by Peter Crowley, President of RE/MAX Alliance Group
Last week Zillow sent a shock wave through the real estate industry when it announced that it was exiting the home-flipping market and terminating its Zillow Offers program. Just a few weeks earlier, Zillow claimed it was merely pausing its purchasing efforts in order to catch up with the backlog of properties it currently held in its pipeline. Ultimately, Zillow’s CEO, Richard Barton, realized the decision was more permanent when he stated, “We’ve determined the unpredictability in forecasting home prices far exceeds what we anticipated, and continuing to scale Zillow Offers would result in too much earnings and balance-sheet volatility.”
This had many real estate professionals claiming a win over the 1,000-pound gorilla that is Zillow. For years, the Zillow Zestimate has been the bane of the real estate agent’s existence as an often wildly inaccurate estimate of a home’s value. Zillow claimed to have refined its home-valuation algorithms to the point where it could accurately predict what price to buy and then subsequently flip the house at a profit. In reality, however, closer analysis of Zillow’s property portfolio demonstrated that it was overpaying for properties (a win for some sellers) but eventually listing and selling those properties at a loss. This may not seem like a big deal for a company the size of Zillow, but those losses will likely total in excess of $500 million when all of the write-offs are accounted for as the program winds down. Even with a balance sheet as large as Zillow’s, this is a big financial hit, and investors have taken note with a beating to the stock price in recent weeks.
I have been reluctant to high-five my fellow real estate agents over this news. First, as a result of terminating its Zillow Offers program, they announced a reduction of 25% of their workforce – that is more than 1,000 individuals who will be out of work and should not be overlooked. Second, and maybe less obvious, is that Zillow is still the behemoth that it was before this setback. It is still a company that relies heavily on the paid advertising platform that was the foundation of the company’s success. Who pays for that advertising? Many of the same real estate agents who were pounding their chests when Zillow swung and missed on the Zillow Offers program.
Rest assured, I am not a cheerleader for Zillow. Ever since the company stood on stage several years ago and insisted that it was only a marketing company and would never enter the real estate business, only to turn around and do exactly that a few years later, let’s just say I have a healthy dose of skepticism about the company’s intentions. But as long as Zillow maintains its grasp on the real estate consumer, it will continue to pivot toward profitability and growth – eventually.
What this setback does demonstrate, however, is that real estate is in fact very local. A real estate professional does more than place a sign in the yard. The local expertise of a real estate professional lends itself to better pricing decisions, a cadre of local connections to vendors integral to the home-buying and selling process and an overall understanding of the intangible nuances of the local real estate market. Algorithms and a seemingly endless supply of cash can fix some things, but some things are better left to the local experts.
Peter Crowley is the president of Re/Max Alliance Group.
We would like to thank our guest author Peter Crowley
Larry and Ann Brzostek
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