Investor Highlight: Real Estate Investments & Zillow's iBuyer Failure

If you're like me, a hobby that lingers from early pandemic days is looking at other people's houses on sites like Zillow and Redfin. The data back up this concept, with a reported 9.6BN visits in 2020. It has become such a phenomenon that SNL parodied the activity as the new late 30's alternative to sex. I first heard about the real estate listing website's flipping of its data into a plan B in its business model via TikTok, where curious minds noticed the company had begun buying up its own listed homes using metrics like saved homes and zip codes. The video, now gone viral twice over, described Zillow's iBuyer practice as market manipulation, in which the company bought up many houses by lowering the Zestimates and then later bought one or two homes at above-market valuations to reset the Zestimates to the higher price for all purchases, including the prior ones.

Since then, both Zillow and Redfin have tried to debunk the rumors, but the public has largely decried the practice in a hot housing market where individual buyers feel the squeeze of competition with iBuyers all-cash offers. But the business model hasn't panned out. Earlier this month, Zillow told investors it would be selling off roughly $2.8BN in housing inventory at a loss of approximately $500BN due to labor and materials shortages. House flipping overall has been returning the least profit in over a decade due to the same supply chain issues.

So who's buying from Zillow?
Apparently, not the public, but rather other institutional investors looking for rental properties. One of these investors is Pretium Partners, a New York-based investment management firm that boasts 66,000 rental properties. Three Democratic Senators are suspicious of the firm's Zillow purchases, given the investor's spotty track record with renters and the loss of available homes for regular buyers. Invitation Homes and American Homes 4 Rent are also considering purchasing some of the inventory up for grabs from Zillow.

Real Estate Sizzle
While Zillow is looking for more "brand-aligned" profit models, other iBuyers continue to increase their buying. Offerpad announced its launch in three California markets for Q1 2022, and Opendoor isn't far behind. If Zillow is an example, predicting future home pricing is a tricky business model, even one that continues to shock potential buyers.