Zillow’s Price Estimates Are Now Cash Offers in Homebuying Push
For years, Zillow Group Inc. has titillated homeowners, prospective buyers and the voyeuristic public by estimating the value of tens of millions of U.S. homes and publishing the results.
Now the real estate giant is putting cash behind its number-crunching, turning its often controversial “Zestimates” into offers to buy homes.
For more than 500,000 properties across 20 markets in the U.S., the company has added language on its websites and apps inviting owners to “sell to Zillow for your Zestimate.” When an offer is accepted, Zillow sends an inspector to make sure its information on the home is accurate, then pays cash for the property, makes light repairs and puts it back on the market.
The program, which Zillow has been testing since late last year, is the latest step in the online listings company’s strategy to embrace home-flipping on a scale rarely seen. In that business, Zillow Offers, bids are generated for homeowners on request and often vetted by a human real estate expert.
The move to turn a Zestimate into a standing bid means that the company is relying solely on its valuation software to generate offers unsolicited, in what executives call an effort to reduce friction and provide owners with certainty that can help them understand how much they can afford to pay for their next home.
“Part of why real estate is so complex is the idiosyncratic nature of assets and the uncertainty around valuation,” said Stan Humphries, the company’s chief analytics officer. “We used to say, it is the ‘Zestimate.’ Well, now it’s the ‘Zprice.’ We’re willing to back it with cash.”
That shows how far the company has come since it started publishing Zestimates in 2006, when it was stringing together computers on ping-pong tables in the company break room. In those days, before the widespread adoption of cloud computing, employees would leave the office for the night and hope the compressor in the refrigerator wouldn’t cause the circuits to short.
In the beginning, the median Zestimate was off by more than 14%, highlighting the difficulty of valuing homes and fueling criticism that the numbers created unrealistic expectations for what a property could sell for.
Some homeowners have gone so far as to sue Zillow over its estimates, though none of those lawsuits have succeeded, according to the company. There were also high-profile misses, such as when former Chief Executive Officer Spencer Rascoff sold his Seattle house in 2016 for 40% less than his website said it was worth.
Today, Zillow says its median Zestimate is off by just 2% for properties that are on the market, and less on the moderately priced homes that it buys through Zillow Offers.
Humphries said that turning the Zestimate into a standing offer helps homeowners by setting a floor on the value of their current property, helping determine how much they can afford to spend on their next one.
Giving homeowners that certainty can add liquidity to the housing market, he said, aiding Zillow in its core business of selling leads to real estate agents. That business has been flying high during the pandemic, as heavy demand drove billions of visits to the company’s sites and pushed shares to a record.
Driving more customers to Zillow Offers, on the other hand, could mean accelerating losses.
Zillow sold more than 900 homes in the fourth quarter, generating $304 million in revenue. But investors would be better off focusing on the nearly $67 million net loss Zillow reported for the segment, according to real estate tech strategist Mike DelPrete. That equates to more than $72,000 for every home sold.
Zillow says the economics will improve as the business grows and that investments in Zillow Offers benefit other segments.
Unlike traditional home-flippers, who try to buy low and sell high, companies such as Zillow and its main competitor, Opendoor Technologies Inc., aim for small margins on a high volume of deals. They’re also looking to boost returns by selling adjacent products, from home loans to title insurance.
“We’re focused on scaling and growth,” said Jeremy Wacksman, Zillow’s chief operating officer. “The point of scaling is to get to operational efficiencies so we can pass them on to customers. We can see better margins for our business and stronger and stronger options for the customer at the same time.”
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