Zillow Bails on Flipping Houses... What Happened

**Zillow’s Home Buying Venture: A Case Study in AI Failures, Market Manipulation, and Ethical Concerns**

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### Introduction

In an unexpected turn of events, Zillow, a household name in real estate, has decided to end its home buying business. This decision came after significant financial losses—reportedly around $500 million—and miscalculations by their AI systems, which were supposed to help the company identify profitable properties for purchase and resale. The story of Zillow’s venture into buying homes is not just a cautionary tale but also raises important questions about the ethical use of AI in real estate, market manipulation, and the broader implications for homeowners and communities.

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### Zillow’s Home Buying Business: A Brief Overview

Zillow’s foray into home buying was an ambitious experiment. The company used its proprietary AI system to identify properties it believed could be flipped for a profit. The strategy involved purchasing homes at what were thought to be undervalued prices, renovating them, and then reselling them at higher prices. Zillow aimed to earn a 5% convenience fee on each deal, leveraging its platform to streamline transactions.

However, this ambitious plan did not go as intended. According to reports, Zillow’s AI failed to account for the volatility and unpredictability of the housing market. The company’s miscalculations led to significant losses, prompting it to exit the business. As of now, Zillow is selling off the properties it owns, marking the end of its brief but controversial foray into the home buying industry.

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### AI Mishaps and Market Manipulation

One of the key reasons behind Zillow’s retreat from the home buying business lies in the failure of its AI system. The algorithm was designed to predict property values and identify profitable opportunities, but it consistently underestimated both purchase prices and resale potential. This led to a situation where Zillow overpaid for some properties while underpaying for others, creating a tangled web of financial losses.

A particularly concerning aspect of this story is the ethical conflict of interest. Zillow is not just an online marketplace; it is also a major player in setting home values through its valuation tool. This dual role creates a potential conflict: if Zillow uses its AI to influence property prices, it can inadvertently manipulate the market in ways that benefit itself at the expense of homeowners and buyers.

A viral TikTok video by a real estate agent with over 11 years of experience sheds light on how Zillow’s actions could distort the housing market. The agent explained that Zillow’s algorithm collects data on which neighborhoods people are searching for homes in, then uses this information to target those areas for purchases. By buying up properties in these neighborhoods and reselling them at inflated prices, Zillow effectively creates a new “comp” (comparable) price point, driving up the value of surrounding homes.

For example, if Zillow buys 30 homes in a two-mile radius for $300,000 each and then sells one home in that same area for $340,000, it creates a new benchmark. This artificially inflated price point can then be used to justify higher appraisals for other properties in the neighborhood, potentially driving up prices across the board.

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### The Broader Implications: Gentrification and Market Distortion

The fallout from Zillow’s AI-driven home buying venture is not limited to financial losses. It has also sparked concerns about gentrification and the broader impact on housing affordability. Critics argue that companies like Zillow, along with private equity firms such as Invitation Homes and America Home Rentals, are contributing to the displacement of long-term residents by driving up property values in low-income neighborhoods.

In cities like Atlanta, residents have reported feeling pressured to sell their homes to these large corporations, often at prices that reflect short-term gains rather than long-term community value. This has led to a sense of economic insecurity and a loss of affordable housing options for many families.

The issue is further complicated by the fact that Zillow’s AI-driven approach is not unique. Other real estate platforms, such as OpenDoor, have adopted similar strategies, with mixed results. However, Zillow’s high-profile exit from the home buying business serves as a stark reminder of the risks associated with relying on algorithms to navigate complex and volatile markets.

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### Lessons from Past Financial Crises

The story of Zillow’s failed home buying experiment also raises questions about the potential for similar crises in the future. The 2008 financial crisis, for instance, was partly driven by flawed valuation models and risky lending practices. While Zillow’s situation is not directly comparable, it highlights the dangers of relying on AI systems to make decisions with far-reaching economic consequences.

Experts warn that there should be greater scrutiny of how algorithms like Zillow’s are used in real estate. If these systems can influence property prices or create artificial demand for certain neighborhoods, they may have the potential to destabilize entire markets. As one commentator noted, “We need to investigate not just the outputs of these algorithms but also the patterns that emerge when they’re applied at scale.”

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### The Future of Real Estate and AI

Despite the challenges Zillow faced, it’s clear that AI will continue to play a role in real estate. However, the industry must adopt stricter regulations to ensure that these technologies are used responsibly. This includes greater transparency in how algorithms determine property values, as well as safeguards against market manipulation.

For now, Zillow’s exit from the home buying business serves as a cautionary tale. It reminds us that even the most advanced AI systems are not immune to human error or market unpredictability. As we move forward, it will be essential to strike a balance between innovation and ethical considerations in real estate—a balance that prioritizes fairness, transparency, and the well-being of homeowners and communities.

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### Conclusion

Zillow’s decision to end its home buying business is a significant moment in the history of AI-driven real estate. While the company’s experiment may have been well-intentioned, it has raised important questions about the ethical use of technology in the housing market. From miscalculations and financial losses to concerns about gentrification and market manipulation, Zillow’s story underscores the need for greater accountability and regulation in an industry that touches the lives of millions. As we look to the future, the lessons of this case will be crucial in shaping how AI is used—and misused—in real estate.

"WEBVTTKind: captionsLanguage: enthis is twit let's talk a little bit about zillow which is not a topic i thought would come up on this show but hey here we are zillow is apparently ending its home buying business which is a business that it from my understanding i hadn't been following this until this this news broke but it's it's kind of interesting they they were buying up properties all over the country or the world i'm not really quite sure but they were using their ai system to help them to identify properties that they could buy basically fix and flip right buy up the properties flip it yes they would make a profit but zillow would really earn a five percent convenience fee on the deal on the deal that that came out of that and they're now saying that they're getting out of that they're going to end up losing somewhere in the realm of you know 500 million dollars in the process um they're selling off the properties that they do have they said they're right their ai miscalculated on both sides of the equation both on what is a good price to buy and then what is the potential of the future sale it's just so volatile and so unpredictable that apparently their systems you know did not work in this in this case uh they pitched seven thousand of their homes uh to institutional investors and i thought this was interesting i think maybe you placed this in here jeff um but i had read a little bit about this too that there were some tick tock videos that were kind of on the you know trying to like understand exactly what this whole zillow thing was and uh you posted this in here so maybe maybe you can give it an explanation but it's uh yeah so i didn't i didn't realize tick tock was doing this and what shocks me about it is it's a tremendous conflict of interest because tick tock is is i mean the ticket i'm saying zillow right is the is the service that that people use now as much as anything to find out the value of homes so they can and that's something that's that they make up out of the air based on comps but they can they can adjust that one way or the other and then they can have an impact on the market the marketplace they're buying and they're a participant so that's pretty yucky so there's a guy who's been a real estate agent for 11 years who put up a video saying um here's what could go wrong with this for the market so i don't know if you want to play a little bit of it yeah it's pretty it's pretty interesting and if we can't play it it's just that twitter uh link that's below the story line 42 john but um i mean yeah if we can't play it i mean it's essentially he's talking about zillow you know finding a whole group of properties in a particular region in a particular area buying them all up selling let's say they buy 300 000 oh right this guy does a good job yeah he does everything everybody used everybody knew of to look for houses and everybody goes on there and searches for housing when they're bored and stuff and so that company they just sit back and they just collect all the data they just know what zip code is looking at what zip code and how much those people can afford everyone's looking at this one zip code everybody seems to be able to afford this certain amount and let's say that billion dollar company uses that information to go into that zip code and start purchasing houses because the people that are selling their houses even though they sell it for a little bit less sometimes than what the home could actually be worth and they pay these high fees to this billion dollar company it's a convenience factor so this company's scooping up houses less than what they actually could cost and let's say that that company excuse me canoe that company buys 30 within a two mile radius and let's say the price is 300 000. so they buy all of these homes for 300 000 and then on the 31st home they buy it for 340. even though they know all of the all of the cubs because most people have to get a loan if you get a loan you have to get an appraisal which means the appraiser is going to look at what homes have sold in the area for that size net price per square foot so they're paying cash they don't they don't need an appraisal why would they pay 340 for this 31st home whenever they've only paid 300 for these others well what that just did is create a new comp so when they go to sell these other 30 homes that extra 40 000 you can say this one sold for 340. just made them 1.2 million off that one neighborhood because they know from their research how much people can afford in that and let's say that then they're going to come in they bought that home at 3 40 that still needs work so they're going to come in and do the good ol paint spackle and change the carpet and call it a remodel so now we can tell them for 360. because we know off of our data that's how much people can't afford wouldn't that be weird if a company did that and then say that this company also starts letting you um use their own lenders and their own title at escrow company it makes you write your contract on this yeah that is awesome but it's really well explained i thought yeah super well it's exactly what happened to the with the libor scandal back in 2020 2012 or so i mean that is which is hey we have insider knowledge we're going to use that to set up a basic comp price and then we're going to benefit off of that repeat oh so such a scheme yeah and they did it badly they're they're they're like trump trump owning a casino only he could lose money he owned a casino and and so they owned ends of the market and they had a i don't know what was going on and they screwed it up yeah yeah obviously not what not working for them they're getting out but i mean um this so this tick tock video i mean okay i i it's brilliant brilliantly laid out is that exactly what's happening here though or is that just history well there's two things happening they're in trouble from the tick tock video did influence people to look at what they're doing but their ai also because of the current craziness in the housing market suddenly they're like oh we did not account for this in the algorithm open door is it is it open door is that the there's another real estate company that just did the same thing because they were like oh crikey yes but they they just uh had to lay off people and yeah and it affects people's lives in their houses their stock fell from 105 last friday to 65 today yeah it couldn't happen to a nicer scam i heard a little bit about this you know a handful of months ago from some people back east especially in the atlanta area in those suburbs there people were that is a popular place for institutions people were getting offers on their home and everybody was basically trying to encourage each other to push back say don't take the offer um this is how this is how people of color are losing the the ability of owning homes because it's not like a lot of us own homes anyway you own a home stop just giving it away and just sort of selling out and that was the big push that i heard about it it's all it was all from zillow coming in writing big checks and everybody's saying no don't take the check that's all i heard about it back then it's not just zillow there's actually a lot of private equity firms are now there's companies called uh homes of america america homes and then invitation homes and those are oh yeah that was the other one yeah they come in and buy single-family starter homes as an investment what they're trying to do is basically generate a portfolio of consistent revenue generation like monthly revenue generation from the rent business plus they own the underlying asset and from there they can you know securitize it or do whatever they want um so that's what's happening zillow and that's a slightly different thing but a lot of people it correlated as the same but those people will continue to own the homes as an asset whereas the zillow people are trying to make money on the commissions and um kind of flip the homes for the most part you don't think they're seeking to own the homes over the long term just but either way both are a tool for gentrification and both are right oh yeah helping push the cost of single family affordable like starter style homes up in markets and there's the atlantic did a good look at it where they were like this isn't so bad because they looked at like the absolute number of homes that were being purchased but they didn't look at the type of homes and so it's there's a lot it's a very controversial thing i would say especially as we're seeing kind of a home shortage and as ant mentioned it is a tool for gentrification yeah we're not in charlotte there was you know within the last 10 years there's a couple different neighborhoods that i can remember looking at that was considered the hood in air quotes um but now you go there you you better have a couple million in the bank if you want to live there because people went in and bought up those hoodtastic homes or single-family homes and destroyed them and pushed everybody out of that area and it doesn't look the same as it did 10 years ago bill thermic mansions yep yeah yeah indeed wow and then i'm i'm curious what happens so when so let's say zillow moves into a a neighborhood and buys up all these homes and then starts creating the new comps by selling them for way more and does this with the entire neighborhood i mean that was that was a manufactured uh inflation of the price and a wide scale that covers a large geographic area once zillow is done does that ever come back down to earth or does it stay up there has zillow driven in 2008 financial crisis in exactly las vegas or phoenix eventually they i mean right now that i would be interested to see if anyone in vegas or phoenix is your home back above water right that was caused by cheap financing but this is basically caused by over over-inflated evaluations yeah i think there's got to be an investigation absolutely you want to investigate an algorithm uh investigate that is to say the output of it were there any patterns once they went into this business was there any pattern of actual sale versus zillow price comp um because it wasn't it's not just a comp that's that's not the issue the comp is the actual sale of a nearby house but zillow of course gives you a projected price of your house uh they've got the stockpile and they're saying and this stockpile is actually worth this not this they could say one is they could undercut the price with their if they're in the market to buy and they could they could say well no your house is only worth 280. that's it right or they can inflate it when they're in the market to sell because they can get off both ends of them hold on though because what happens is when you do unless unless this is all cash so if this is all cash and you're buying cat buying a house with cash go you um but if you're gonna seek a loan what will happen is this actually happened to us here the person who's giving you your loan is going to come in and send out their own person to value the house and do an estimate and then if that estimate is nothing then you can't get finance but what i'm saying stacey is you could have an impact on the actual sales by people's impressions one way or the other yeah most people know that those estimates are whatever pretty inflated yeah i mean you talk to anybody about their value you know oh zillow doesn't have it it's either too your t-cat or your county assessor has it too high and they usually have it too low and you know whatever yeah yeah anyway fascinating story that who would have thought that we'd have an ai ethical tech regulation story out of zillow yeah exactly i didn't see that guy very interesting youthis is twit let's talk a little bit about zillow which is not a topic i thought would come up on this show but hey here we are zillow is apparently ending its home buying business which is a business that it from my understanding i hadn't been following this until this this news broke but it's it's kind of interesting they they were buying up properties all over the country or the world i'm not really quite sure but they were using their ai system to help them to identify properties that they could buy basically fix and flip right buy up the properties flip it yes they would make a profit but zillow would really earn a five percent convenience fee on the deal on the deal that that came out of that and they're now saying that they're getting out of that they're going to end up losing somewhere in the realm of you know 500 million dollars in the process um they're selling off the properties that they do have they said they're right their ai miscalculated on both sides of the equation both on what is a good price to buy and then what is the potential of the future sale it's just so volatile and so unpredictable that apparently their systems you know did not work in this in this case uh they pitched seven thousand of their homes uh to institutional investors and i thought this was interesting i think maybe you placed this in here jeff um but i had read a little bit about this too that there were some tick tock videos that were kind of on the you know trying to like understand exactly what this whole zillow thing was and uh you posted this in here so maybe maybe you can give it an explanation but it's uh yeah so i didn't i didn't realize tick tock was doing this and what shocks me about it is it's a tremendous conflict of interest because tick tock is is i mean the ticket i'm saying zillow right is the is the service that that people use now as much as anything to find out the value of homes so they can and that's something that's that they make up out of the air based on comps but they can they can adjust that one way or the other and then they can have an impact on the market the marketplace they're buying and they're a participant so that's pretty yucky so there's a guy who's been a real estate agent for 11 years who put up a video saying um here's what could go wrong with this for the market so i don't know if you want to play a little bit of it yeah it's pretty it's pretty interesting and if we can't play it it's just that twitter uh link that's below the story line 42 john but um i mean yeah if we can't play it i mean it's essentially he's talking about zillow you know finding a whole group of properties in a particular region in a particular area buying them all up selling let's say they buy 300 000 oh right this guy does a good job yeah he does everything everybody used everybody knew of to look for houses and everybody goes on there and searches for housing when they're bored and stuff and so that company they just sit back and they just collect all the data they just know what zip code is looking at what zip code and how much those people can afford everyone's looking at this one zip code everybody seems to be able to afford this certain amount and let's say that billion dollar company uses that information to go into that zip code and start purchasing houses because the people that are selling their houses even though they sell it for a little bit less sometimes than what the home could actually be worth and they pay these high fees to this billion dollar company it's a convenience factor so this company's scooping up houses less than what they actually could cost and let's say that that company excuse me canoe that company buys 30 within a two mile radius and let's say the price is 300 000. so they buy all of these homes for 300 000 and then on the 31st home they buy it for 340. even though they know all of the all of the cubs because most people have to get a loan if you get a loan you have to get an appraisal which means the appraiser is going to look at what homes have sold in the area for that size net price per square foot so they're paying cash they don't they don't need an appraisal why would they pay 340 for this 31st home whenever they've only paid 300 for these others well what that just did is create a new comp so when they go to sell these other 30 homes that extra 40 000 you can say this one sold for 340. just made them 1.2 million off that one neighborhood because they know from their research how much people can afford in that and let's say that then they're going to come in they bought that home at 3 40 that still needs work so they're going to come in and do the good ol paint spackle and change the carpet and call it a remodel so now we can tell them for 360. because we know off of our data that's how much people can't afford wouldn't that be weird if a company did that and then say that this company also starts letting you um use their own lenders and their own title at escrow company it makes you write your contract on this yeah that is awesome but it's really well explained i thought yeah super well it's exactly what happened to the with the libor scandal back in 2020 2012 or so i mean that is which is hey we have insider knowledge we're going to use that to set up a basic comp price and then we're going to benefit off of that repeat oh so such a scheme yeah and they did it badly they're they're they're like trump trump owning a casino only he could lose money he owned a casino and and so they owned ends of the market and they had a i don't know what was going on and they screwed it up yeah yeah obviously not what not working for them they're getting out but i mean um this so this tick tock video i mean okay i i it's brilliant brilliantly laid out is that exactly what's happening here though or is that just history well there's two things happening they're in trouble from the tick tock video did influence people to look at what they're doing but their ai also because of the current craziness in the housing market suddenly they're like oh we did not account for this in the algorithm open door is it is it open door is that the there's another real estate company that just did the same thing because they were like oh crikey yes but they they just uh had to lay off people and yeah and it affects people's lives in their houses their stock fell from 105 last friday to 65 today yeah it couldn't happen to a nicer scam i heard a little bit about this you know a handful of months ago from some people back east especially in the atlanta area in those suburbs there people were that is a popular place for institutions people were getting offers on their home and everybody was basically trying to encourage each other to push back say don't take the offer um this is how this is how people of color are losing the the ability of owning homes because it's not like a lot of us own homes anyway you own a home stop just giving it away and just sort of selling out and that was the big push that i heard about it it's all it was all from zillow coming in writing big checks and everybody's saying no don't take the check that's all i heard about it back then it's not just zillow there's actually a lot of private equity firms are now there's companies called uh homes of america america homes and then invitation homes and those are oh yeah that was the other one yeah they come in and buy single-family starter homes as an investment what they're trying to do is basically generate a portfolio of consistent revenue generation like monthly revenue generation from the rent business plus they own the underlying asset and from there they can you know securitize it or do whatever they want um so that's what's happening zillow and that's a slightly different thing but a lot of people it correlated as the same but those people will continue to own the homes as an asset whereas the zillow people are trying to make money on the commissions and um kind of flip the homes for the most part you don't think they're seeking to own the homes over the long term just but either way both are a tool for gentrification and both are right oh yeah helping push the cost of single family affordable like starter style homes up in markets and there's the atlantic did a good look at it where they were like this isn't so bad because they looked at like the absolute number of homes that were being purchased but they didn't look at the type of homes and so it's there's a lot it's a very controversial thing i would say especially as we're seeing kind of a home shortage and as ant mentioned it is a tool for gentrification yeah we're not in charlotte there was you know within the last 10 years there's a couple different neighborhoods that i can remember looking at that was considered the hood in air quotes um but now you go there you you better have a couple million in the bank if you want to live there because people went in and bought up those hoodtastic homes or single-family homes and destroyed them and pushed everybody out of that area and it doesn't look the same as it did 10 years ago bill thermic mansions yep yeah yeah indeed wow and then i'm i'm curious what happens so when so let's say zillow moves into a a neighborhood and buys up all these homes and then starts creating the new comps by selling them for way more and does this with the entire neighborhood i mean that was that was a manufactured uh inflation of the price and a wide scale that covers a large geographic area once zillow is done does that ever come back down to earth or does it stay up there has zillow driven in 2008 financial crisis in exactly las vegas or phoenix eventually they i mean right now that i would be interested to see if anyone in vegas or phoenix is your home back above water right that was caused by cheap financing but this is basically caused by over over-inflated evaluations yeah i think there's got to be an investigation absolutely you want to investigate an algorithm uh investigate that is to say the output of it were there any patterns once they went into this business was there any pattern of actual sale versus zillow price comp um because it wasn't it's not just a comp that's that's not the issue the comp is the actual sale of a nearby house but zillow of course gives you a projected price of your house uh they've got the stockpile and they're saying and this stockpile is actually worth this not this they could say one is they could undercut the price with their if they're in the market to buy and they could they could say well no your house is only worth 280. that's it right or they can inflate it when they're in the market to sell because they can get off both ends of them hold on though because what happens is when you do unless unless this is all cash so if this is all cash and you're buying cat buying a house with cash go you um but if you're gonna seek a loan what will happen is this actually happened to us here the person who's giving you your loan is going to come in and send out their own person to value the house and do an estimate and then if that estimate is nothing then you can't get finance but what i'm saying stacey is you could have an impact on the actual sales by people's impressions one way or the other yeah most people know that those estimates are whatever pretty inflated yeah i mean you talk to anybody about their value you know oh zillow doesn't have it it's either too your t-cat or your county assessor has it too high and they usually have it too low and you know whatever yeah yeah anyway fascinating story that who would have thought that we'd have an ai ethical tech regulation story out of zillow yeah exactly i didn't see that guy very interesting you\n"