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How Zillow's homebuying scheme lost $881M

522 points by spansoa 5y ago

emodendroket 5y ago
Guess Zillow didn't have the brilliant insider information as to what the market would do that everybody thought.
h2odragon 5y ago
Zillow's estimates of home values in my area have consistently been 150% of actual prices, as far as I've seen over the past years. Not that I've looked that closely and given that this is a hard area for them with low sales and a broad range of values for reasons not easy for their algorithms to quantify. However, I always took that to be intentional, sort of a "see how valuable your home is / how high the values are where you're looking at"; hype that cost them nothing but made everyone feel better. Did the person that set that "glamor bonus" fudge factor get fired or just wasn't allowed to talk to the team deciding offer prices?
- avgDev 5y ago
  Odd. My house is valued at $330k on zillow, would sell for $420K+ in a few days.
  - brk 5y ago
    Mine is pretty accurate ($2.5M), based on recent sales and a couple of solicitations from realtor friends. FWIW, we have had a high frequency of home sales in the past year, so that might help. I just looked up my previous house (sold 5 years ago), and Zillow is saying $740K, which I am pretty sure is massively overvalued, however the street it is on, and general area, have a fairly low turnover, so less recent data.
    - syspec 5y ago
      Humble brag
      - eyjafjallajokul 5y ago
        Not if you bought a home a decade or two ago and house prices went up around you with no action of your own. I drive an old Honda Civic and my neighbors all have Tesla, Porsche, etc.
      - brk 5y ago
        I didn't mean it that way, and it's all relative really. There are a ton of houses above and below my price point.
        fugalfervor 5y ago
        No, you're rich.
      - DonHopkins 5y ago
        I'm working on my second million! ...I gave up on my first.
    - imilk 5y ago
      Mine is pretty accurate as well ($44.8M), based on recent mentions in Architectural Digest and a couple of solicitations from fellow G650 owners.
      - diamondlovesyou 5y ago
        There isn't exactly a large market for homes at that price point. Plus at that price, a thorough DD is an order. So not unexpected that your home's value would be accurate.
        cole-k 5y ago
        What's "a thorough DD"? I assume it's building on the previous joke but I don't recognize the abbreviation.
        a_r41 5y ago
        Due diligence.
  - micromacrofoot 5y ago
    It varies a lot based on location and what's sold locally. If there aren't a lot of similar properties in the area that have sold recently it will be much less accurate.
- some-guy 5y ago
  Another anecdote: I’m in Oakland, where condo prices went down slightly during the pandemic overall, yet Zillow’s estimates are always much higher than Redfin’s (which seem to be in the same ballpark as the sale prices).
  - mistrial9 5y ago
    maybe Redfin actually incorporates "price at end of closing" into their models, instead of say .. "wishful drinking" prices from Zillow and crew?
- throwaway1777 5y ago
  It varies widely by Area how accurate the zestimate is. In some places Redfin is much higher than Zillow, in others places it’s reversed. Sometimes they’re too high, sometimes they’re too low. I presume the algorithm does best when the prices are fairly flat, but in this market real estate prices changed dramatically and it seems pretty impossible for an algorithm to figure it out without modeling the entire economy and movement patterns of the population.
- civilized 5y ago
  The Zestimate history for a condo I used to own is hilarious. There have been several sales of this property over 5 years, all at about the same price. If you follow the Zestimate through time, it climbs rapidly until there is a sale, then it goes "oh shit" and plummets down to the sale price, which is barely different from the last time it was sold. This cycle repeats each time the property is sold. Zillow is absolutely certain that this property should be rapidly increasing in value, no matter how many times it sells at about the same price it sold for last time. When we sold the property, the agent told us it was in an awkward spot: too expensive for single people, not quite big enough for high-earning families. So it's stuck in price limbo as all the neighboring condos skyrocket. Based on this experience, I remain convinced that there are micro-structural factors the fancy data science pricing models just can't seem to capture yet.
bastawhiz 5y ago
I recently bought a home. We toured a Zillow home, and I can understand what they were going for and where they failed. We were able to pull up to the driveway, book a tour for that minute, and walk in the front door. It was almost a magical experience compared to the process of finding and going to showings. The listings were clear and thorough. The experience was extremely compelling. The downside: the homes were absurdly overpriced. I bought a home for about 10% less than the last Zillow listing. For less, I got three times the land, 40% more square footage, a better location, updated appliances, new carpets, landscaped back yard, horseshoe driveway, two car garage. Almost zero effort had been put into modernizing the Zillow home and it showed. I suspect if I had come in with a very low offer, they'd have accepted it. But for what? If I was Zillow, I'd have licensed the tech to realtors. I'd definitely be inclined to buy a home through them if they weren't the ones selling the property directly.
- wcfields 5y ago
  If I can give any home buying tip from my experience of buying two houses it's been to look at places that are in "the middle". Both homes I've bought in SoCal have had some god-awful photos online, and the finish is new-ish, but done by someone in the 70s so it's new but tacky in a little-old-lady way. This ends up pricing the house too expensive to flippers, and not nice enough to sell compared to other houses because it doesn't have the farmhouse sink and looks exactly like a grandma took out a home equity line and renovated (which is what happened).
  - deleted 5y ago
    [deleted]
  - escapedmoose 5y ago
    We took the same approach with our house, and the results were marvelous. Major props to our realtor for seeing the potential hidden in those god-awful listing photos.
    - IshKebab 5y ago
      The American house buying process is seriously weird!
endisneigh 5y ago
They should’ve set it up so you can be sent a set of cameras to put across your house, they photograph and setup a smart lock, etc. In return people would be able t book a viewing to your house without a buyers agent nor would a sellers agent be involved. Cut both parties out, pass some savings to the buyer and seller and take a large cut. Everyone wins.
- asdff 5y ago
  Who do you talk to about the listing in this case?
mistrial9 5y ago
I am especially annoyed at Zillow SF holding "Data Science" meetups in San Francisco at the penthouse place, while advertising for TWO data science positions.. meanwhile, frat guys are at the golf course by the dozens, across three states. The people that they hired at that time, probably built this setup exactly as required by the frat guys. Happy banking Zillow!
- mwt 5y ago
  There's some poetry in older banks claiming they're pivoting to being tech companies (i.e. Capital One) while some tech companies are heading straight towards being banks.
  - HWR_14 5y ago
    There was the line about Netflix seeing the writing in the wall about needing to produce their own content because everyone was going to make their own steaming service. "We need to become HBO before HBO becomes us." If the right answer is a blend of two business models, then both companies becoming more like the other make sense.
  - sjroot 5y ago
    Former C1 employee here with a personal opinion. C1 is walking the walk; everyone up to the CEO is very tech-forward (which quite surprised me initially)
  - ccvannorman 5y ago
    It was surprising to me to learn that airlines are basically banks https://www.reddit.com/r/urbanplanning/comments/rgkne9/how_airlines_quietly_became_banks/ https://www.reddit.com/r/urbanplanning/comments/rgkne9/how_a...
    - mdaniel 5y ago
      If one enjoys Wendover videos, there was a recent one about that: https://www.youtube.com/watch?v=ggUduBmvQ_4 https://www.youtube.com/watch?v=ggUduBmvQ_4
thr0wawayf00 5y ago
The scary thing is that it's easy to see how something how like this could drive a market boom and bust cycle. I'm imagining a scenario where two iBuyer companies try to outbid each other algorithmically, driving the prices further and further out of reach of people who are looking for a primary home. Tangentially related, I talked to a friend who works on geospatial data for one of the big vacation rental companies, and he was remarking how many homes in many desirable areas are now rentals. It's not that uncommon to see nearly entire neighborhoods converted to short term rentals now in some areas where they're still legal. Hearing that really depressed me. We often talk about automation in terms of replacing various types of labor, but I've become really interested in automation creating adverse market incentives for smaller market participants because that's exactly what buying real estate right now feels like. It's honestly quite scary how I'm in the top 2% of income earners in my generation and yet I could barely afford to buy a small place in a semi-desirable area. I can easily see myself not being able to compete in algorithmically dominated markets flush with venture cash in the future and I earn more than just about everybody I know today.
- runamok 5y ago
  Cities can regulate this. Recent example in San Diego: https://www.nbcsandiego.com/news/politics/san-diego-mayor-signs-short-term-rental-regulations-into-law/2576807/ https://www.nbcsandiego.com/news/politics/san-diego-mayor-si...
- ddoolin 5y ago
  The problem here is that they were buying the homes at prices above what they would actually sell for to real buyers and Zillow ended up racking up losses in that way. In your scenario in which two iBuyers outbid each other -- fine, but wouldn't the same situation as Zillow's happen? They'd just end up with overpaid inventory.
  - mwt 5y ago
    Whether or not the market works itself out later, it puts everything into a weird state while the bidding war is going on. If iBuyer1 and iBuyer2 together buy up the inventory of a zip code for 120% of asking, then what are people who are willing to go to 105% to do? Maybe it just resets the market to whatever the drunken algorithm decided it to be.
buzzdenver 5y ago
The author has a valid point in that the information asymmetry will attract sellers whose property is overvalued to sell to Zillow. I suspect though that something different happened in reality. I live in a 70 unit condo building, so there are a lot of very good comparables. Zillow bought one of the units about 10% over market value, which makes me think that they're doing some sort of market manipulation, like charging a 20% fee that is not part of the real estate record. So they wanted to pump up prices, but it didn't work.
- civilized 5y ago
  In my experience, Zillow is sometimes conspicuously bad at valuing condos and literally doesn't know their market value, no matter how obvious it may be to you https://news.ycombinator.com/item?id=30724925 https://news.ycombinator.com/item?id=30724925
- TimPC 5y ago
  It’s very hard to do good real estate pricing models from raw data. You can get all sorts of metrics on the property statistics but one important factor in the cost of the home is the state of renovation. Since most listings don’t have a historical listing of work done in the home your best hope of accurately assessing this comes from something like computer vision on the listing pictures. Assessing the quality of work, recency of work, quality of materials and factoring that into a house price is extremely hard. It would not surprise me at all if Zillow paid near market value for a whole bunch of dated homes that hadn’t kept up with the times and would sell for below the market of similar homes in the neighborhood according to typical metrics. The stories make it seem like their model had even more issues than that. Still I’m surprised anyone actually tried this idea given how poor the algorithms are and how obvious it is that key data points are not available.
  - buzzdenver 5y ago
    What was stopping Zillow from having a human look at the property and adjust the price based on factors that their algorithm didn't consider?
chrisbrandow 5y ago
How many homes did they buy? wow. <Quickly searches to answer question for myself> Oh, ~5,000/month.
- LimaBearz 5y ago
  What gets me is even if the number was significantly smaller the fallout effect is massive. A common argument I've heard defending the practice is "well they didn't buy that many homes, it was just a small portion of total sales" ...implying that its not a big deal. Lets no argue the truthiness of that statement but look at it as stated. They buy one house within a 10-20 mile radius away from you and they do so aggressively paying 20-30%+ over the pre-bubble price (think early pandemic times when prices were more realistic then they are now) Well now thats the anchor price on comps for the next guy just looking to sell his house. Rinse and repeat a few times with anchored expectations on an inflated value and we have runaway prices.
  - vanilla_nut 5y ago
    It at least gives me hope that if regulation and profit margins push corporate buyers OUT of the market, we can return to sanity and I can someday own a home. But given this country's history of regulating giant corporations... more likely we'll just do nothing until homelessness balloons even more and the vast majority of homes are corporate owned. Then we'll have to wait for a VC bubble burst before they start selling all of the homes and tank the market.
  - bduerst 5y ago
    That's because real estate pricing is fixed to nearby inventory. Zillow doesn't have to buy many homes in a neighborhood to inflate the prices of all the homes, it just needs to buy 1 or 2.
dpierce9 5y ago
Anecdote on the estimates. We bought a house for X and renovated it. The day before we listed it both Zillow and Redfin estimate had an estimate around the purchase price X. When we listed it for 2X, both companies changed their estimate to be close to the listing. However, Redfin changed the entire price history as well showing a gentle slope. Zillow preserved their previous history and showed a spike.
- double0jimb0 5y ago
  Noticed the same, but I still think Zillow tweaks historical but just not as brazenly as Redfin.
- harikb 5y ago
  +1 I have always been annoyed by Redfin's rewrite of history. At least have the decency to show two lines (original prediction for last year and how it turned out to be).
  - ct0 5y ago
    This happens all the time with most data providers.
  - el_benhameen 5y ago
    At least in my area, they've completely given up on providing a "historical" estimate of the house in question and just have a trend graph for the general area. I assume this data is also heavily massaged, too, though.
  - creaghpatr 5y ago
    Same, I find this to be a bizarre practice. What's the point if the snapshots are revised?
    - notahacker 5y ago
      I assume the rationale is that it's are supposed to be an indicator of the actual value of the property at a point in time, not the accuracy of their algorithm at that point in time. So if they update with new information, it's assumed that instead of the price suddenly jumping (which looks very odd if you're trying to understand a local property market), the original snapshots are assumed to have been wrong
encoderer 5y ago
I was at Zillow for many years and left in 2020. On the tech side the pivot into iBuying was absolutely bonkers. The message from senior leadership was basically: I have no idea what your teams should be working on but it’s definitely not what they are currently working on so stop that and figure something else out. This has nothing directly to do with their market failure but they probably are driven by the same leadership problems.
- deleted 5y ago
  [deleted]
- itronitron 5y ago
  Sounds familiar, I read this as leadership saying... "you all need to change what you are doing because you must not know what you're doing because we don't know what we're doing and we're the ones in charge."
- phlowbieuq 5y ago
  i wish we lived in the same area and could have an OTR conversation about this. believe it or not, the new "strategy" now that ZO is all shut down is even less well-defined and more pie-in-the-sky than ZO ever was.
  - sib301 5y ago
    Please share!
  - hackernewds 5y ago
    what is ZO?
    - allenu 5y ago
      Zillow Offers. The name of the iBuying service the company provided. (Former Zillow myself, as of a couple of weeks ago.)
1B05H1N 5y ago
How much money did this cost everyone else?
- maldeh 5y ago
  Likely some stressed out buyers paid for overpriced homes given the sharply rising prices across the market (although completely by their choice), and the sellers probably loved it - but that's already par for the course with the housing market at the moment. Zillow probably didn't help but isn't the sole contributor by any means.
- titanomachy 5y ago
  I think that "everyone else" actually made money from this. Zillow overpaid for houses and then was forced to sell them for the actual market value, so this $881M was basically free money given directly to the people Zillow bought from.
bell-cot 5y ago
Reminds me of an old guy in knew back in the early 90's. His (quite nice) house was on a lot shaped like "well, that was the leftovers, after we gave all the other houses reasonable lots". Every year, the City tried to raise his property's assessed value by ~10% more than the neighborhood's average increase. And every time that his house sold (he had decades of records, to support his appeals of their over-assessments), it sold for ~50% of what the City wanted it to be worth. Now if he could have gotten the City to buy him out, for what their Assessment rulebook said his house was worth... Edit: Added seemed-obvious final sentence.
- sokoloff 5y ago
  I've often wished that one avenue of appeal of a city assessment was an option given to the property owner to force the city to buy the property for 90% of what they assessed it. You could either go through the current appeals process or just sell them the house if they were way off.
  - nikanj 5y ago
    And the same for the reverse: You can claim your house is only worth $40k, but then the city is allowed to buy it for $48k.
    - sokoloff 5y ago
      I'd be OK with that, but would probably design it to allow the homeowner to "fold" and withdraw their petition to reduce the assessment. (Otherwise, you'd see crap like "Oh, nikanj's kid is a senior next year; let's jack up their assessment because they're not going to want to move and so won't contest it...")
  - bluGill 5y ago
    Where I live the assessed value is a complex formula only somewhat related to real estate values. My house might be say $500k, but it should assess for about $380k. So I'm losing long before it would be worth a buyout
Invictus0 5y ago
I wonder how this would have ended up if they just dealt in options instead of taking on the inventory. For those that don't know, a real estate option gives the holder the right to buy the property at a fixed price within a certain timeframe, in exchange for a premium. This would have been a much better way to learn the market than diving straight into home purchases.
- sokoloff 5y ago
  Most people who are selling their house are doing so in order to buy another one. That is to say they need the money from the sale to close on their other house. Selling an option on a house you live in is a pretty terrible idea since if the market takes off, your option gets called, you're out of a house and into a market that's skyrocketing. I don't think there's enough benefit to sellers to make buying options feasible.
  - devoutsalsa 5y ago
    Now I want to sell puts on over priced houses.
    - projektfu 5y ago
      I will buy your put on an overpriced house!
jjice 5y ago
It's such a glaring red flag that one of the largest public resources for getting pricing information on housing is also buying and selling that housing. Come on, this is so glaringly abusable that any teenager could tell you what's wrong.
- lotsofpulp 5y ago
  Can you illustrate the mechanism of abuse? Pricing information on housing is readily available to almost everyone, outside of the couple stated that do not mandate it. Zillow makes it easier, but Redfin and realtor.com and countyoffice.org and other websites offer the same information scraped from municipal websites.
  - afterburner 5y ago
    Zillow could lie about regional home values and blame it on their "secret sauce".
    - lotsofpulp 5y ago
      Why would anyone trust Zillow’s opinions over anyone else’s opinion? Everyone has access to the same historical sales data that the market actually cleared at. In fact, it is has never been easier for the average person to research historical sales information. They can filter the parameters of the house they are interested in the area they are interested and find all the previous sales data, all while sitting on the toilet, thanks to websites like Redfin and Zillow. They can “lie” all they want, it makes no difference to what price a house sells for.
      - afterburner 5y ago
        People tell outrageous lies on Facebook all the time and they seem to work. Deception works (especially subtle deception), and laziness is a thing. Also, Zillow's current value estimates are about "current" values, not past values.
echan00 5y ago
How do you lose money in a market where homes only went up?
- JKCalhoun 5y ago
  They pretty much lay it out in the article. Essentially they end up with the "lemons" and then have to pay to hold them until they sell.
- advisedwang 5y ago
  The point of the article is the answer to this: they were systematically overpaying because the offers where they overestimate value were disproportionately taken up by sellers. But also there's the cost of inspection, property insurance, title insurance, escrow fees, labour costs of making the sale etc. As the article says, trading houses is not like trading stocks.
- colinmhayes 5y ago
  The only offers they made that were accepted were the ones on shitty houses that their algorithm mispriced.
ourmandave 5y ago
I'm planning to sell very soon and love the iBuyer model. Don't have to deal with showings, or fix anything, or hope a buyer's financing doesn't fall through at the last minute. To me that's worth whatever percent they're getting. Sadly, no iBuyer operates in my fly-over state.
- JKCalhoun 5y ago
  Not sure why the article goes to such lengths to legitimize "Corporate flipping", calling it iBuying or whatever. No matter what terminology you use, buyers without cash-in-hand are getting screwed.
  - mywittyname 5y ago
    > No matter what terminology you use, buyers without cash-in-hand are getting screwed. "Cash is king" is a common phrase in real estate for good reason. In pretty much all instances, a cash buyer has a leg up over everyone else. In a liquidity crunch, cash buyers get discounts because people can't get loans; in hot markets, they get discounts because they can wave contingencies; in cool markets, they get discounts because they can move faster; etc.
    - bduerst 5y ago
      This hasn't always been the case with real estate though. The market used to be much more accessible, and tech bubbles overlapping into it are just further destroying it.
  - jdross 5y ago
    look up Opendoor’s buy with cash product. Turns every buyer into a cash buyer in exchange for the same commission as any other buyer agent (maybe lower?)
    - mdaniel 5y ago
      Flyhomes is in that game, too: https://www.flyhomes.com/ https://www.flyhomes.com/
JRKrause 5y ago
Zillow purchased a home in my neighborhood for $370K, is now trying to sell it for $410K. Prior to this purchase other houses with a larger footprint in our exact same neighborhood were selling for $250K(literally just months before). For some reason zillow chose to pay 100K over what would have been fair value for the house.
Finnucane 5y ago
"In the real estate industry, this service is called iBuying, " Also, 'flipping.'
- dopamean 5y ago
  I dont really think anyone would call the business models of Opendoor, Offerpad, and formerly Zillow "flipping." Yes, they did buy a house with the intent to sell it but imo the term flipping refers to a much, much smaller scale business that also includes fixing up the property in some way. That is not what iBuyers do.
  - Finnucane 5y ago
    Buying a house to make a short-term profit on the resale is flipping. You can cover it up with some marketing tech-biz baloney, but it is still flipping flipping.
    - Otternonsenz 5y ago
      Agreed. In my local Multiple Listing Service, it can show you all deed history for a given property, it is most certainly labeled as a flip if anyone – iBuyer or no – buys and then sells within a short period of time, even if they don’t make profit. The intention is understood by all market participants.
prototypeasap 5y ago
I recall reading months ago that Zillow made cash offers with inspections waived, in order to expedite the process. I believe they had an algo which would access average repair cost which they would factor in the actual offer. Each house needs to be inspected by multiple experts as there are many toxic properties with huge liabilities.
- ridgered4 5y ago
  If I was stuck in a toxic house that I couldn't afford to fix that Zillow no contingency offer would be like a literal dream come true!
devmunchies 5y ago
> Zillow’s exit from the market strengthens the position of companies like Opendoor or Offerpad, which do something similar Does Opendoor just have better algorithms/models? What factors allow them to have different outcomes from Zillow?
- bkberry352 5y ago
  Mostly that they no longer have to compete with Zillow
- trixie_ 5y ago
  This is a good question. I am long on some company figuring out how to really streamline the home buying/selling process. Everyone dreads it, nothing worse than trying to buy or sell a home. These companies could be great buffers allowing the quick sale/buying of a home with minimal overhead. There is definitely a market for providing 'peace of mind' and the guarantee of not being screwed which today there is a high probability of from all angles. Hopefully Opendoor can figure it out. They're probably going to need a lot of cash, homes, and software to really put it together into something that can be automated and scale.
- philipodonnell 5y ago
  If I remember the discussion at the time, OpenDoor and Offerpad are pure-play iBuying while Zillow was an already huge business pivoting into iBuying to make up for declines in its advertising business. Zillow had a reason to scale faster than the others and they didn't do it very well.
- bgentry 5y ago
  Yes. Source: I was employee 24 at Opendoor. Zillow's pricing algorithms are and always were terrible. They tried to paper over this during their iBuying push with humans, and then in an effort to outgrow Opendoor, they incentivized growing at any cost without the proper controls to prevent adverse selection. And due to some unfortunate timing with the market cooling, they got wrecked for it.
annoyingnoob 5y ago
The Zillow properties in my area were all overpriced, they were paying too much. People were happy to sell to Zillow at a premium.
sys_64738 5y ago
I thought the Zillow webpage was simply to guesstimate the cost of houses. This whole scenario sounds like they were totally out of their core competency zone.
rahimnathwani 5y ago
"Do market makers in the stock market run into this problem?" Yes, that's why they have to account for the probability that whoever hits their bid is an informed trader (vs. uninformed/noise trader). And it's part of the reason they can provide price improvement when they source order flow from retail brokers, whose customers are mainly uninformed/noise traders.
krinchan 5y ago
It definitely feels like market making is something all parties involved in a real estate transaction would like. The article lays out the problems of applying the concept to real estate pretty clearly. Personally, I think the physical cost of holding inventory and the lack of commodity status (commoditization?) for houses is manageable, if not outright surmountable. I think the condition that simply must change for this business model to work is the velocity of buying and selling residential real estate. Until you can go from “I want this” to “I bought this” or “I want to sell this” to “I sold this” in a scale of days if not hours, any market maker in residential real estate is going to end up a market risk taker implicitly betting on the future price of the property. Even if Zillow could move directly from closing on the house from the seller to initiating a sell to another buyer in less than 24 hours, there’s still several weeks involved. If the market is volatile, that’s a substantial risk exposure. Simply put, it needs to be possible to move the title twice in 24 hours along with some way to finance a buyer on a very accelerated timescale. Both of these things will need reforms at all levels of government: municipal, state, and federal. I just don’t see that happening for a very long time, to be honest.
ridaj 5y ago
Re opendoor etc > A less competitive market is less dynamic and worse for sellers, but it is better for the iBuyers that remain. If they can avoid taking on the bad deals that Zillow was previously shielding them from. I've seen how in some markets the disappearance of a provider that falls victim to this kind of adverse customer selection merely moves the problem to other providers in a cascading fashion. It's not clear that there are that many profitable deals to be made on the iBuying model
bernardv 5y ago
That’s what happens when you get involved in a business you really know not much about I.e. market-making and risk-taking.
hgomersall 5y ago
Why could this not be run as an actual service. Zillow fronts say 75% of the estimated purchase price, then sells it and takes a cut of the premium, the rest going to the original seller. It's an estate agent with financing.
- Traster 5y ago
  Because very often the reason you're selling a house is that you're buying a house, and so you need 100% of the value of the sale to go towards your new deposit. It's no good having 75% of the cash now, you need it all as a deposit and the mortgage company isn't going to take the risk that that 25% turns up eventually.
- octoberfranklin 5y ago
  This is a brilliant idea, and if I ever sold my house I would want to do it this way. Unfortunately most homeowners are debt-leveraged out the wazoo as a result of the artificially low interest rates we've had for the past decade. Once you filter out people who aren't looking to move the remaining cohort is homedebtors. Although something like 1/3rd of homeowners own their house outright those tend not to be the ones looking to move or flip.
antidnan 5y ago
Has anyone seen an analysis of why their pricing models were above market, and/or worse than OpenDoor?
- ccorda 5y ago
  Mike DelPrete has done several: - https://www.mikedp.com/articles/2021/12/16/opendoor-vs-zillow-a-tale-of-two-pricing-models https://www.mikedp.com/articles/2021/12/16/opendoor-vs-zillo... - https://www.mikedp.com/articles/2021/11/3/zillow-exits-ibuying-five-key-takeaways https://www.mikedp.com/articles/2021/11/3/zillow-exits-ibuyi...
projektfu 5y ago
The author buried the lede. Zillow came up with a model to choose bid and ask prices. The model said, "Don't buy". They didn't believe the model and chased the deal, and lost money. Sometimes it's better to sit on your hands.
- shp0ngle 5y ago
  Yeah this article makes it sounds like algorithmic trading is wrong by design, but that’s not really true in this case at least
bghdrmz 5y ago
I feel this is happening in the automotive space. Companies like carlots and carvana have been completely swallowing up all supply and driving prices up well beyond fair value.
- bduerst 5y ago
  It's definitely happening, also compounded by chip shortages and supply chain issues. I've leased the last six years but only in the 8 months have I had dealerships calling me with offers to buy out my lease just to get the car back early.
ilamont 5y ago
Any time that you’re working with imperfect knowledge and trying to operate a business on a large scale, you’re likely to run into this kind of trouble. Can we admit that this is a major problem with the "AI" search algorithms operated by Google, Amazon, and others? They are assigning "value" to content, or books, or whatever based on an incomplete understanding of the market. It's made even worse because so many owners are able to game the system.
nikanj 5y ago
How do you _lose_ money investing in homes since 2010 or so? The market has been going gangbusters everywhere with a zip code, with solid double-digit gains in all place with more than one Starbucks
CloudYeller 5y ago
I bet humans could have done a lot better than -$881M, and it wouldn't have been very costly to employ them. How many homes did Zillow iBuy in total, 10-20k? If it takes 5 minutes to evaluate a house, that would be 100,000 minutes, which is ~50 people working full time for a week. Spending $100k on that could have saved 100s of millions, plus it might have generated better training data for the model.
natas 5y ago
Based on S4 forms, Zillow execs made a cumulative $1.3B from what might have been called a ponzi scheme, so it was overall well played.
- mistrial9 5y ago
  > so it was overall well played in one breath it is overtly and explicitly illegal, second breath same sentence.. "wellplayed" .. any red flags here? I have heard "contemporaneously, during the Fall of Rome, there was a precipitous rise in the number of lawyers"...
skrtskrt 5y ago
Some twitter threads from Zillow insiders I saw around this referenced a couple things: * the pricing algorithm was good, but the business leadership got hungry and kept overriding it with higher offers in the hunger to do more business. * they were trying to do so much business that they couldn't source the labor need to flip - painting, landscaping etc. They were so backlogged they were just sitting on houses they overpaid for (due to overriding the algorithm), and the constant cashflow aspect that makes flipping work at scale was destroyed Matt Levine's take was something like: if the pricing algorithm is good but it tells you that the flip strategy is only profitable on relatively small number of properties, then it's not profitable at scale cuz you're paying a big engineering team to create, tune and maintain it.
- dmix 5y ago
  When you hire at a growth rate the workers will find work to do whether or not it helps your business. In this case I could see a bunch of home buyers being hired and justifying their jobs.
- shp0ngle 5y ago
  Ahh the classic “lose at every sale and make it up in volume” strategy
noasaservice 5y ago
And a solution is exponential taxation for properties not being lived in by the buyer. I'm done and tired of vulture capitalists and all sorts trying to make bank on where to live. I'm sick of landlords looking for shitty almost-passive income while I build them equity. Fuck'em all. I want this "industry" to die in a pit of firey death.
- jgod 5y ago
  Can start with people who aren't citizens (overseas "investors"), and then people who may be citizens, but don't have the country as their primary residence. And then beyond a certain number / distance (discourage absentee landlords).
Otternonsenz 5y ago
As a current residential real estate appraiser, and coming from being a developer for a large corporation that is very active in this space, this has been eye opening yet unsurprising to watch from where I sit with access to all the transactions in my area (I service the Phoenix-Metro and outlying areas). In appraisal after appraisal after appraisal within the last 6-7 months, I have watched Zillow, Opendoor, and OfferUp getting cleaned out to the tune of losing $30,000 - $60,000 on home after home in some neighborhoods. And in AZ, Zillow and Opendoor have been buying and selling in this market pretty healthily the past few years, and we’re it not for themselves and the buying frenzy of last Spring and Summer, they probably would not have gotten as hurt here in the Valley. They got suckered into paying top dollar in a market that was at its peak, and their algos were not trained to deal with the human factors causing this. When I was working as a developer for a real estate tech company, it was made very clear that this company, along with any other iBuyer are able to show homes and come up with estimates is because they have local access just like realtors, appraisers, and developers to a Multiple Listing Service (MLS). In fact, the company I worked for had access to every MLS in the US; They would use the data from any of these MLSs to populate their front end product, which would then be influenced by their data science team to give the “estimate” based on whatever factors they deemed appropriate. As someone whose job is predicated on objectively using primarily historical (for the past year) MLS/County data to asses what the market will allow a home to be valued at, it pains me to see people being taken advantage of by companies like Zillow who want to be “market makers” while not thinking through the implications of their strategies past making money on “easy” flips. All this at the cost of local communities home values losing touch with the realities of the people who are living in an area to live, not invest. And here in Phoenix, it’s only gotten worse for anyone who doesn’t already have generational or attained wealth to find affordable housing. The median price as of the past few months has cooled down to $350,000 - $400,000 for what would be considered normal for a less-than 2,000 square foot home. But, in some areas of the valley, it’s gotten so ridiculous that a sub 2,000 sf house is able to sell for $610,000. On the one hand, I can appreciate these types of companies and business practices because they will keep me in a job making sense of the messes they make in the micro. On the other hand in a macro view, I hope this shakes some sense into the C-suite and product teams of these platforms that they need to approach this less as a “move fast, break things” type enterprise, for themselves and the communities they impact with their choices.
alecbz 5y ago
> Here’s the problem: my autodraft team ended up with a roster almost exclusively stocked with the players idiosyncratically overrated by Yahoo!. For example, an older player whose younger backup had just earned praise from the coach, suggesting that he might be about to lose his job. I guess this is pretty obvious but just to be explicit, what's happening I guess is that players that are "correctly" valued by the algorithm are getting taken by others, and only the overvalued ones are left for the algorithm to choose.
cloutchaser 5y ago
How did opendoor manage to do the same thing better? The article seems like a takedown of the model, but opendoor managed to do the same thing profitably. From what I've read it seems Zillow never had the actual expertise to do this, they were always a house price checking site. On the other hand opendoor started out doing this from the start.
crate_barre 5y ago
The funny thing is that while that number sounds like a lot, it would only be about 900 houses in places like Cali and NY.
jijji 5y ago
its easy to lose money if you're buying at retail and then selling at retail... there is really no money to be made in that scenario. I buy and remodel and either sell or rent the houses I aquire, but I do this at drastically reduced rates below retail. IMHO its the only way to buy. Every property I invest in has a problem, which is why the price is so low, alot of times its 10x below retail because of this. The top reasons why a house might have a problem is 1) the owners died and taxes were never paid, 2) the bank (or an individual) foreclosed on it reducing the price, 3) there are leins from the county or federal government that are making the house not sellable or worth nothing as a result, 4) the house has permit or code enforcement issues that the owner cannot resolve on their own ... Anyway, the best way to buy property is this way, and one rule I learned from attending auctions in person along time ago (its mostly online now) was that once the bidding goes above a third of its retail value, I'm out... Because sometimes you may have to invest 10-40k to make a house back to normal, and so paying even half its retail value just makes no sense.
samwillis 5y ago
With the articles reference to second had car sales it interesting to compare to British Car Auctions (BCA) here in the UK. They have something like a 60% market share on second had sales, they are completely dominant as the central “trading house” for second hand sales. Most second hand car forecourts are buying a significant portion of their cars from a BCA auction. The other thing they have which compares to what Zillow were doing is webuyanycar.com. It is literally what it says, you get a quote from their site to value it, go to their location and they buy your car. When I did it I was there for just 7 minutes, easiest car sale ever! And they payed be nearly 1k more than anyone else. They are truly the market makers with this system, ensuring a steady stream of cars into their auctions. Have full visibility in real time of the pricing on both sides and are only holding the cars for about one week. Some argue that they were a major contributing factor to the used car price inflation last year (on top of the issues with new car availability).
- lotsofpulp 5y ago
  > Some argue that they were a major contributing factor to the used car price inflation last year (on top of the issues with new cad availability). And they would be wrong. Market makers do not get to set prices, supply and demand does.
darkerside 5y ago
I wonder Zillow could do market making without the actually buying and selling that introduce so much of the risk. Gather into from prospective buyers about what they're looking for and identify houses that are a good fit and serve them up to the buyers. Not sure how to monetize, but this is essentially cannibalizing realtors, which is always where I thought their business model was going in the first place.
lvl102 5y ago
We need to stop corporations from buying single family homes.
PaulHoule 5y ago
Scale is the enemy of profitability for this. If you make lowball offers you won’t have many accepted but you will make money on the ones they accept. If you make higher offers you’ll be killed if anything goes wrong at all.
mupuff1234 5y ago
Just saw this article today: https://nypost.com/2022/03/18/firebird-grove-scoops-up-entire-nyc-street-for-just-32m/ https://nypost.com/2022/03/18/firebird-grove-scoops-up-entir...

522 points by spansoa 5y ago

Guess Zillow didn't have the brilliant insider information as to what the market would do that everybody thought.

Zillow's estimates of home values in my area have consistently been 150% of actual prices, as far as I've seen over the past years. Not that I've looked that closely and given that this is a hard area for them with low sales and a broad range of values for reasons not easy for their algorithms to quantify. However, I always took that to be intentional, sort of a "see how valuable your home is / how high the values are where you're looking at"; hype that cost them nothing but made everyone feel better. Did the person that set that "glamor bonus" fudge factor get fired or just wasn't allowed to talk to the team deciding offer prices?

avgDev 5y ago
Odd. My house is valued at $330k on zillow, would sell for $420K+ in a few days.
- brk 5y ago
  Mine is pretty accurate ($2.5M), based on recent sales and a couple of solicitations from realtor friends. FWIW, we have had a high frequency of home sales in the past year, so that might help. I just looked up my previous house (sold 5 years ago), and Zillow is saying $740K, which I am pretty sure is massively overvalued, however the street it is on, and general area, have a fairly low turnover, so less recent data.
  - syspec 5y ago
    Humble brag
    - eyjafjallajokul 5y ago
      Not if you bought a home a decade or two ago and house prices went up around you with no action of your own. I drive an old Honda Civic and my neighbors all have Tesla, Porsche, etc.
    - brk 5y ago
      I didn't mean it that way, and it's all relative really. There are a ton of houses above and below my price point.
      - fugalfervor 5y ago
        No, you're rich.
    - DonHopkins 5y ago
      I'm working on my second million! ...I gave up on my first.
  - imilk 5y ago
    Mine is pretty accurate as well ($44.8M), based on recent mentions in Architectural Digest and a couple of solicitations from fellow G650 owners.
    - diamondlovesyou 5y ago
      There isn't exactly a large market for homes at that price point. Plus at that price, a thorough DD is an order. So not unexpected that your home's value would be accurate.
      - cole-k 5y ago
        What's "a thorough DD"? I assume it's building on the previous joke but I don't recognize the abbreviation.
        a_r41 5y ago
        Due diligence.
- micromacrofoot 5y ago
  It varies a lot based on location and what's sold locally. If there aren't a lot of similar properties in the area that have sold recently it will be much less accurate.
some-guy 5y ago
Another anecdote: I’m in Oakland, where condo prices went down slightly during the pandemic overall, yet Zillow’s estimates are always much higher than Redfin’s (which seem to be in the same ballpark as the sale prices).
- mistrial9 5y ago
  maybe Redfin actually incorporates "price at end of closing" into their models, instead of say .. "wishful drinking" prices from Zillow and crew?
throwaway1777 5y ago
It varies widely by Area how accurate the zestimate is. In some places Redfin is much higher than Zillow, in others places it’s reversed. Sometimes they’re too high, sometimes they’re too low. I presume the algorithm does best when the prices are fairly flat, but in this market real estate prices changed dramatically and it seems pretty impossible for an algorithm to figure it out without modeling the entire economy and movement patterns of the population.
civilized 5y ago
The Zestimate history for a condo I used to own is hilarious. There have been several sales of this property over 5 years, all at about the same price. If you follow the Zestimate through time, it climbs rapidly until there is a sale, then it goes "oh shit" and plummets down to the sale price, which is barely different from the last time it was sold. This cycle repeats each time the property is sold. Zillow is absolutely certain that this property should be rapidly increasing in value, no matter how many times it sells at about the same price it sold for last time. When we sold the property, the agent told us it was in an awkward spot: too expensive for single people, not quite big enough for high-earning families. So it's stuck in price limbo as all the neighboring condos skyrocket. Based on this experience, I remain convinced that there are micro-structural factors the fancy data science pricing models just can't seem to capture yet.

bastawhiz 5y ago

I recently bought a home. We toured a Zillow home, and I can understand what they were going for and where they failed. We were able to pull up to the driveway, book a tour for that minute, and walk in the front door. It was almost a magical experience compared to the process of finding and going to showings. The listings were clear and thorough. The experience was extremely compelling. The downside: the homes were absurdly overpriced. I bought a home for about 10% less than the last Zillow listing. For less, I got three times the land, 40% more square footage, a better location, updated appliances, new carpets, landscaped back yard, horseshoe driveway, two car garage. Almost zero effort had been put into modernizing the Zillow home and it showed. I suspect if I had come in with a very low offer, they'd have accepted it. But for what? If I was Zillow, I'd have licensed the tech to realtors. I'd definitely be inclined to buy a home through them if they weren't the ones selling the property directly.

wcfields 5y ago
If I can give any home buying tip from my experience of buying two houses it's been to look at places that are in "the middle". Both homes I've bought in SoCal have had some god-awful photos online, and the finish is new-ish, but done by someone in the 70s so it's new but tacky in a little-old-lady way. This ends up pricing the house too expensive to flippers, and not nice enough to sell compared to other houses because it doesn't have the farmhouse sink and looks exactly like a grandma took out a home equity line and renovated (which is what happened).
- deleted 5y ago
  [deleted]
- escapedmoose 5y ago
  We took the same approach with our house, and the results were marvelous. Major props to our realtor for seeing the potential hidden in those god-awful listing photos.
  - IshKebab 5y ago
    The American house buying process is seriously weird!

endisneigh 5y ago

They should’ve set it up so you can be sent a set of cameras to put across your house, they photograph and setup a smart lock, etc. In return people would be able t book a viewing to your house without a buyers agent nor would a sellers agent be involved. Cut both parties out, pass some savings to the buyer and seller and take a large cut. Everyone wins.

asdff 5y ago
Who do you talk to about the listing in this case?

mistrial9 5y ago

I am especially annoyed at Zillow SF holding "Data Science" meetups in San Francisco at the penthouse place, while advertising for TWO data science positions.. meanwhile, frat guys are at the golf course by the dozens, across three states. The people that they hired at that time, probably built this setup exactly as required by the frat guys. Happy banking Zillow!

mwt 5y ago
There's some poetry in older banks claiming they're pivoting to being tech companies (i.e. Capital One) while some tech companies are heading straight towards being banks.
- HWR_14 5y ago
  There was the line about Netflix seeing the writing in the wall about needing to produce their own content because everyone was going to make their own steaming service. "We need to become HBO before HBO becomes us." If the right answer is a blend of two business models, then both companies becoming more like the other make sense.
- sjroot 5y ago
  Former C1 employee here with a personal opinion. C1 is walking the walk; everyone up to the CEO is very tech-forward (which quite surprised me initially)
- ccvannorman 5y ago
  It was surprising to me to learn that airlines are basically banks https://www.reddit.com/r/urbanplanning/comments/rgkne9/how_airlines_quietly_became_banks/ https://www.reddit.com/r/urbanplanning/comments/rgkne9/how_a...
  - mdaniel 5y ago
    If one enjoys Wendover videos, there was a recent one about that: https://www.youtube.com/watch?v=ggUduBmvQ_4 https://www.youtube.com/watch?v=ggUduBmvQ_4

thr0wawayf00 5y ago

The scary thing is that it's easy to see how something how like this could drive a market boom and bust cycle. I'm imagining a scenario where two iBuyer companies try to outbid each other algorithmically, driving the prices further and further out of reach of people who are looking for a primary home. Tangentially related, I talked to a friend who works on geospatial data for one of the big vacation rental companies, and he was remarking how many homes in many desirable areas are now rentals. It's not that uncommon to see nearly entire neighborhoods converted to short term rentals now in some areas where they're still legal. Hearing that really depressed me. We often talk about automation in terms of replacing various types of labor, but I've become really interested in automation creating adverse market incentives for smaller market participants because that's exactly what buying real estate right now feels like. It's honestly quite scary how I'm in the top 2% of income earners in my generation and yet I could barely afford to buy a small place in a semi-desirable area. I can easily see myself not being able to compete in algorithmically dominated markets flush with venture cash in the future and I earn more than just about everybody I know today.

runamok 5y ago
Cities can regulate this. Recent example in San Diego: https://www.nbcsandiego.com/news/politics/san-diego-mayor-signs-short-term-rental-regulations-into-law/2576807/ https://www.nbcsandiego.com/news/politics/san-diego-mayor-si...
ddoolin 5y ago
The problem here is that they were buying the homes at prices above what they would actually sell for to real buyers and Zillow ended up racking up losses in that way. In your scenario in which two iBuyers outbid each other -- fine, but wouldn't the same situation as Zillow's happen? They'd just end up with overpaid inventory.
- mwt 5y ago
  Whether or not the market works itself out later, it puts everything into a weird state while the bidding war is going on. If iBuyer1 and iBuyer2 together buy up the inventory of a zip code for 120% of asking, then what are people who are willing to go to 105% to do? Maybe it just resets the market to whatever the drunken algorithm decided it to be.

buzzdenver 5y ago

The author has a valid point in that the information asymmetry will attract sellers whose property is overvalued to sell to Zillow. I suspect though that something different happened in reality. I live in a 70 unit condo building, so there are a lot of very good comparables. Zillow bought one of the units about 10% over market value, which makes me think that they're doing some sort of market manipulation, like charging a 20% fee that is not part of the real estate record. So they wanted to pump up prices, but it didn't work.

civilized 5y ago
In my experience, Zillow is sometimes conspicuously bad at valuing condos and literally doesn't know their market value, no matter how obvious it may be to you https://news.ycombinator.com/item?id=30724925 https://news.ycombinator.com/item?id=30724925
TimPC 5y ago
It’s very hard to do good real estate pricing models from raw data. You can get all sorts of metrics on the property statistics but one important factor in the cost of the home is the state of renovation. Since most listings don’t have a historical listing of work done in the home your best hope of accurately assessing this comes from something like computer vision on the listing pictures. Assessing the quality of work, recency of work, quality of materials and factoring that into a house price is extremely hard. It would not surprise me at all if Zillow paid near market value for a whole bunch of dated homes that hadn’t kept up with the times and would sell for below the market of similar homes in the neighborhood according to typical metrics. The stories make it seem like their model had even more issues than that. Still I’m surprised anyone actually tried this idea given how poor the algorithms are and how obvious it is that key data points are not available.
- buzzdenver 5y ago
  What was stopping Zillow from having a human look at the property and adjust the price based on factors that their algorithm didn't consider?

chrisbrandow 5y ago

How many homes did they buy? wow. <Quickly searches to answer question for myself> Oh, ~5,000/month.

LimaBearz 5y ago
What gets me is even if the number was significantly smaller the fallout effect is massive. A common argument I've heard defending the practice is "well they didn't buy that many homes, it was just a small portion of total sales" ...implying that its not a big deal. Lets no argue the truthiness of that statement but look at it as stated. They buy one house within a 10-20 mile radius away from you and they do so aggressively paying 20-30%+ over the pre-bubble price (think early pandemic times when prices were more realistic then they are now) Well now thats the anchor price on comps for the next guy just looking to sell his house. Rinse and repeat a few times with anchored expectations on an inflated value and we have runaway prices.
- vanilla_nut 5y ago
  It at least gives me hope that if regulation and profit margins push corporate buyers OUT of the market, we can return to sanity and I can someday own a home. But given this country's history of regulating giant corporations... more likely we'll just do nothing until homelessness balloons even more and the vast majority of homes are corporate owned. Then we'll have to wait for a VC bubble burst before they start selling all of the homes and tank the market.
- bduerst 5y ago
  That's because real estate pricing is fixed to nearby inventory. Zillow doesn't have to buy many homes in a neighborhood to inflate the prices of all the homes, it just needs to buy 1 or 2.

dpierce9 5y ago

Anecdote on the estimates. We bought a house for X and renovated it. The day before we listed it both Zillow and Redfin estimate had an estimate around the purchase price X. When we listed it for 2X, both companies changed their estimate to be close to the listing. However, Redfin changed the entire price history as well showing a gentle slope. Zillow preserved their previous history and showed a spike.

double0jimb0 5y ago
Noticed the same, but I still think Zillow tweaks historical but just not as brazenly as Redfin.
harikb 5y ago
+1 I have always been annoyed by Redfin's rewrite of history. At least have the decency to show two lines (original prediction for last year and how it turned out to be).
- ct0 5y ago
  This happens all the time with most data providers.
- el_benhameen 5y ago
  At least in my area, they've completely given up on providing a "historical" estimate of the house in question and just have a trend graph for the general area. I assume this data is also heavily massaged, too, though.
- creaghpatr 5y ago
  Same, I find this to be a bizarre practice. What's the point if the snapshots are revised?
  - notahacker 5y ago
    I assume the rationale is that it's are supposed to be an indicator of the actual value of the property at a point in time, not the accuracy of their algorithm at that point in time. So if they update with new information, it's assumed that instead of the price suddenly jumping (which looks very odd if you're trying to understand a local property market), the original snapshots are assumed to have been wrong

encoderer 5y ago

I was at Zillow for many years and left in 2020. On the tech side the pivot into iBuying was absolutely bonkers. The message from senior leadership was basically: I have no idea what your teams should be working on but it’s definitely not what they are currently working on so stop that and figure something else out. This has nothing directly to do with their market failure but they probably are driven by the same leadership problems.

deleted 5y ago
[deleted]
itronitron 5y ago
Sounds familiar, I read this as leadership saying... "you all need to change what you are doing because you must not know what you're doing because we don't know what we're doing and we're the ones in charge."
phlowbieuq 5y ago
i wish we lived in the same area and could have an OTR conversation about this. believe it or not, the new "strategy" now that ZO is all shut down is even less well-defined and more pie-in-the-sky than ZO ever was.
- sib301 5y ago
  Please share!
- hackernewds 5y ago
  what is ZO?
  - allenu 5y ago
    Zillow Offers. The name of the iBuying service the company provided. (Former Zillow myself, as of a couple of weeks ago.)

1B05H1N 5y ago

How much money did this cost everyone else?

maldeh 5y ago
Likely some stressed out buyers paid for overpriced homes given the sharply rising prices across the market (although completely by their choice), and the sellers probably loved it - but that's already par for the course with the housing market at the moment. Zillow probably didn't help but isn't the sole contributor by any means.
titanomachy 5y ago
I think that "everyone else" actually made money from this. Zillow overpaid for houses and then was forced to sell them for the actual market value, so this $881M was basically free money given directly to the people Zillow bought from.

bell-cot 5y ago

Reminds me of an old guy in knew back in the early 90's. His (quite nice) house was on a lot shaped like "well, that was the leftovers, after we gave all the other houses reasonable lots". Every year, the City tried to raise his property's assessed value by ~10% more than the neighborhood's average increase. And every time that his house sold (he had decades of records, to support his appeals of their over-assessments), it sold for ~50% of what the City wanted it to be worth. Now if he could have gotten the City to buy him out, for what their Assessment rulebook said his house was worth... Edit: Added seemed-obvious final sentence.

sokoloff 5y ago
I've often wished that one avenue of appeal of a city assessment was an option given to the property owner to force the city to buy the property for 90% of what they assessed it. You could either go through the current appeals process or just sell them the house if they were way off.
- nikanj 5y ago
  And the same for the reverse: You can claim your house is only worth $40k, but then the city is allowed to buy it for $48k.
  - sokoloff 5y ago
    I'd be OK with that, but would probably design it to allow the homeowner to "fold" and withdraw their petition to reduce the assessment. (Otherwise, you'd see crap like "Oh, nikanj's kid is a senior next year; let's jack up their assessment because they're not going to want to move and so won't contest it...")
- bluGill 5y ago
  Where I live the assessed value is a complex formula only somewhat related to real estate values. My house might be say $500k, but it should assess for about $380k. So I'm losing long before it would be worth a buyout

Invictus0 5y ago

I wonder how this would have ended up if they just dealt in options instead of taking on the inventory. For those that don't know, a real estate option gives the holder the right to buy the property at a fixed price within a certain timeframe, in exchange for a premium. This would have been a much better way to learn the market than diving straight into home purchases.

sokoloff 5y ago
Most people who are selling their house are doing so in order to buy another one. That is to say they need the money from the sale to close on their other house. Selling an option on a house you live in is a pretty terrible idea since if the market takes off, your option gets called, you're out of a house and into a market that's skyrocketing. I don't think there's enough benefit to sellers to make buying options feasible.
- devoutsalsa 5y ago
  Now I want to sell puts on over priced houses.
  - projektfu 5y ago
    I will buy your put on an overpriced house!

jjice 5y ago

It's such a glaring red flag that one of the largest public resources for getting pricing information on housing is also buying and selling that housing. Come on, this is so glaringly abusable that any teenager could tell you what's wrong.

lotsofpulp 5y ago
Can you illustrate the mechanism of abuse? Pricing information on housing is readily available to almost everyone, outside of the couple stated that do not mandate it. Zillow makes it easier, but Redfin and realtor.com and countyoffice.org and other websites offer the same information scraped from municipal websites.
- afterburner 5y ago
  Zillow could lie about regional home values and blame it on their "secret sauce".
  - lotsofpulp 5y ago
    Why would anyone trust Zillow’s opinions over anyone else’s opinion? Everyone has access to the same historical sales data that the market actually cleared at. In fact, it is has never been easier for the average person to research historical sales information. They can filter the parameters of the house they are interested in the area they are interested and find all the previous sales data, all while sitting on the toilet, thanks to websites like Redfin and Zillow. They can “lie” all they want, it makes no difference to what price a house sells for.
    - afterburner 5y ago
      People tell outrageous lies on Facebook all the time and they seem to work. Deception works (especially subtle deception), and laziness is a thing. Also, Zillow's current value estimates are about "current" values, not past values.

echan00 5y ago

How do you lose money in a market where homes only went up?

JKCalhoun 5y ago
They pretty much lay it out in the article. Essentially they end up with the "lemons" and then have to pay to hold them until they sell.
advisedwang 5y ago
The point of the article is the answer to this: they were systematically overpaying because the offers where they overestimate value were disproportionately taken up by sellers. But also there's the cost of inspection, property insurance, title insurance, escrow fees, labour costs of making the sale etc. As the article says, trading houses is not like trading stocks.
colinmhayes 5y ago
The only offers they made that were accepted were the ones on shitty houses that their algorithm mispriced.

ourmandave 5y ago

I'm planning to sell very soon and love the iBuyer model. Don't have to deal with showings, or fix anything, or hope a buyer's financing doesn't fall through at the last minute. To me that's worth whatever percent they're getting. Sadly, no iBuyer operates in my fly-over state.

JKCalhoun 5y ago
Not sure why the article goes to such lengths to legitimize "Corporate flipping", calling it iBuying or whatever. No matter what terminology you use, buyers without cash-in-hand are getting screwed.
- mywittyname 5y ago
  > No matter what terminology you use, buyers without cash-in-hand are getting screwed. "Cash is king" is a common phrase in real estate for good reason. In pretty much all instances, a cash buyer has a leg up over everyone else. In a liquidity crunch, cash buyers get discounts because people can't get loans; in hot markets, they get discounts because they can wave contingencies; in cool markets, they get discounts because they can move faster; etc.
  - bduerst 5y ago
    This hasn't always been the case with real estate though. The market used to be much more accessible, and tech bubbles overlapping into it are just further destroying it.
- jdross 5y ago
  look up Opendoor’s buy with cash product. Turns every buyer into a cash buyer in exchange for the same commission as any other buyer agent (maybe lower?)
  - mdaniel 5y ago
    Flyhomes is in that game, too: https://www.flyhomes.com/ https://www.flyhomes.com/

JRKrause 5y ago

Zillow purchased a home in my neighborhood for $370K, is now trying to sell it for $410K. Prior to this purchase other houses with a larger footprint in our exact same neighborhood were selling for $250K(literally just months before). For some reason zillow chose to pay 100K over what would have been fair value for the house.

Finnucane 5y ago

"In the real estate industry, this service is called iBuying, " Also, 'flipping.'

dopamean 5y ago
I dont really think anyone would call the business models of Opendoor, Offerpad, and formerly Zillow "flipping." Yes, they did buy a house with the intent to sell it but imo the term flipping refers to a much, much smaller scale business that also includes fixing up the property in some way. That is not what iBuyers do.
- Finnucane 5y ago
  Buying a house to make a short-term profit on the resale is flipping. You can cover it up with some marketing tech-biz baloney, but it is still flipping flipping.
  - Otternonsenz 5y ago
    Agreed. In my local Multiple Listing Service, it can show you all deed history for a given property, it is most certainly labeled as a flip if anyone – iBuyer or no – buys and then sells within a short period of time, even if they don’t make profit. The intention is understood by all market participants.

prototypeasap 5y ago

I recall reading months ago that Zillow made cash offers with inspections waived, in order to expedite the process. I believe they had an algo which would access average repair cost which they would factor in the actual offer. Each house needs to be inspected by multiple experts as there are many toxic properties with huge liabilities.

ridgered4 5y ago
If I was stuck in a toxic house that I couldn't afford to fix that Zillow no contingency offer would be like a literal dream come true!

devmunchies 5y ago

> Zillow’s exit from the market strengthens the position of companies like Opendoor or Offerpad, which do something similar Does Opendoor just have better algorithms/models? What factors allow them to have different outcomes from Zillow?

bkberry352 5y ago
Mostly that they no longer have to compete with Zillow
trixie_ 5y ago
This is a good question. I am long on some company figuring out how to really streamline the home buying/selling process. Everyone dreads it, nothing worse than trying to buy or sell a home. These companies could be great buffers allowing the quick sale/buying of a home with minimal overhead. There is definitely a market for providing 'peace of mind' and the guarantee of not being screwed which today there is a high probability of from all angles. Hopefully Opendoor can figure it out. They're probably going to need a lot of cash, homes, and software to really put it together into something that can be automated and scale.
philipodonnell 5y ago
If I remember the discussion at the time, OpenDoor and Offerpad are pure-play iBuying while Zillow was an already huge business pivoting into iBuying to make up for declines in its advertising business. Zillow had a reason to scale faster than the others and they didn't do it very well.
bgentry 5y ago
Yes. Source: I was employee 24 at Opendoor. Zillow's pricing algorithms are and always were terrible. They tried to paper over this during their iBuying push with humans, and then in an effort to outgrow Opendoor, they incentivized growing at any cost without the proper controls to prevent adverse selection. And due to some unfortunate timing with the market cooling, they got wrecked for it.

annoyingnoob 5y ago

The Zillow properties in my area were all overpriced, they were paying too much. People were happy to sell to Zillow at a premium.

sys_64738 5y ago

I thought the Zillow webpage was simply to guesstimate the cost of houses. This whole scenario sounds like they were totally out of their core competency zone.

rahimnathwani 5y ago

"Do market makers in the stock market run into this problem?" Yes, that's why they have to account for the probability that whoever hits their bid is an informed trader (vs. uninformed/noise trader). And it's part of the reason they can provide price improvement when they source order flow from retail brokers, whose customers are mainly uninformed/noise traders.

krinchan 5y ago

It definitely feels like market making is something all parties involved in a real estate transaction would like. The article lays out the problems of applying the concept to real estate pretty clearly. Personally, I think the physical cost of holding inventory and the lack of commodity status (commoditization?) for houses is manageable, if not outright surmountable. I think the condition that simply must change for this business model to work is the velocity of buying and selling residential real estate. Until you can go from “I want this” to “I bought this” or “I want to sell this” to “I sold this” in a scale of days if not hours, any market maker in residential real estate is going to end up a market risk taker implicitly betting on the future price of the property. Even if Zillow could move directly from closing on the house from the seller to initiating a sell to another buyer in less than 24 hours, there’s still several weeks involved. If the market is volatile, that’s a substantial risk exposure. Simply put, it needs to be possible to move the title twice in 24 hours along with some way to finance a buyer on a very accelerated timescale. Both of these things will need reforms at all levels of government: municipal, state, and federal. I just don’t see that happening for a very long time, to be honest.

ridaj 5y ago

Re opendoor etc > A less competitive market is less dynamic and worse for sellers, but it is better for the iBuyers that remain. If they can avoid taking on the bad deals that Zillow was previously shielding them from. I've seen how in some markets the disappearance of a provider that falls victim to this kind of adverse customer selection merely moves the problem to other providers in a cascading fashion. It's not clear that there are that many profitable deals to be made on the iBuying model

bernardv 5y ago

That’s what happens when you get involved in a business you really know not much about I.e. market-making and risk-taking.

hgomersall 5y ago

Why could this not be run as an actual service. Zillow fronts say 75% of the estimated purchase price, then sells it and takes a cut of the premium, the rest going to the original seller. It's an estate agent with financing.

Traster 5y ago
Because very often the reason you're selling a house is that you're buying a house, and so you need 100% of the value of the sale to go towards your new deposit. It's no good having 75% of the cash now, you need it all as a deposit and the mortgage company isn't going to take the risk that that 25% turns up eventually.
octoberfranklin 5y ago
This is a brilliant idea, and if I ever sold my house I would want to do it this way. Unfortunately most homeowners are debt-leveraged out the wazoo as a result of the artificially low interest rates we've had for the past decade. Once you filter out people who aren't looking to move the remaining cohort is homedebtors. Although something like 1/3rd of homeowners own their house outright those tend not to be the ones looking to move or flip.

antidnan 5y ago

Has anyone seen an analysis of why their pricing models were above market, and/or worse than OpenDoor?

ccorda 5y ago
Mike DelPrete has done several: - https://www.mikedp.com/articles/2021/12/16/opendoor-vs-zillow-a-tale-of-two-pricing-models https://www.mikedp.com/articles/2021/12/16/opendoor-vs-zillo... - https://www.mikedp.com/articles/2021/11/3/zillow-exits-ibuying-five-key-takeaways https://www.mikedp.com/articles/2021/11/3/zillow-exits-ibuyi...

projektfu 5y ago

The author buried the lede. Zillow came up with a model to choose bid and ask prices. The model said, "Don't buy". They didn't believe the model and chased the deal, and lost money. Sometimes it's better to sit on your hands.

shp0ngle 5y ago
Yeah this article makes it sounds like algorithmic trading is wrong by design, but that’s not really true in this case at least

bghdrmz 5y ago

I feel this is happening in the automotive space. Companies like carlots and carvana have been completely swallowing up all supply and driving prices up well beyond fair value.

bduerst 5y ago
It's definitely happening, also compounded by chip shortages and supply chain issues. I've leased the last six years but only in the 8 months have I had dealerships calling me with offers to buy out my lease just to get the car back early.

ilamont 5y ago

Any time that you’re working with imperfect knowledge and trying to operate a business on a large scale, you’re likely to run into this kind of trouble. Can we admit that this is a major problem with the "AI" search algorithms operated by Google, Amazon, and others? They are assigning "value" to content, or books, or whatever based on an incomplete understanding of the market. It's made even worse because so many owners are able to game the system.

nikanj 5y ago

How do you _lose_ money investing in homes since 2010 or so? The market has been going gangbusters everywhere with a zip code, with solid double-digit gains in all place with more than one Starbucks

CloudYeller 5y ago

I bet humans could have done a lot better than -$881M, and it wouldn't have been very costly to employ them. How many homes did Zillow iBuy in total, 10-20k? If it takes 5 minutes to evaluate a house, that would be 100,000 minutes, which is ~50 people working full time for a week. Spending $100k on that could have saved 100s of millions, plus it might have generated better training data for the model.

natas 5y ago

Based on S4 forms, Zillow execs made a cumulative $1.3B from what might have been called a ponzi scheme, so it was overall well played.

mistrial9 5y ago
> so it was overall well played in one breath it is overtly and explicitly illegal, second breath same sentence.. "wellplayed" .. any red flags here? I have heard "contemporaneously, during the Fall of Rome, there was a precipitous rise in the number of lawyers"...

skrtskrt 5y ago

Some twitter threads from Zillow insiders I saw around this referenced a couple things: * the pricing algorithm was good, but the business leadership got hungry and kept overriding it with higher offers in the hunger to do more business. * they were trying to do so much business that they couldn't source the labor need to flip - painting, landscaping etc. They were so backlogged they were just sitting on houses they overpaid for (due to overriding the algorithm), and the constant cashflow aspect that makes flipping work at scale was destroyed Matt Levine's take was something like: if the pricing algorithm is good but it tells you that the flip strategy is only profitable on relatively small number of properties, then it's not profitable at scale cuz you're paying a big engineering team to create, tune and maintain it.

dmix 5y ago
When you hire at a growth rate the workers will find work to do whether or not it helps your business. In this case I could see a bunch of home buyers being hired and justifying their jobs.
shp0ngle 5y ago
Ahh the classic “lose at every sale and make it up in volume” strategy

noasaservice 5y ago

And a solution is exponential taxation for properties not being lived in by the buyer. I'm done and tired of vulture capitalists and all sorts trying to make bank on where to live. I'm sick of landlords looking for shitty almost-passive income while I build them equity. Fuck'em all. I want this "industry" to die in a pit of firey death.

jgod 5y ago
Can start with people who aren't citizens (overseas "investors"), and then people who may be citizens, but don't have the country as their primary residence. And then beyond a certain number / distance (discourage absentee landlords).

Otternonsenz 5y ago

As a current residential real estate appraiser, and coming from being a developer for a large corporation that is very active in this space, this has been eye opening yet unsurprising to watch from where I sit with access to all the transactions in my area (I service the Phoenix-Metro and outlying areas). In appraisal after appraisal after appraisal within the last 6-7 months, I have watched Zillow, Opendoor, and OfferUp getting cleaned out to the tune of losing $30,000 - $60,000 on home after home in some neighborhoods. And in AZ, Zillow and Opendoor have been buying and selling in this market pretty healthily the past few years, and we’re it not for themselves and the buying frenzy of last Spring and Summer, they probably would not have gotten as hurt here in the Valley. They got suckered into paying top dollar in a market that was at its peak, and their algos were not trained to deal with the human factors causing this. When I was working as a developer for a real estate tech company, it was made very clear that this company, along with any other iBuyer are able to show homes and come up with estimates is because they have local access just like realtors, appraisers, and developers to a Multiple Listing Service (MLS). In fact, the company I worked for had access to every MLS in the US; They would use the data from any of these MLSs to populate their front end product, which would then be influenced by their data science team to give the “estimate” based on whatever factors they deemed appropriate. As someone whose job is predicated on objectively using primarily historical (for the past year) MLS/County data to asses what the market will allow a home to be valued at, it pains me to see people being taken advantage of by companies like Zillow who want to be “market makers” while not thinking through the implications of their strategies past making money on “easy” flips. All this at the cost of local communities home values losing touch with the realities of the people who are living in an area to live, not invest. And here in Phoenix, it’s only gotten worse for anyone who doesn’t already have generational or attained wealth to find affordable housing. The median price as of the past few months has cooled down to $350,000 - $400,000 for what would be considered normal for a less-than 2,000 square foot home. But, in some areas of the valley, it’s gotten so ridiculous that a sub 2,000 sf house is able to sell for $610,000. On the one hand, I can appreciate these types of companies and business practices because they will keep me in a job making sense of the messes they make in the micro. On the other hand in a macro view, I hope this shakes some sense into the C-suite and product teams of these platforms that they need to approach this less as a “move fast, break things” type enterprise, for themselves and the communities they impact with their choices.

alecbz 5y ago

> Here’s the problem: my autodraft team ended up with a roster almost exclusively stocked with the players idiosyncratically overrated by Yahoo!. For example, an older player whose younger backup had just earned praise from the coach, suggesting that he might be about to lose his job. I guess this is pretty obvious but just to be explicit, what's happening I guess is that players that are "correctly" valued by the algorithm are getting taken by others, and only the overvalued ones are left for the algorithm to choose.

cloutchaser 5y ago

How did opendoor manage to do the same thing better? The article seems like a takedown of the model, but opendoor managed to do the same thing profitably. From what I've read it seems Zillow never had the actual expertise to do this, they were always a house price checking site. On the other hand opendoor started out doing this from the start.

crate_barre 5y ago

The funny thing is that while that number sounds like a lot, it would only be about 900 houses in places like Cali and NY.

jijji 5y ago

its easy to lose money if you're buying at retail and then selling at retail... there is really no money to be made in that scenario. I buy and remodel and either sell or rent the houses I aquire, but I do this at drastically reduced rates below retail. IMHO its the only way to buy. Every property I invest in has a problem, which is why the price is so low, alot of times its 10x below retail because of this. The top reasons why a house might have a problem is 1) the owners died and taxes were never paid, 2) the bank (or an individual) foreclosed on it reducing the price, 3) there are leins from the county or federal government that are making the house not sellable or worth nothing as a result, 4) the house has permit or code enforcement issues that the owner cannot resolve on their own ... Anyway, the best way to buy property is this way, and one rule I learned from attending auctions in person along time ago (its mostly online now) was that once the bidding goes above a third of its retail value, I'm out... Because sometimes you may have to invest 10-40k to make a house back to normal, and so paying even half its retail value just makes no sense.

samwillis 5y ago

With the articles reference to second had car sales it interesting to compare to British Car Auctions (BCA) here in the UK. They have something like a 60% market share on second had sales, they are completely dominant as the central “trading house” for second hand sales. Most second hand car forecourts are buying a significant portion of their cars from a BCA auction. The other thing they have which compares to what Zillow were doing is webuyanycar.com. It is literally what it says, you get a quote from their site to value it, go to their location and they buy your car. When I did it I was there for just 7 minutes, easiest car sale ever! And they payed be nearly 1k more than anyone else. They are truly the market makers with this system, ensuring a steady stream of cars into their auctions. Have full visibility in real time of the pricing on both sides and are only holding the cars for about one week. Some argue that they were a major contributing factor to the used car price inflation last year (on top of the issues with new car availability).

lotsofpulp 5y ago
> Some argue that they were a major contributing factor to the used car price inflation last year (on top of the issues with new cad availability). And they would be wrong. Market makers do not get to set prices, supply and demand does.

darkerside 5y ago

I wonder Zillow could do market making without the actually buying and selling that introduce so much of the risk. Gather into from prospective buyers about what they're looking for and identify houses that are a good fit and serve them up to the buyers. Not sure how to monetize, but this is essentially cannibalizing realtors, which is always where I thought their business model was going in the first place.

lvl102 5y ago

We need to stop corporations from buying single family homes.

PaulHoule 5y ago

Scale is the enemy of profitability for this. If you make lowball offers you won’t have many accepted but you will make money on the ones they accept. If you make higher offers you’ll be killed if anything goes wrong at all.

mupuff1234 5y ago

Just saw this article today: https://nypost.com/2022/03/18/firebird-grove-scoops-up-entire-nyc-street-for-just-32m/ https://nypost.com/2022/03/18/firebird-grove-scoops-up-entir...