How Zillow Closing Its Home-Flipping Division Will Cause Long-Term Brand Damage
The company's $540 million loss was just the tip of the iceberg.
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Zillow announced yesterday that they are shuttering their home-flipping division, Zillow Offers. This will result in the real estate valuation platform selling off over 7,000 properties it has acquired since starting the division. It will also be cutting its staff by 25%, and in its quarterly earnings report on Tuesday, the company said it will see a loss of more than $540 million as a result of its exit from the business.
While the company lost a considerable investment in this endeavor, the real damage hasn't yet hit yet, and that's the damage to its brand. Zillow's entire business model hinges on providing home-value data. The problem is that their home-flipping division failed because the company's own data did not match the real world. As a result, Zillow was unable to accurately assess the values of the homes it was purchasing and trying to flip, which many in the real estate industry say is further evidence of a flawed valuation model.
Realtors and investors have long claimed that the prices listed on Zillow tend to be higher than buyers are willing to pay, giving homeowners a distorted idea of what their home is worth. But that detail has been mostly hidden over the last couple of years as reduced supply and increased demand have made buyers eager to snatch up almost anything that hits the market at almost any price. In fact, in many areas, homes are selling for $100,000 or more over the asking price in brutal bidding wars.
The fact that Zillow was unable to do what tens of thousands of real estate investors with far fewer resources successfully do every day is going to hurt the brand far into the future. It's not because the company failed in its attempt at real estate investing. Companies fail at new initiatives all the time. That in and of itself is neither newsworthy nor a sign of incompetence. It's because a company that claims to have cracked the code on valuing residential real estate was unable to succeed in real estate investing despite having every bit of that data at their fingertips.
If Zillow can't do this, with the valuation data they provide to users as well as mountains of additional data that we never get access to, the only logical conclusion is that that data is not accurate. And that's exactly what realtors have been saying for years.
Luis Cortes, a Tennessee-based Realtor with MW Real Estate explains, "I've been to countless showings where the homeowners got a valuation from Zillow, but then when a trained professional, such as an appraiser or Realtor, evaluate the property, we find that the value is significantly lower."
In the past, advocates for Zillow claimed that criticism from Realtors was driven by fear, that they were only criticizing the platform because it was working to eliminate them from the equation. But when Zillow tried to build a business around using their own data in the real world, it was an epic failure.
Now, it's not just Realtors saying the data is bad. The market is saying it as well — to the tune of a $540 million dollar loss. Even the company's CEO, Rich Barton acknowledged Zillow's failure to accurately forecast home prices, remarking in a statement, "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."
I believe this will hurt the company's brand for many years to come. More consumers will begin to realize they can't trust the data provided by Zillow, and since this data is the entirety of the company's brand, the brand will be devastated. That will make Realtors more valuable than ever because they can provide more accurate home values based on the same data points Zillow uses, along with the nuance of experience and local knowledge.
As fewer people use the platform, instead opting to seek the guidance of a trained and experienced professional, the company will continue to lose relevance and market share. This won't happen overnight, but the ball is already in motion, and it's moving fast.
Can Zillow recover? Yes, but the company has a lot of work ahead. The key is to first address the inaccuracy in its home-value data and then fix it. The next step is to repair its relationship with the real estate industry. Zillow has a long history of demonizing Realtors and trying to eliminate them from the home buying process. That has to be repaired if the company expects any buy-in from the industry. And finally, it must operate with transparency going forward. Only then can Zillow to resolve its rapidly unfolding PR crisis and repair the damage to its brand.