Zillow’s House-Flipping Rivals Defend Tech-Powered Homebuying

(Bloomberg) -- Zillow Group Inc.’s pullback from its home-flipping operation is reverberating across the real estate industry, leaving its competitors to defend using technology-powered algorithms to buy houses. 

The issue is not with business model, they say, but the execution. 

“Buying homes is the easiest part of being an iBuyer,” Offerpad Solutions Inc. Chief Executive Officer Brian Bair said in an interview. “Buying, renovating and selling in 100 days is the key to doing this successfully.”

Zillow holds a lot of sway in the U.S. real estate industry, serving as a fixation for consumers and competitors. So when the company announced plans to abandon its home-flipping business and fire 25% of its workforce, it brought new scrutiny to the so-called iBuying industry.

IBuyers such as Offerpad and Opendoor Technologies Inc. use tech to buy and sell homes, pitching consumers on speed and convenience to ease headaches in the U.S. housing market. Shares of both companies slid this week as Zillow’s troubles rattled investors, though they rallied Thursday to erase much of those losses. 

“When Zillow jumped in the market, I got pounded with questions,” Bair said. “What are you going to do now that Zillow is an iBuyer? Now I’m getting pounded with, Zillow is getting out, what are you going to do?”

For Opendoor, Zillow’s departure represents an opportunity, CEO Eric Wu said in an interview. He expects his company, which pioneered the iBuying model, to be the market leader now that the best-known brand is out.

“We’re going to lead the charge in this transition from offline to online,” he said in an interview.

Wu said Opendoor has invested heavily to build expertise in home pricing and getting renovations done in a timely, cost-efficient manner. Those challenges contributed to Zillow’s iBuying demise.  

On Oct. 17, Bloomberg reported that the Seattle-based company would stop pursuing new acquisitions for its iBuying business, citing shortages of workers and supplies it needed to fix up homes. But Zillow also struggled to get pricing right. The company bought many homes for more than it could sell them for, forcing it to take writedowns of more than $500 million on property inventory. 

Those results convinced Zillow CEO Rich Barton that the iBuying model was too risky for his company.

“Fundamentally, we have been unable to predict future pricing of homes to a level of accuracy that makes this a safe business to be in,” Barton said on the company’s earnings call this week.

Redfin Corp. CEO Glenn Kelman is also more circumspect on the prospects of the business. Unlike other iBuyers, Kelman’s company operates primarily as a real estate brokerage, using algorithmic home purchases as a complimentary offering. 

That’s an important distinction, he said on a conference call with investors Thursday.  It lets the company buy homes in markets where it thinks prices are favorable, while avoiding risk by funneling some customers to a more traditional process.

“This is a business that could scale to any size you want if you’re willing to overpay for houses,” said Kelman. “If you have to buy houses every day of the week in every type of market condition, you are just force-feeding yourself potentially toxic assets.”

The basic premise of the iBuying business remains unchanged, Opendoor’s Wu said. Industries from retail, food delivery and even auto purchases have moved online. The same shift is coming for real estate, and in Wu’s view, Zillow’s decision to stop flipping houses won’t stop that.

“In 10 years, I’m not sure it matters,” Wu said. “If we’re able to deliver on what we’re aiming to deliver, which is the ability to buy and sell a home together, at the same time, in a digital way, consumers won’t remember.”

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