Digital real-estate firm Zillow (NASDAQ: Z) has shelved its iBuying business after questioning its reliability. The company's actions have caused experts to doubt the reliability of the "Zestimates" tool.
To say that it's been a rough week for Zillow would be quite an understatement. Despite riding high on robust Q2 reports just a few months ago, the real estate-tech firm has found itself facing cratering share prices and considerable losses in Q3. Zillow's buying division, Zillow Offers, is closing down and taking a quarter of the company's workforce with it. To make matters worse, some are starting to question the Zestimate tool, Zillow's key remaining product.
The Zestimate tool, which iBuying was built off, attempts to estimate the value of a home using algorithms. While Zillow claims that the median error rate of 1.9% for on-market houses and 6.9%, different markets have experienced different error rates. To illustrate, the average rate in Cincinnati was 35% of homes landing within 5% of the final sales price, while in Denver, that rate was over half.
Zestimate's propensity was to overvalue homes. While this attracted more customers to the platform, it ultimately meant that the company was losing money and quite a lot at that. Through iBuying, Zillow hoped to purchase, refurbish, and flip homes but found its algorithms struggled to keep up with price forecasting.
While the company hasn't been helped by volatility coming because of the pandemic, Zillow's practices were a bit detached from the functions of the real estate market. Competitors such as Opendoor (NASDAQ: OPEN) conduct transactions akin to typical real estate brokers and interact directly with buyers and sellers in the market. Zillow's "hands-off" digital model left the company often utilizing pricing data that was out of date, whereas firms such as Opendoor have direct access to real-time valuation.
Zillow might be licking its wounds for a while, having taken quite the beating at the market. Starting Monday at $104.74, Zillow took a 37% hit over the week, with Friday's closing price sitting at $66.17.