Zillow’s zeal to outbid house prices in flipping fumbles

Patrick Clarke and Noah Bukhayar | Bloomberg

Faced with the fastest growing property price rises in US history, the Zillow Group changed the algorithms of its house flipping operation to make higher bids.

As a result, he had so many winning bids that he had to stop making new real estate offers. Now, after buying more homes in the third quarter than ever before, the company is working with more homes to renovate and sell, facing an unpleasant reality: a slowdown in price increases means it will sell many homes at a very low price. a loss.

Zillow put a record number of homes on the market in September, according to research by YipitData, with the lowest markups since November 2018. The company also cut prices by nearly half of its U.S. listings in the third quarter, signaling that its inventory prices were lower than expected, Yipit said.

This shift has been demonstrated in places like Atlanta and Phoenix, two markets where house prices have skyrocketed. Zillow’s roughly 250 active properties in Phoenix are currently on average 6% lower than the price the company paid for their homes.

According to data compiled by Mike DelPret, a real estate strategist and researcher at the University of Colorado at Boulder, this translates to a $ 29,000 discount on regular real estate.

“All the key metrics I’ve seen at Zillow over the past few months just don’t make sense,” DelPrete said. “It’s like he’s making decisions two to three months later than the market.”

Zillow’s new aggressiveness was good for people like Abidemi Boltiva, who watched the process in real time. In late September, he sold his four-bedroom home in Phoenix to Zillow for $ 531,300, paying a convenience commission that was less than traditional agent commissions would cost him.

Bolativa said he also asked for an offer from Opendoor Technologies, which would pay him roughly $ 504,000. Ten days after Zillow bought the house, he put it up for sale for $ 505,900. When it wasn’t sold, the company cut the price another $ 11,000 to $ 494,900.

While Zillow’s main competitor, Opendoor, also saw a decline in Phoenix home sales, according to DelPrete’s analysis, it continued to sell homes for more than it buys. It also ranks best in Atlanta, where Opendoor lists homes at a 6.5% premium to their purchase price, compared to Zillow’s 1.3% spread.

A Zillow spokesman declined to comment.

The company said on Oct. 18 that it would stop making new offers for home purchases while it worked through the backlog, causing the stock to drop 9.4%. But stocks have recovered those losses and analysts have largely ignored the operational difficulties. The housing relocation operation, which is being carried out in 2018, has not yet made a profit.

“Prices turned against them, they got a little frozen and were probably too aggressive in trading,” said Brad Erickson, an analyst at RBC Capital Markets. “They probably don’t care. At this stage of the game, it is not so important to make money. “

Zillow and Opendour practice a high-tech approach to home flipping called iBuying. Companies use software algorithms to predict the rise in house prices. They charge commissions that replace the usual real estate agent commissions by reassuring clients of the convenience of the service. Buying thousands of homes every quarter is a complex process that requires a lot of precision to make the right choice.

Zillow CEO Rich Burton emphasized that creating competitive offerings is critical to achieving the scale required to generate profits for the business. During an August talk with investors, he lamented that the surge in home prices has widened the gap between the cost of buying and renovating a Zillow home and what he sells the property for. This has led the company, which bought 3,800 homes in the second quarter, to make higher bids as it aims to buy 5,000 homes a month by 2024.

“We saw a rapid increase in conversions during the quarter as we increased the strength of our offering,” he said.