How Zillow’s business model lost $380 million

Most homeowners wonder from time to time what they could get for their home. Even if you aren’t actively looking to sell, it’s natural to wonder where the value of your home sits.

Chances are you’ve looked online at Zillow to see what your home’s Zestimate is. Basically, it’s an algorithm-fueled pricing tool that Zillow created to provide estimate values for millions of homes across the country.

In 2019, Zillow launched an iBuyer business called Zillow Offers. Essentially, they were purchasing homes directly from owners, making repairs, and then putting the homes back on the market. Zillow was so confident in their pricing algorithm that it said its Zestimates would serve as the initial offer price on eligible homes. As you can guess, this didn’t end well.

The company announced in 2021 that it was exiting the iBuyer business, basically stating that they were unable to correctly forecast home prices because of the volatility of the pandemicdriven housing frenzy. A major flaw in the business model was the fact that they didn’t account for house-flipping investors paying too much, and also underestimating the time and cost to flip a house and get it back on the market. The result? Hundreds of millions of dollars lost. Ouch. The takeaway lesson from the Zillow fiasco? Property values can change fast. These three things will always be true, no matter how great an algorithm may seem:

• A qualified real estate agent will help determine your home’s value by knowing the neighborhood and analyzing recent similar property sales.

• An appraisal is your friend. Lenders require them for a reason.

• A “Sethstimate” is ALWAYS better than a Zestimate.

Lejeune