What s up guys! It s
Jason here and welcome back to my YouTube channel, Home Flipping Insight. Today, let
s talk about how a huge real estate company was brought down by robots.
Well Not literally robots, at least not the Boston Dynamic military robots kind..but the
story of Zillow s fall is a tale of hubris and an over reliance on algorithms. AI may
be the wave of the future, but for Zillow, AI may very well be the cause of its destruction.
You ll be surprised to learn how this simple home classifieds business transformed itself
into $50 billion dollar data-driven AI reliant home flipping business over the course of
nearly 2 decades. $50 billion dollars! The house of cards is now falling with the robots,
which might take down the entire company with it. Let s see what s going on and what the
future forebodes for Zillow with the 5 fundamental problem with its business model and the home
flipping market in the US.
Before we begin If you wouldn t mind just tapping that LIKE button for the YouTube algorithm,
I would really appreciate it as this is a brand new channel I started this year. If
you ve ever used Zillow before, be sure to subscribe and hit that notification bell for
new videos each week. Thanks for doing that and now let us continue on with the Rise and
Fall of Zillow in 2022.
What is Zillow and Why is it Important?
Zillow has been the making the rounds in the world of financial news lately for all the
wrong reasons. They recently announced a fire sale of thousands of properties.
Anyone who has drunkenly shopped on Amazon can tell you that online buying can be dangerous.
Drunk on their own algorithm and business model, Zillow just found out exactly how dangerous
online shopping can be.
I don t know if you are like me, but I love to click through Zillow s multi-million dollar
home listings and imagine, what if? If I had all the money in the world, I would buy that
14 bedroom, 20 bath mansion in the Hollywood Hills.
The data and real estate listings that Zillow provides are convenient and is the main money-maker
for the real estate company.
But the company had a side-hustle apart from its main money maker. That side-business relied
on the use of algorithms to help it buy houses and then flip them.
The company did a great job of snatching up properties, but it was terrible at the selling
part.
In late October, the company revealed that its iBuying service, Offers, has been hemorrhaging
money to the tune of $300 million in a short few months. Zillow killed the program and
is axing about 2,000 people. Zillow has about 7,000 homes that it needs to offload,
and the bulk of the homes will lose the company money.
You may not have known that Zillow was in the house flipping business. For the bulk
of the company s life, their focus was on publishing online real estate listings.
In 2018, RIchard Barton, Zillow s CEO pushed the company into iBuying. His master plan
included using algorithms to locate homes to purchase and flip. Zillow would swoop in,
buy the home directly from the seller, renovate the property, flip the house and make fat
stacks of cash.
Barton s vision was to buy 5,000 homes per month by 2024 and generate $20 billion annual
profit. $20 billion! In theory, the plan was sound.
In reality, the plan was insane. Looking back, sounds similar to wework doesn t it?
As an industry, iBuying is in its infancy. Tech investors are scrambling to be the Amazon
of home buying. Companies like Zillow, Redfin,Offerpad, and Opendoor are daydreaming about the future
of algorithm driven home buying.
One man s daydream is another man s dystopian nightmare housing crisis. Huge companies with
huge piles of cash and mounds of data bidding against normal people seems like the start
of a bleak sci-fi movie. Anyone who isn t a tech investor is screwed. But it s not all
that simple. Let s explore.
Problems with the Zillow Business Model
There were some problems with Zillow s business model.
Zillow Problem #1: TAM First, you have to know about Steve Eisman.
Steve Eisman infamously shorted collateralized debt obligations and turned a huge profit
when the US housing market collapsed in 2008.
Then in 2019, Eisman predicted dire things for people gambling on Zillow s success. Eisman
s big short on Zillow has been going on for a while. Eisman argued, I would say Zillow
has one of the most flawed business models I ve seen in a very, very long time.
So what is it about Zillow s business model that caused Eisman to short them?
In Zillow s 2020 Group Annual Report, the company discusses the total addressable market
(TAM) of the house flipping industry.
Their flaw was seeing the real estate TAM as one huge monolith worth $1.9 trillion.
But, it s more accurate to see real estate TAM as lots of small markets.
Eisman reasoned that Zillow would find out that there was an enormous difference between
flipping houses between states, within states, even within cities and neighborhoods.
Zillow, as a huge company, had no chance to compete with the local experts who had experience
and an intimate understanding of the local real estate dynamics. These local experts
had lived and worked in these neighborhoods and have been massaging these markets for
years.
And it turned out that Eisman was right.
Zillow Problem #2: Market Manipulation
Second, accusations of market manipulation dogged Zillow. A viral real Nevada based real
estate agent called Sean Gotcher caused a little bit of drama from Zillow.
Gotcher claimed that iBuyers manipulated the home buying market. Without naming Zillow,
Gotcher explains that a huge company harvested people s data while they were on Zillow s
website.
Allegedly, the
company used the data it scraped from its users to buy
up properties in the neighborhoods that people perused. Then, the company bought up all the
nearby properties in order to artificially drive up prices. This is definitely unfair.
Predictably, Zillow denies these allegations. But in theory, they could right?
Zillow probably did not engage in blatant market manipulation. It wasn t from a lack
of trying though. The company relied on its algorithm to try to outsmart the market. In
this case, the market won, but that might not always be the case in the future.
Zillow Problem #3: Labor Shortage
Third, a labor shortage made it difficult to renovate homes. Zillow s COO said in a
statement that the company is dealing with problems especially in the construction, renovation,
and closing spaces.
The company s push to buy up homes, renovate, and flip for a profit ran into a COVID-19
sized snag. Disruptions in the supply chain caused the cost of materials to soar to all
time highs.
The demand for homes increased which drove a further increase in the prices of materials.
The prices of wood have come back to Earth a little bit, but steel and pvc prices are
still astronomically high and in short supply.
There is also a debilitating shortage of construction workers. The cost and scarcity of materials
coupled with the lack of workers to renovate homes made flipping homes exceedingly difficult
for Zillow.
The supply chain and labor shortage resulted in Zillow getting stuck with 9,800 homes in
its inventory and another 8,200 homes in contract. To recoup some of their losses, Zillow is
looking to sell 7,000 homes to BlackRock Investing for $2.8 billion.
Zillow Problem #4: A Shitty Algorithm [Editor, pls BEEP Shitty]
Fourth, Zillow s algorithm was a pile of trash. Over the past three years, Zillow went all
in on its home buying bots. The company invested a huge chunk of money, $1 billion, into its
Offers program.
The company was cock-sure that Offers would generate massive profits using their algorithm
to buy and flip homes. Flipping homes is a tricky business, especially during an overheated
housing market.
The algorithm caused Zillow to overpay for thousands of homes over the summer. Barton,
Zillow s CEO, admitted that his company failed to account for home appreciation in their
model. Barton noted that they were much higher than they predicted.
Over the course of the Offers program, the technology that Zillow relied on exacerbated
their errors. Zillow shit the bed with their adjustments--they adjusted the program to
aggressively bid on properties just as the market cooled.
Zillow didn t have the luxury of renting or moving into property like smaller house flippers
are able to do. The flips become massive flops.
In the end, Zillow listed more than 60 percent of its homes for prices much lower than it
paid. It s not all the bot's fault though, they were only following Barton s commands.
Zillow Problem #5: They didn t understand the home buying experience
Fifth, Zillow fundamentally misunderstood the home buying experience. It s no doubt
that people love to house hunt on Zillow. But when it s time to actually buy a home,
real estate remains and face to face business.
Zillow s Zestimates aren t always accurate. It also quells doubts for a home buyer to
visit the actual site of the house. You want to check out the home and the surrounding
areas to determine if the home is actually worth what is being listed.
Zillow sent out appraisers to check out homes after the bots made an offer. Those human
appraisers were tasked with finding obvious lies and red flags, the bots were calling
the shots.
So how has this affected Zillow s bottom line?
Zillow s shares have been dropping since February till now. And in the last week, Zillow shares
dropped more than 20%. The announcement that Zillow was ending the Offers program ensured
that the company would continue its death spiral.
Since their highest valuation in February, the company s stock has dropped by two-thirds.
At $65.57, the company s stock is the lowest it has been in sixteen months. Its core business
model is intact and produces profit, but they still reported a $328 million dollar loss
tied up in their iBuying program.
Previously Zillow made money selling homes at higher prices relative to its purchase
prices. At the same time, Zillow ramped up its buying.
iBuying promised homeowners to sell on Zillow for cash rather than going through a broker.
This prevented the seller from dealing with the bidding and closing process. But then
the market shifted and supply chains sent costs skyrocketing.
As a result, the company found itself bogged down with upside down assets.
What s going to happen to iBuying?
Does that mean that this is the end of iBuying? For Zillow, it does. But overall, other companies
like Opendoor, Offerpad, and Redfin are in good spots. As Zillow went all in this summer,
those other companies too a more measured approach and are doing fine.
It does highlight the issue with full automation in the real estate industry though. iBuying
was supposed to be the panacea for sellers who didn t want to deal with the hassles of
selling their home.
However, it s not really clear if sellers dislike selling their home using the traditional
route. Selling your home isn t like selling something on Amazon. You may only do it a
few times in your life and as such, you don t want to drop the ball.
Your home is probably the biggest investment you will make in your lifetime and it makes
sense that you wouldn t want to screw it up. So why would you sell to Zillow?
It s worth noting that only 10% of buyers accepted Zillow s offers. That makes sense
since Zillow did not hide the fact that they were in the flipping business. The only reason
that sellers would sell to Zillow is if the company was overpaying, which it was.
So with that said, thank you so much for watching my video. There was a significant amount of
House flipping that went into making this video possible. If you haven t seen already,
check out my Hamburger Insight YouTube Series or the Rise and Fall of McDonalds Mascots.
As always, stay happy and healthy and stay tuned for another episode of Company Insight
next week.