Does Zillow's Algorithm Distort Prices and Cheat Homeowners?

They are most active in 'hot' Sunbelt markets where they can flip homes for little investment. The concern is that their activity creates speculation which ultimately hurts consumers. JL

Maxwell Strachan reports in Motherboard:

“iBuyers” like Opendoor and Zillow have burst onto hot U.S. markets with a promise: For a fee, they will buy your home for cash, let you pick your move-out date, and help you avoid the process of showing your home. iBuyers tend to be most active in hot markets like Phoenix and Raleigh. iBuyers dispute the notion they are house-flippers, claiming any profit they earn on the resale is incidental. The companies target mid-level homes that do not require heavy repairs. “They create both artificial surpluses and deficiencies in housing supply. Speculative behavior in property markets usually ends up negatively impacting homeowners."

High-tech “iBuyers” like Opendoor and Zillow have burst onto the housing scene in hot U.S. markets with a seductive promise: For a fee, they will buy your home for cash, let you pick your move-out date, and help you avoid the irritating process of showing your home. 

The iBuyers are attempting to scale up rapidly in order to win market share and recognition, throwing their current hopes for a profit out the window in a 2020s reprise of the rideshare wars. The companies have started to gain unwanted attention in the process; earlier this month, one TikTok went viral after pushing conspiracy theories about the iBuyers’ end goals. 

The criticism of iBuyers is not limited to internet users. Competitors and local real estate agents are starting to voice their concerns with the model and say they know of a better way. 

“These are price-distorting entities,” Vishal Garg, the founder and CEO of Better.com, a digital homeownership company, told Motherboard. “They harm our customers.”

Zillow argues that it wouldn’t make sense to distort prices and said in a statement that its “goal is to buy at market rate, then sell quickly at market rate.” 

“If we overpay - we’ll lose money on the resale. If we make too low of an offer - homeowners won’t use us,” Zillow spokesperson Viet Shelton said. Opendoor declined to comment.

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iBuyers say they primarily hope to make money through the convenience fees they charge when you sell. Zillow says its “modest fee” is typically around 5 percent nationally. Opendoor’s fee typically comes in around 5 to 8 percent. After you move, they make some light repairs and resell it on the market quickly, banking any appreciation.

Such a model costs too much, Garg said. “I don’t like it because it means that consumers are going to lose money,” Garg said. His company, Better, offers an alternative model. Better buys homes on people’s behalf for them while charging a low commission that comes out to around 1.5 percent for the purchase, much lower than the industry average, the company said. Better makes money on the financing and insurance.

Garg himself is a controversial figure. Articles in The Daily Beast and Forbes have detailed his “scorched-earth management style,” and Garg has been sued for fraud and misappropriation of funds, which a company spokesman has called “baseless.” ("Better has grown its business almost exponentially by staying relentlessly focused on delivering great outcomes for our customers,” the company said when asked about the allegations.) 

The company, which is valued at over $7 billion and preparing to go public, nevertheless believes it is pushing for changes akin to squeezing out travel agents fees in the airline industry. In Dallas, the company has already started to try and have homes bought and sold on the Better platform with a zero percent commission for both sides, it said. 

When Sean Black started Knock.com in 2015, he said, he wanted to create certainty, convenience, and transparency for homeowners without “buying their old house at a discount.” He and his co-founder developed a business where they could help people buy their new home with cash, move, and then sell their current one while still only making one mortgage payment. 

Black, the co-founder and CEO of Knock, said iBuyers helped create liquidity in the market, but did so at an unnecessary “cost to the consumer.” He compared the iBuyer industry to Hilton Hotels and Knock to Airbnb, saying his company was open platform, doesn’t own the real estate, and is consequently less capital intensive and lighter on its feet. 

“We're able to pass all of that savings on to the consumer and still make a good healthy business while having consumers get a better deal,” Black said. 

But for now, iBuyers are winning the war for public attention. David Chol, a real estate agent and Texas division sales and operations manager for Marketplace Homes, in Austin, Texas, works with iBuyers frequently, he said. He estimated roughly 60 percent of his clients now come in wanting to know more about iBuyers, and said he’s seen a “massive uptick” in the number of people choosing to go with iBuyers this year. 

He has a simple explanation: Zillow offered fees as low as one percent this year, he claimed, which Chol called “pretty shocking.” “It's easy to sell something when you're giving away everything,” he said. Zillow is trying to essentially break even as it scales up its iBuyer business, the company recently told Motherboard. Chol believes iBuyers will face challenges in selling the benefits of convenience the moment they raise their fees. 

As an example, he said that when a few Zillow offers recently came with a steeper 8 percent fee, the non-financial benefits didn’t seem to matter all that much.

“If the only way to do that is to give away the house, how is that sustainable?” Chol asked. “How do you retain market share when you can't give away the house on every deal?” 

On the whole, Chol believes companies similar to Knock are overlooked nationally, even though they offer the same benefits to clients at sometimes even more “affordable” prices. “Maybe they're overlooked because it seems too complicated,” Chol said. Black agrees with Chol’s assessment, saying the iBuyer model was easier to understand. 

Garg compared the iBuyer model to ticket scalping, noting that iBuyers tend to be most active in hot markets like Phoenix and Raleigh. “Should you be buying slices from somebody who just went to the pizzeria before you did?” Garg asked. iBuyers aggressively dispute the notion they are house-flippers, claiming any profit they earn on the resale is incidental.The companies target mid-level homes that do not require heavy repairs. But Garg argued the mere action of buying and selling homes could have a price-distorting effect. 

“They create both artificial surpluses and artificial deficiencies in housing supply,” Garg said. “That means that you have speculative behavior and speculative behavior in property markets usually ends up negatively impacting homeowners and the people who finance homes.”

Black wonders what will happen to the iBuyers should the market turn cold, leaving them with thousands of homes worth less than they bought them for. Zillow says this isn’t a concern. “Zillow Offers is designed to work in either a hot or cold real estate market,” the Zillow spokesperson told Motherboard. “In the event of a shift in a market, we are able to adjust the service fee we charge to account for the costs we incur when we re-sell the home.”

Earlier this month, Sean Gotcher posted a TikTok theorizing about an unnamed online real estate company that people used to search for homes. The Las Vegas-based real estate agent wondered aloud if such a company might end up using a combination of data and inventory in the future to manipulate housing prices. The TikTok went viral, and Zillow said in response that the video was born out of “misinformation and falsehoods.” 

Motherboard asked Gotcher over the phone whether he believed his hypothetical scenario could become reality, noting many people considered it conspiratorial. 

“Call it a conspiracy. I hope it never comes true,” he said. But, he added, “But I've been told a lot by these big companies until something does come true. Then they say, ‘Oopsie, I'll pay a fine.’"

One place where Gotcher and Zillow can agree: iBuyers aren’t the core reason for the housing crisis. They make up a tiny fraction of the monstrous $36 trillion real estate market, which had issues long before the term “iBuyer” was ever conceived. 

“This isn't the entire housing crisis. This is part of what we need to be paying attention to, but this isn't what's causing all of these prices to increase,” Gotcher said. “It's not one thing. It's not one company. It's not one governmental system. It’s screwed—in every aspect.”