Zillow Offers' "Volatile Error Rate"

In November 2021, Zillow announced that it was planning to shut down Zillow Offers, its iBuying program that leveraged its home value algorithm to quickly purchase homes for later resale. Zillow made the announcement after its market capitalization dropped from $48.35 billion in February 2021 to $16 billion in November. Poor program performance in 2021 left the company with roughly $500 million in losses due to an extensive inventory of overpaid homes and a 25% workforce reduction. This case offers an overview of iBuying, an algorithm-driven real estate purchase process; Zillow's version of iBuying, Zillow Offers; and one possible reason for Zillow Offers' demise: adverse selection. It is taught at Darden in the elective course “Data Visualization and Analytics.”<p>Excerpt</p><p>UVA-QA-0944</p><p>May 24, 2022</p><p>Zillow Offers' “Volatile Error Rate”</p><p>In November 2021, Zillow announced that it was planning to shut down Zillow Offers, the company's iBuying program that leveraged its home value algorithm to quickly purchase homes for later resale. It made the announcement after its market capitalization (market cap) dropped from $48.35billion in February 2021 to $16billion in November, just nine months later. Poor program performance in 2021 left the company with roughly $500million in losses due to an extensive inventory of overpaid homes and a 25% workforce reduction. In regard to the iBuying program, Zillow CEO Rich Barton said, “our observed error rate has been far more volatile than we ever expected possible.”</p><p>iBuying</p><p>iBuyers were companies that relied on algorithms to generate residential real estate offers based on property details submitted online by potential sellers. iBuyers extended offers, usually in cash, to sellers within a day or so of the shared property information. When a seller accepted an offer, iBuying companies sent representatives to the property to finalize the contract.</p><p>. . .</p>