Real estate company Zillow announced on October 18, 2021, that the company’s iBuying business — Zillow Offers — would not sign any additional contracts to purchase homes for the rest of 2021,” citing a major backlog of closings and a need to reduce the “renovation pipeline.”
“We’re operating within a labor-and-supply-constrained economy inside a competitive real estate market, especially in the construction, renovation, and closing spaces,” said Zillow Chief Operating Officer Jeremy Wacksman. “We have not been exempt from these market and capacity issues and we now have an operational backlog for renovations and closings. Pausing new contracts will enable us to focus on sellers already under contract with us and our current home inventory.”
iBuyers — such as major companies like Zillow Offers, OpenDoor, and Offerpad — use technology to make instant offers on homes, usually working directly with contractors to provide renovations and improvements before reselling.
In previous years, the iBuying market has been a reliable source of funding for many contractors. In a 2019 profile on contractors working in iBuying, contractor Jeff Perry claimed that “If [my company] only wanted jobs from Zillow, we could sustain our business doing that.”
In a turn from this prior high level of cash flow, there’s a significant amount of funding that may not be available to the renovation and construction industry for the remainder of the year due to the move.
According to Securities and Exchange Commission documents, Zillow borrowed $460 million to fund the launch of Zillow Offers in March 2021.
While some of that will likely be used to fund work on prior contracts, the company’s pullback does remove the possibility of a number of new renovation opportunities for contractors for a period.
Zillow’s mention of supply chain struggles will be notable for many contractors, as well. For a majority of the COVID-19 pandemic, contractors have had to deal with exorbitant materials prices and major shortages of products needed for construction, which has held back projects all over the country. It’s possible that these same issues could have big implications for contractors who work on these projects often.
Could contractors see a reduction in work from iBuyers?
Though the situation is cause for some concern with those who work often with iBuyers (and especially with Zillow), it’s currently not clear whether or not Zillow’s move will result in less work for contractors in the near future, as the company will continue renovation and could resume new purchase contracts in 2022.
Real estate investor Michael Greene specified that the move may simply be the company using caution, saying “The activity we saw this summer was so unprecedented relative to the way real-estate typically moves, I can see why an iBuyer might want to take time to digest the signals coming out of the market now that it seems to have slightly more stable footing.”
Some large iBuyers — Zillow’s chief competitors among them — are projecting confidence that they can maintain their purchasing and renovating.
“We are confident in our ability to meet demand from our customers who want a convenient and flexible home-selling option, despite challenges with the construction labor market and supply chain,” said a spokesperson for Redfin about the company’s iBuying business, RedfinNow.
A statement from Opendoor noted that “We know how important certainty and convenience are to homeowners seeking to move and we’ve worked hard over the past seven years to ensure we can continue to deliver our experience at scale,” adding the clear point that “Opendoor is open for business and continues to scale and grow.”
A number of industry officials believe that the iBuying business model may have more difficulty going forward than the companies themselves would like to project, however, and that contractors may want to be wary about the future of this aspect of the industry.
“When an iBuying business model relies heavily on the same trades who are also struggling to keep up with new construction demands, then you have a recipe for disappointment, delays and higher costs,” said Fathom Realty CEO Josh Harley. “Other iBuyers such as Opendoor are struggling with the same issues and no amount of capital can remedy this.”
Some have even more harsh assessments of the situation. Ryan Raveis, co-president of William Raveis Real Estate, Mortgage & Insurance, believes that Zillow’s move is pointing towards the beginning of the end of the iBuying industry: “The economics just aren’t there in the long run; the increased cost of inputs is a convenient excuse to put the brakes on a poor business model—the iBuying fad will lose its breath as market absorption rates normalize.”