ORLANDO, Florida – The five-bedroom yellow house on East Harding Street is empty and unassuming, drawing little attention in the middle of Orlando’s Hourglass neighborhood. Although the windows are dark, the lot is maintained. The lawn is cut and the paint is clean. A basketball hoop hangs over the aisle, dripping in the late fall rain.

For months, however, this house has been the talk of the neighborhood. A sign in front of the front door offers the first clue.

“Owned by Zillow,” it reads, in the company’s blue-and-white color scheme, displaying phone numbers and additional information to potential buyers.

No one is interested in the house. In fact, the East Harding Street home signifies the collapse of the burgeoning real estate empire and offers a warning lesson to those who try to use computer code to predict a future laid down by humans.

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Money is king

For years, Zillow has been a household name in the real estate world. The website has become a go-to place to check a property’s value, compare it to neighbors, and find potential candidates to visit a real estate agent.

A few years ago, the company entered the business known as iBuying. Businesses, rather than individuals, have placed bids on properties using an algorithm to predict the home’s value and its selling price.

The offers are enticing – all in cash, and quick, in exchange for a slightly lower-than-normal offer. A seller would not have to deal with buyers, tours, agents or renovations. Homes sold as is for as little effort as a click.

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“They don’t buy old, they don’t mostly rent,” Keller Williams real estate agent Ray Lopez explained. “They will flip your house. They’re going to buy it today, paint it, carpet, fix this and fix that, not a lot of money, and then put it back on the market a month, two or three later and sell it.

Zillow was not the first. Other companies like Offerpad, Redfin, and Open Door also compete with regular realtors every day. However, the scale of the company sets her apart, Lopez said. Backed by billions of dollars and the desire to become the biggest player in the game, Zillow has pushed the boundaries, delivering better deals to sellers in an effort to acquire as many homes as possible.

“Zillow came like gangbusters because they were paying a high price,” Lopez recalled, adding that house prices could sometimes be 5-10% higher than the seller’s.

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Sometimes the numbers were mind blowing.

The East Harding Street home was originally listed by its owner for $ 285,000, neighbor John Miller recalled. Miller had reviewed the property when moving to the Orlando area, but decided the layout was not ideal. He bought the property next door.

The chatter in her community started after the Zillow sign appeared at the end of the driveway. The website listed the sale price: $ 445,000, 56% above the asking price.

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“The house was still pretty much the same as when I looked at it online,” Miller said.

He remembered crews coming in to touch up the paint and replace a few ceiling fans after the sale, but nothing major. Zillow then put the house up for sale again for $ 510,000.

“It’s also a bit disgusting,” Miller said. “For them to buy a property at the price they bought and do nothing to increase the value of the house and then list it at that price.”

The process worked, however, due to the frenzy of the market. With homes receiving 10 or more offers on day one and prices rising 12% per year, the business could afford to pay, knowing it would come back and push nearby comparisons higher.

Until no.

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Billion dollar error

Towards the end of the summer, the Orlando real estate market slows down as children return to school and tourists return home. Realtors like Lopez know this, telling clients now is the best time to start thinking about buying a home because they will face less competition.

Other companies know it too. Data Lopez showed that iBuying’s competitors lowered their offers to sellers as the market peaked.

Zillow didn’t.

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“They expected the market to continue to rise at the same rate as over the past 12 months,” he said. “Zillow kept paying top dollar for asking. So they ended up getting those houses back, trying to put them back on the market. They couldn’t sell them at a price close to what they bought them for.

Zillow executives also blamed global supply chain shortages for expensive lumber and materials, as well as the labor shortage that has driven prices up for contractors. The two ate off the company’s profits by buying, renovating and selling homes.

Lopez data shows that Zillow has listed 994 Orlando area homes in the past year. They have sold 331 of these properties and another 356 have pending bids. Including the East Harding Street home, 299 are still on the market, representing almost 10% of all homes available to buyers this month.

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Lopez and other agents believe this is just the tip of the iceberg. The common estimate is that the company has around 500 other homes in its inventory that are not currently listed. Many of these homes are expected to be sold at a loss when the company offloads them.

However, he said Zillow should hold onto them until the seasonal market begins to recover in early 2022 to cut losses. That, and the continued low stock of available homes, means prices for buyers won’t drop dramatically, as some had hoped, as Zillow drains its inventory.

“We need around 5,000 homes to get to the market so that we can balance [the sellers]”, explained Lopez.

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Everyone wins

The East Harding Street home may sit empty, but officers say shockwaves are being felt throughout the industry. Most people, they said, would win out of the titan.

Lopez said other iBuying companies will have more wiggle room when making deals with sellers, no longer needing to match the company’s 9% margins, well below the rest of the competetion.

Officers like him will also have more room to breathe.

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“The good thing is we can come in and tell you, instead of them doing your fairness, why don’t we paint, carpet,” he said. “As a real estate agent, I can show my worth and the seller can earn the money that Zillow, Open Door, Offerpad were going to make.”

Finally, buyers benefit by not paying the huge markups that Zillow was trying to charge for relatively little work. They also won’t move in and find a major problem that could have been covered up.

“People have been using Zestimate for years,” Lopez said. “People need to realize that the most accurate valuation comes from a local real estate agent who knows your subdivision, knows your homes, knows what’s in them and what the projection is at different times in the market.”

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The collapse is forcing industry insiders to reassess the market for the long haul. Some say the iBuying model doesn’t work, while others argue that it can be done as long as experienced humans are involved in the process.

In a recent interview, the CEO of Offerpad said MarketWatch that the ease of the model is hard to beat for people looking to get rid of their properties quickly.

Lopez said there was a lesson to be learned from the crumbling empire for all tech companies, even those outside of real estate.

“All of this estimating value just happened to bite them,” he said. “If they hadn’t done this, they would still be King Zillow.”

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