Zillow, the online real estate marketplace, faced a rash of criticism this week over its growing presence in the housing market, where it has expanded from simply listing U.S. homes on its website to buying and selling thousands of them outright.
But the company says the controversy is born out of circulating “misinformation and falsehoods” about its home buying and selling program that misrepresent its intentions, incentives, and core business model.
The controversy began earlier this month after a real estate agent named Sean Gotcher posted a video on TikTok in which he theorized about an unnamed company that “everybody used” to “look for houses.” Gotcher put forth a hypothetical scenario where the company purchased 30 homes close together before buying a 31st for $340,000, which the company would turn around and use as the comp at which to sell the other homes, netting the hypothetical company a hypothetical $1.2 million. The post soon racked up hundreds of thousands of likes and was circulated on numerous social platforms.
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The video was a not-so-veiled shot at Zillow, which has re-positioned itself as a player in the crowded iBuyer market. iBuyers like Zillow and Opendoor target mid-level homes in decent condition, offer to buy the house with cash, and make the selling and moving process quick and convenient. They then make a few repairs and quickly put the homes back on the market. In exchange, they charge the homesellers convenience fees.
The company has aggressively increased its activity in the iBuyer space this year, announcing in August that in the second quarter it had purchased 3,805 homes, a “record number” and more than double its first quarter total. (Zillow also sold 2,086 homes.) It hopes to double its revenue in its so-called Homes division in the third quarter, to somewhere around $1.4-1.5 billion.
Though these are big numbers, they should be kept in perspective. Millions of existing homes are sold in the United States every month. Zillow is currently selling only around 2,400 homes that it owns, according to its website. While the homes are concentrated in several hot real estate markets, Zillow appears not to have scaled enough to materially affect the national market, at least not yet.
The ramp up is nonetheless real and part of a broader “arms race” among the growing group of iBuyers who are scaling up rapidly in hopes of becoming the predominant online brand in the homebuying space, according to Daren Blomquist, vice-president of market economics at Auction.com. “It’s less about making money off that inventory, at least initially, and more about who can get the most inventory the fastest,” he told Motherboard last month.
Mike DelPrete, a scholar-in-residence at the University of Colorado Boulder who studies the iBuyer market, published an analysis last month that similarly concluded that iBuyers had shifted “to a free-for-all, acquire at any cost strategy.”
DelPree isn’t entirely buying Gotcher’s line of reasoning, writing in an email to the real estate site Inman that said he found Gotcher’s theory “fairly conspiratorial,” though he added “there are potential downsides for having a corporate middleman involved in a real estate transaction at scale.”
The real estate companies themselves have been unequivocal in their distaste for the theory. Two days after Gotcher posted the video, Glenn Kelman, the CEO of the real estate brokerage Redfin, posted a series of tweets attempting to refute the allegations. “Where Redfin’s concerned, this is untrue,” Kelman wrote. “We’d never intentionally underpay or overpay for a home. It’s madness to overpay for a single home in order to set a high-water mark for other sales.”
“There is a conspiracy between iBuyers, but it’s to pay lower commissions to the brokers representing the buyers of the homes we sell, by about 60 basis points so far,” Kelman continued. “This may be one reason some brokers dislike iBuyers.”
Similarly, a Zillow spokesperson said in a statement provided to Motherboard that the video was an example of the internet spreading “misinformation and falsehoods.”
Like Redfin, Zillow maintains that it would not make sense for the company to overpay for a home. “With Zillow Offers, our goal is to buy at market rate, then sell quickly at market rate,” the company told Motherboard. “Because our margins are so thin, it’s critical that we price a home accurately. If we overpay – we’ll lose money on the resale. If we make too low of an offer – homeowners won’t use us.”
Zillow considers itself a “market maker,” meaning that it hopes to make the home buying and selling process easier (and less stressful) for both sides by offering conveniences like selecting your exact move-out date. The company makes money in the process by charging a fee of around 5 percent, which means they have an incentive to scale the business—more transactions, more profit. Viet Shelton, a Zillow spokesperson, previously told Motherboard that the company is hopeful that with enough growth, “this business model can generate immense profits even if the profit per home isn’t eye-popping to the casual investor or analyst.”
“For this to work we need to buy and sell as many homes as possible to generate the revenue and profit that we want,” the Zillow spokesperson said. “Then we get to use that capital to go buy the next set of homes.”
Right now, the iBuyer industry remains in its nascent stage, representing a small percent of the $36 trillion residential real estate market. Nevertheless, the combination of distrust in technology firms and anxiety around the housing market have made companies like Zillow and Redfin the focus of intense suspicion—and not unreasonably.
“What happens when a company — backed by Wall Street and motivated by profit — has the ability to withhold listings from the market in the midst of a once-in-a-generation housing shortage?” DelPrete added in his statement to Inman. “With the rise of new models that change the paradigm of home ownership, careful attention should be paid to a possible collision between what’s good for a company, and what’s good for the consumer.”
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