Zillow’s IBuying Failure: The Good, Bad, And Ugly

The home buying platform Zillow has recently found itself in hot water. In September, the real estate platform came under speculation after a viral TikTok revealed it might be manipulating the real estate market. Zillow Group Inc. was trying to recreate a house-flipping business driven by an algorithm. But the company’s iBuying efforts backfired when it realized “the unpredictability in forecasting home prices far exceeds what [they] anticipated.” (That’s what homebuyers have been trying to say for years.) Now, Zillow is trying to offload over 9,800 properties and 8,200 it was in the process of buying. What’s even worse is they’re selling them to corporate giants. So, here’s what went down.

Zillow’s iBuying failure

TikToker Sean Gotcher exposed a secret: An unnamed company supposedly was buying people’s houses, fixing them up, and then selling them on Zillow to Zillow customers. Social media then did its snooping and connected this unnamed company to Zillow itself. The company was using its Zestimate tool—an algorithm that predicts home prices—to do some iBuying, or using technology to value, buy and sell homes to turn a profit. And sellers couldn’t pass up the offers; Zillow was putting forward faster, all-cash deals. So, the platform would purchase these homes, renovate them, and sell them as quickly as possible, hoping to make bank on transaction fees and appreciation.

But Zillow’s fixer-upper dreams were crushed when the company realized it couldn’t really predict what the price of homes would do. By the third quarter of 2021, it had to sell homes for around 5%-7% less than initially forecasted. Now, Zillow is no longer buying homes, and, as the final nail in the coffin, it laid off a quarter of its 8,000-person workforce.

Why was the idea such a bad thing?

First, Zillow was consciously taking opportunities away from real estate agents and average homebuyers. Opendoor said the platform’s business model provides them with keen insight into the changes in the housing market’s price appreciation, seasonal buying patterns, and other factors that signal how much the firm should be buying and what it should be paying. It was cool when their Zestimate helped customers but not so cool when they used it to take opportunities away from those same customers and make quick cash.

Another critical effect of the iBuying failure is that Zillow is selling its failed ventures to giant Wall Street rental operations. According to Bloomberg, experts are worried that thousands of houses from this failed operation are going not to individuals but corporate buyers. Zillow even went as far as letting these firms have a chance at these properties before they were opened up to individuals.

“The bigger that number gets, the worse I feel about it. I get that there are business considerations. Zillow flicking off thousands of houses at a time makes sense as a business. But this is more than business, this is housing.” -Mike DelPrete, real estate tech strategist and scholar-in-residence at the University of Colorado Boulder / via Bloomberg

Getting in the market

Are you in the market for a new home? Well, the housing market has seen astronomical prices in the last year. The median sale price rose 13.3% in September from the year before. And with the constant ups and downs of inflation, shortages, interest rates, it’s difficult to predict prices right now. Nevertheless, some people are still using the Zestimate to help inform them on the home buying process. And “it’s a good tool for what it is,” DelPrete said. But, as Zillow learned with its little home-flipping project, it’s a mistake to think the tool can accurately predict house prices now or in the future.

And if you think now’s the time to start a house-flipping business, you might want to think again. “Considering [that] returns on each deal generally allow for the next one, flippers should be cautious in what they are paying for homes so as not to chase the market,” Todd Teta, Attom’s chief product officer, told CBS MoneyWatch.

Should we be worried that big corporations are buying these houses and locking regular people out of the market? Do you trust Zillow?