Why Zillow’s Home-Buying Program Is Failing and Can It Be Repaired

Zillow, a well-known online real estate platform, has launched several home-buying initiatives, including its mid-2023 program where it buys homes from sellers and aims to resell them at a profit. However, recent events have demonstrated significant challenges in this new venture, leading to concerns about its long-term viability and the potential for repair.

The Concept and Implementation

The whole idea of a middleman adding themselves into a transaction where they are not needed just does not seem to work well. There may be some people willing to give up part of their equity to Zillow and others, but it seems like a hard sell to me. A traditional broker takes a much smaller part of the home sale and actually works for it.

Backlogs and Competing Interests

Zillow is now a significant Real Estate Investment Trust (REIT), and they are now buying and flipping homes. However, they have no interest in helping home buyers since this is their direct competition. People are skeptical about Zillow's motives, as they are more focused on flipping properties rather than genuinely assisting home buyers.

The Challenge of Maintenance and Skilled Labor

To use an old expression, it looked like Zillow bit off more than they could chew. They seem to be having trouble finding enough skilled people to do the repairs and maintenance on the houses that they bought during the earlier part of this year. Given the amount of cash Zillow is supposedly sitting on, I suspect this is a temporary problem that will disappear when they learn to calibrate their acquisition rate with their maintenance capacity.

The mortgage companies ran into a similar problem during the big wave of foreclosures a few years ago. To a business that deals with houses but doesn't actually own them, a house is just a number on a spreadsheet. The accountants do just fine with this concept. Once they come into actual possession of a house, it becomes bricks and sticks, wires and pipes, land and shingles, and neighbors and squatters. All of this needs care by somebody who actually understands how it all works. Suddenly, the bean counters find themselves in over their heads, and chaos ensues.

The Market Risk and Speculation

Why is Zillow’s home-buying program failing? And can it be repaired? I am not sure what you mean by repair the process. Zillow, along with other similar programs where they buy a home directly from the seller with the idea to fix it up and then resell it for a profit, only works in a rising market. Private investors will suffer also if they make a purchase in June with the understanding that the home will sell in November for at or a higher price. If the market suffers a drop in prices before November, then all those who speculated that prices would go up are suddenly upside down and cannot sell for the amount they had expected months earlier.

The difference between a single investor and Zillow is that the investor might lose money on 1 or 2 houses, whereas Zillow stands to lose money on thousands of homes. In a falling market, besides Zillow, there are other groups like Opendoor that stand to lose millions.

Conclusion and Potential Solutions

In conclusion, while Zillow's home-buying program faces various challenges, including management of maintenance and skilled labor, and market risks, there is potential for repair and improvement. Zillow must find a balance between rapidly acquiring homes and appropriately managing maintenance and repairs. By diversifying their portfolio and reducing overreliance on a single market, Zillow can mitigate risks and strengthen its home buying program.

For potential home buyers, the best strategy is often to work with a traditional broker who is experienced in navigating the complexities of home transactions. This can provide a more stable and long-term solution while ensuring that both buyer and seller are satisfied with the process.