opendoor they filled out some “basic paperwork” and then completed
a 15-minute video inspection through a smartphone. A few days later, a firm
offer came through, and they sold their home to Opendoor.
“The process was pretty pain-free,” said Marsha Johnson, who worked for Los
Angeles County social services before moving out of state. “We got the money
pretty quick.”
Advertisement
A new way of selling homes is taking root on laptops and smartphones across the
country.
Companies including Opendoor, Offerpad and Redfin are using algorithms backed by
reams of data to value houses and buy them fast, in cash, and with much of the
transaction online. The companies then do minor repairs and resell the homes,
earning money on price appreciation and fees they charge.
Operating somewhat as industrial-scale flippers, the so-called ibuyers — instant
buyers — have expanded rapidly in recent years, primed for growth by a worldwide
flood of capital chasing yield in the U.S. housing market.
People can also buy homes directly from the companies, touring houses at their
leisure by downloading a smartphone app to unlock the front door.
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For those who have already endured the more traditional, time-consuming way, a
quick and easy home transaction may seem too good to be true. Already, cracks
are showing in the ibuying business model — still in its infancy — and industry
experts aren’t sure how these new players are affecting the housing market more
broadly.
“That’s what I find really interesting. What happens when you have a corporate
middleman involved in the real estate transaction process?” said Mike DelPrete,
an independent real estate analyst and scholar in residence at the University of
Colorado in Boulder. “What happens when Wall Street and billions of dollars come
in?”
The answer has significant bearing for the country but particularly for
California, where home prices are among the highest in the nation, middle-class
families have had increasing difficulty affording homes, and many renters are
struggling to make ends meet.
In recent weeks, Zillow, the second-largest ibuyer, made a fast U-turn after
ramping up its home-flipping — buying and reselling. The company initially said
it was pausing purchases because it had run into labor and supply chain issues.
On Tuesday, Zillow said it would exit the ibuying business altogether, raising
questions about whether the tech powering these companies is up to the challenge
in such an overheated, fast-changing housing market.
“Fundamentally, we have been unable to predict the future pricing of homes to a
level of accuracy that makes this a safe business to be in,” Zillow Chief
Executive Rich Barton said during a conference call with analysts. Zillow had
been listing large numbers of homes at lower prices than it bought them at, and
it announced a $381-million loss on the service, called Zillow Offers, in the
third quarter.
Zillow’s exit shows ibuying is tough, but other ibuyers are still growing and
their services are likely to become even more popular, said Rick Palacios Jr.,
research director at John Burns Real Estate Consulting.
Business
Zillow shuts home-flipping business after racking up losses
Zillow is closing its tech-powered home-flipping operation, saying its pricing
algorithms weren’t accurate enough to build a stable business.
Nov. 2, 2021
Ibuyers say they simplify home sales, streamlining and speeding up the usual
steps: repairs, viewings, negotiations. The companies promise an offer within
days, even minutes, and purchase homes “as is” with cash, meaning sellers don’t
need to make repairs or wonder whether their buyer’s financing will come
through.
Sellers can also choose their own closing date, which makes moving easier. For
those buying, Opendoor will even purchase a new house for consumers in cash,
then later work to lock in mortgage financing.
In Southern California, the largest ibuyers — Opendoor, Zillow, Offerpad and
Redfin — accounted for 1.2% of total home sales in Los Angeles and Orange
counties during the second quarter and 2% in the Inland Empire — an increase
from the same period in 2018, when the figure was 0.1% in the two metro areas,
according to a recent report from Zillow.
In some markets, such as Phoenix, ibuyer market share is above 5%.
“I would be shocked if this isn’t an option for people to sell or buy a home,”
Palacios said. “It is going to be a part of housing going forward.”
A major question is how the companies affect home prices and whether they can
deliver, at large scale, the seamless experience they advertise.
In a viral TikTok video in September, a Las Vegas real estate agent posed one
“hypothetical” scenario as ibuying becomes more popular. In it, a “company
everyone knows” and uses to search for homes purposely pays $40,000 more for a
house than what it’s been buying homes for, with the goal of setting a higher
comparable sale so it could sell the other houses at a higher price.
As the theory of market manipulation ping-ponged around the internet, Zillow and
Redfin both came forward to deny it was happening or would even make financial
sense.
Some analysts said they believe ibuyers have put upward pressure on prices in a
different way. Part of that is simple supply and demand, because the companies
represent additional buyers in a crowded marketplace with too few homes for
sale.
DelPrete, the real estate analyst, said there’s also evidence ibuyers grew more
aggressive as the market kicked into overdrive this year.
An analysis he conducted of home sales from April through June showed Opendoor,
Zillow and Offerpad paid a few percent more than the valuations provided by an
algorithm from ATTOM Data Solutions. That’s a shift from 2019 and 2020, when the
companies paid less than the ATTOM valuation.
In a hot market in the second quarter, DelPrete said, buyers overall paid about
103% to 104% of the ATTOM valuation. That’s about what Zillow and Offerpad paid;
Opendoor clocked in higher, at 107.7% of the ATTOM valuation.
Ibuyers may have boosted offers during the second quarter because investors want
to see them grow market share, DelPrete said, and to do that in a hot market the
companies need to pay top dollar.
“You have publicly listed companies that need to show growth, and they have
billions of dollars of Wall Street capital,” he said. “They are going to go out
there and pay whatever they need to pay to acquire homes.”
Tomasz Piskorski, a real estate finance professor at Columbia Business School,
said he doubts the companies put much upward pressure on prices given their
still small overall market share. Rather, the main drivers of today’s
double-digit price appreciation are still low interest rates, low inventory,
people seeking more space while working from home and a large cohort of
millennials entering peak home-buying years.
Some ibuyers have also noted that they resell the homes they purchase and argue
that the easy-to-use process brings more supply to the market than otherwise
would exist.
Piskorski also doubted that ibuyers would purposely overpay. But he did say
investor pressure and a belief that prices will keep rising might cause ibuyers
to take more risks in what they buy, including, for example, inadvertently
buying homes with problems that should really be valued lower.
“You could make the legit case that as long as house prices on average are
growing, even if we are willing to make more mistakes, the mistakes on average
will be compensated by the growth in house prices,” he said.
Business
Hot, hot, hot ... warm: SoCal home values hit new record, but price rises are
slowing
The Southern California housing market is hot, but cooling. Home prices rose
nearly 13% in September — the smallest jump since January.
Oct. 20, 2021
Such a strategy still requires an accurate prediction of future home prices.
After a red-hot market in the first half of the year, both Opendoor and Offerpad
adjusted faster than Zillow to a housing market in which price appreciation had
slowed, DelPrete said.
According to his analysis of the Phoenix market, both Opendoor and Offerpad
reduced the prices they paid for homes in September, as well as the number of
homes they bought. Zillow kept buying more homes and paying more for them.
By October, Zillow was listing homes in Phoenix for 6.2% less than what it paid,
while Opendoor listings were priced 1% above what it paid, DelPrete said.
“If you pay too much for a home that’s not good,” Offerpad Chief Executive Brian
Bair said. “That’s where you get tripped up.”
If ibuying continues to grow market share, there’s still a question of what
happens in a sustained downturn.
Palacios said home prices could fall faster if ibuyers suddenly stopped buying
or if they kept buying but did so at discounts as consumers rushed to the exits.
Ibuyers could also sell to families at a discount or choose to unload homes en
masse to single-family rental firms. The companies already sell some homes to
big landlords; according to a report from Bloomberg, Zillow is now shopping
roughly 7,000 homes to institutional investors.
For now the focus of individual home sellers isn’t the future but their
pocketbooks.
In interviews with The Times, more than half a dozen people who sold their house
to Opendoor said they did so because they liked the speed of the transaction and
the certainty of an offer they found fair. All said they had a positive
experience with the largest of the ibuyers, including Marsha Johnson, the Duarte
home seller.
Noah, 5, right, and his sister Ariel, 4, play in front of the house their
parents, Hazel and Ruben Aguayo, purchased from Opendoor.
(Francine Orr / Los Angeles Times)
On the flip side, those who bought homes from Opendoor didn’t always have
stellar reviews — including Hazel Aguayo, who bought the Johnsons’ former home
from Opendoor in July.
Aguayo, a 36-year-old part-time real estate agent, said she and her husband,
Ruben, sought to move from a rented apartment because they wanted a yard for
their two children, 5-year-old Noah and 4-year-old Ariel.
But if Aguayo hadn’t represented herself in the transaction, she said, she
thinks another agent would have urged her to look elsewhere. Aguayo said the
point person Opendoor assigned to her transaction often didn’t respond to
questions, forcing her to call a general phone number and constantly update
different employees where she was in the buying process.
The escrow company Opendoor used was also hard to get in touch with and at one
point told her to wire an incorrect amount, Aguayo said. “Doing [a sale] with
Opendoor is like doing it with customer service.”
Three other Opendoor buyers or their representatives recounted similar
experiences to The Times.
Aguayo identified an aspect of buying through the company that played to her
advantage: Opendoor employees she came into contact with weren’t in Southern
California. That enabled her to successfully negotiate her family’s purchase to
about $37,000 below the list price by pointing to other houses listed for sale
in a less attractive part of Duarte.
“Had the agent been local, they would know not to compare this house from those,
because this house is in the best neighborhood,” Aguayo said.
--------------------------------------------------------------------------------
BusinessHousing & Homelessness
Andrew Khouri
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Andrew Khouri covers the housing market for the Los Angeles Times. Before coming
to The Times he wrote about commercial real estate for the San Fernando Valley
Business Journal. He holds a master’s degree in journalism from the University
of Southern California’s Annenberg School for Communication and Journalism and
graduated from the University of San Diego with a degree in history.
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