More “IBuiyng’ Troubles
Over the pandemic real estate market, a popular trend that came to life was a process called ‘IBuying.’ Essentially, ‘ibuying’ is when an algorithm alerts an investor or real estate investment company to purchase a home based on certain conditions. A lot of these algorithms lead to higher than anticipated sales prices offered to sellers for their homes. This is where the problem comes in, and what has recently caused issues for Zillow and OpenDoor. The FTC has fined the ‘IBuying’ company of OpenDoor, months after Zillow lost billions of dollars on their ‘ibuying’ program. This is why there has been more ‘ibuying’ troubles.
The FTC announced that the firm must settle their allegations of misleading potential home sellers in marketing campaigns. The allegations come from their aggressive marketing campaigns that often times influence sellers to sell their homes through a company rather than the open market. The FTC fined the company $62 million dollars in damages due to illegal marketing practices and claims that could not be proven. Essentially, this is considered against NAR ethics and created a moral hazard for a company fighting for sellers in a competitive marketplace.
The company OpenDoor was the creator of this phenomenon called ‘ibuying.’ This program was used by a few real estate listing companies during the pandemic, and eventually took loses that were grave. We talked about Zillow and their ‘ibuying’ mistake months ago, and you can read that article here. Zillow and OpenDoor might have had different scales of business and different objectives, however, had similar losses. It will be interesting to see how the future for these ‘ibuying’ companies unfold, and the place for ‘ibuying’ in real estate might be shifting.
“Opendoor promised to revolutionize the real estate market but built its business using old-fashioned deception about how much consumers could earn from selling their homes on the platform,” Samuel Levine, director of the FTC’s bureau of consumer protection, said in the statement.
“While we strongly disagree with the FTC’s allegations, our decision to settle with the commission will allow us to resolve the matter and focus on helping consumers buy, sell and move with simplicity, certainty and speed,” the company said.
The future of “ibuying’ is unsure, however, likely to grow. While these pioneers of this algorithm based real estate practice have taken losses and fines, they are paving the way for the future of the phenomenon.
Zillow’s iBuying Service
Zillow has now pulled the cord on their “revolutionary” iBuying real estate system. The corporation tried to expand outside of a traditional multiple listing service and into the home-flipping market. However, they were met with catastrophic failure. The ambitious effort of getting into the home-flipping market could potentially impact the company for years to come. Their biggest issue came as their pricing algorithms led them to purchase homes at, or above, actual home value.
With the iBuying system proving to ultimately be their biggest downfall to date, the company expects tremendous losses. After reporting the sale of over 7,000 homes the corporation has purchased, Zillow expects to lose as much as $570 million dollars in 2021. Zillow is also completely eliminating the home-flipping branch of its company, cutting over 25% of its workforce. Zillow Offers, the name of the iBuying branch, showed a $380 million dollar loss in Q3 of 2021. This loss resulted in an 11% drop is stock price in little over one trading session, and caps off a rough year for Zillow shareholders.