In the beginning there were Zestimates, Zillow’s best guess at what the house next door was worth. Then there were Zprices, as company insiders nicknamed its attempt to use home valuation software to get into the home-flipping game. Finally there was the gasoline Zillow Group Inc. poured on the fire as it burned cash paying too much for houses, leading to a $569 million dumpster fire. On Nov. 2 the online property giant shuttered its technology-powered home-flipping business, Zillow Offers; said it was firing 2,000 workers; and began grappling with the damage it had done to one of the most valuable brands in real estate.
The episode is a cautionary tale about what happens when an overconfident company uses algorithms to supersize an old-fashioned business. But although it’s easy to assume Zillow’s number-crunching software misjudged the housing market, it wasn’t bad data or faulty code that did the venture in, according to current and former employees, competitors, and counterparties. As in so many misadventures in modern technology, Zillow’s downfall wasn’t caused by the tools so much as how the company used them.
Automated home valuations have been a core part of Zillow’s business since Rich Barton and his partners founded the company in 2006. Unlike its peers in online real estate listings, the company published its computer-generated Zestimates, which let people track the value of their own homes—and everyone else’s. This predated the advent of cheap cloud computing, so the magic happened on a bunch of computers strung together on a pingpong table in Zillow’s break room.
In the early days, the median Zestimate was as much as 14% off the amount a home eventually sold for. Today the company has a much improved median error rate of just 2% on homes that have been listed for sale, but that goes up to 6.9% on off-market properties. Such results don’t look great as the basis for a real estate investment operation, but Zillow’s main business was charging real estate agents for leads, and Zestimates were great at drawing visitors to the website.
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