From June to September, Zillow snapped up homes in Multnomah County at a remarkable rate, buying an average of one a day.
Then in October, the Seattle-based real estate company suddenly announced it would stop buying new homes and close Zillow Offers, its relatively new house-flipping arm.
Now the company is left with a portfolio of more than 100 homes in the county, property records analyzed by The Oregonian show. Combined with its biggest competitor in the high-tech house-flipping business, Opendoor, about 250 houses were tied up by so-called “iBuyers” as of mid-October.
These iBuyers pitch themselves to prospective sellers and buyers as a way to bypass many of the headaches of the usual real estate process. Instead, tech companies like Zillow, Opendoor and Redfin use an algorithm to price homes and make a direct offer to sellers. Then they make some repairs and sell them again, theoretically at a tidy profit.
But when Zillow bailed from the whole business last month, it said it was poised to take a loss on the vast portfolio of homes it had amassed nationwide. It had set its pricing algorithm to make overly aggressive offers that won’t turn a profit on resale.
While homes owned by Zillow and other iBuyers represent a small fraction of the Portland metro real estate market, the companies changed the landscape of homebuying, offering a quick and often surprisingly profitable alternative for sellers.
But some sellers said it seemed the companies were stretched thin. They cited an inefficient and disorganized buying process. Real estate analysts, meanwhile, pointed out that the program’s algorithm wasn’t always able to account for specific variables in each home, and often priced homes incorrectly.
In a shareholders meeting early this month, Zillow CEO Rich Barton said the company planned to end Zillow Offers because it was unable to accurately forecast home prices and blamed a “series of extraordinary events,” including the pandemic, a temporary freeze on the housing market and a labor shortage that made it hard to keep up with turning homes around to sell.
Zillow and Opendoor have been operating in the Portland area for nearly three years, though each paused their purchases during the early days of the pandemic in 2020.
In Portland, Zillow purchased at least 155 homes between March and October but sold just 22. The company still had 129 houses in its inventory as of late October, on which it spent $66.6 million.
Zillow spokesperson Erika Riggs said the company will continue selling the homes it purchased and complete the transactions that are in progress.
Opendoor has at least 122 homes it bought for $62.7 million currently in its inventory. Since January 2019, the company has flipped 134 more.
Zillow made $242,535 on the 22 homes it sold in 2021 through October, and Opendoor made $316,327 on its resales since 2019 — numbers that don’t take into account the cost of repairs or marketing the homes for sale. The companies also charge a service fee analogous to a real estate agent commission, pocketing a percentage of the purchase price.
The profit both companies made on some Multnomah County sales have been offset by taking a bath on others. Opendoor, for example, made $51,100 on resale of one home before subtracting costs and adding its fee. But its largest loss on resale was $60,800.
The companies’ activity isn’t distributed evenly across the county. Zillow and Opendoor purchases were concentrated east of the Willamette River, particularly in the county’s more affordable pockets, with clusters in east Portland and Gresham.
For buyers, the apps can offer an appealing proposition.
Bo Caldwell wasn’t looking to sell his home. But while browsing on Zillow’s website earlier this year, he saw an offer from the company that was too good to pass up.
Caldwell and his wife ended up selling their Lake Oswego house to the company for about $777,000 — nearly $200,000 more than what they purchased it for two years prior. The price took into account a list of repairs the company said it would have to make before reselling the house. Even so, Caldwell found it shocking.
“They have their ‘Zestimate,’ and mine was $705,000,” he said, referring to home value estimates that are the backbone of Zillow’s flagship real-estate website. “The fact that they came back $70,000 higher makes me think that they for sure didn’t have human eyes looking at it.”
Caldwell consulted with a real estate agent he’d worked with before. She told him there was no way he would be able to get a comparable price if he listed it on the open market.
Jerry Johnson, an economist who studies land use and real estate development, said the flaw in the companies’ method of pricing houses is that it values houses based on its algorithm — but most of the time guesses the price either too high or too low.
In theory it would even out over time, but in practice, he said, sellers only take the deal when Zillow guesses high. As a result, Zillow ends up overpaying.
He said the company likely thought it could close quickly on homes, then turn them around soon and resell them. But he said its high-ball cash offers began to distort the market over time, making it more difficult for regular buyers to compete.
The sale process wasn’t quite as seamless as Caldwell expected from a high-tech industry disruptor.
He said the company struggled with paperwork for the transaction, repeatedly losing track of one form and failing to account for a family member who had helped with his first down payment and whose name appeared on the deed.
“A lot of it was me pounding my head and trying to get them to fix things that they just wanted to power through,” he said.
Caldwell moved out this summer. He tried to get Zillow to move up the Oct. 29 closing date, but the company refused, even though closing date flexibility is a selling point for iBuyers. A Zillow representative who conducted a final walkthrough as the family prepared to leave told Caldwell’s wife that it could be months before the company listed it again because of a backlog of repairs.
Dill Ward, a principal broker with Living Room Realty, said Zillow’s backlog of houses seemed to stem from a lack of contractors to do work on the homes they’d bought — a result of a labor shortage. She noted that even a paint job or presentation of the house can sway a buyer.
“I do think, from a perspective of working with buyers who look at those homes as they come on the market, it’s pretty evident that whoever’s in charge hasn’t had a deep understanding of the needs of buyers,” Ward said.
Brion Prickett bought a Gresham house through Opendoor in 2018 — then sold it to Zillow about three years later.
When the pandemic hit and he got laid off from his job, Prickett decided to start doing some some home repairs himself, including replacing the floors.
Facing high prices from a lumber shortage and work needed throughout the entire house, Prickett started to have second thoughts on his DIY approach. Out of curiosity, he sought an offer from Zillow. The company offered him $375,000 for the house.
“I had a low number and a high number, and they hit me right in the middle of that,” Pickett said. “I didn’t even tell them my number — I was like, ‘cash me out.’”
But Prickett said the process that followed was slow, and he was surprised by lack of communication from the company.
With the amount of work the house needed, he said the process of selling it without having to go through open houses or walkthroughs with buyers was easier.
“I think I got the better end of it,” he said.
But he said he wouldn’t recommend going through the process if someone wasn’t in a rush to get rid of their home.
“If someone wasn’t in my spot where they were faced with 20 grand back pay, looking to lose their house, if they had it remodeled, in this market I would tell people not to do it and to go through a real estate agent,” he said.
As of Nov. 17, Zillow had listed the home for $419,900.
The real estate agents Zillow and other iBuyers had the potential to push out of the equation say their algorithms fail to account for the intangible aspects of buying a home.
“The fatal flaw in their model is that they view real estate as a commodity,” said Chad Meier, another broker with Living Room Realty. “Your house, a three-bedroom, two-bathroom, 1500-square foot home is a completely different product than the one even two streets over,” he said. “All kinds of things go into the value of real estate. It’s not something that can be replicated by an app. But they view real estate as a numbers game.”Copyright 2021 Tribune Content Agency.