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What are the learnings from Zillow’s mistake?

What are the learnings from Zillow’s mistake?

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If you haven’t heard of Zillow, they are the US equivalent to realestate.com.au or domain.com.au.

Launched in 2004, Zillow are now the dominate real estate advertising platform in the US and grew to a market cap of $US48 Billion in Feb 2021 with a share price of over $US200.  In 2018 they entered the physical property market and started buying houses. It is known as iBuying (i stands for instant) which is where deep-pocketed prop-tech companies buy properties, do some minor renovations and then sell them (or flip them) for a gain. It is predicated on the premise that given the huge volume of property market data they are capturing, they can predict the market direction and value of homes better than the general market.

Zillow developed an algorithm to predict the future market values which enabled them to calculate a price to pay for a property today, that generated a a profit margin on sale after costs. They called it Zillow Offers.

An algorithm uses quantifiable data which for property includes variables like building and land size, number of bedrooms, distance to services, location, date and price. They are all numbers assigned to a property. But we all know the appeal and value of property is more than numbers. How do you attribute a number to the view, design style, quality of finishes and structure, neighbourhood, overlooking, general feel, smells etc etc?   It’s not clear if the actual algorithm was flawed or if property has so many unquantifiable variables that it is impossible to assess the current value of a property from a computer, let alone the future value.

Maybe it was a bit of both but if you are interested to read more about how to buy and value an apartment you may find these two articles helpful. Apartment Buying Apartment Hunters.

Unfortunately the idea didn’t go so well. Zillow shares today are at $US60.27 with a market cap of $US15.5 Billion. That is a drop of $US32.5 Billion or about 68% in 9 months. Not only did the strategy of making money not work, they now have a stock pile of homes that will most likely sell for a loss.

The learnings for anyone looking to buy an apartment is clear. Go and look at many of them and have a system like that the one provided in our free Apartment Hunters Workbook to help you capture both the tangible and intangible features that impact value and especially the ones you can’t see from an online listing.

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