What We Can Learn From Zillow’s Downfall?

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By Clinton Lu, TFS Properties

Zillow’s making headlines recently, but not necessarily in a positive way. As you may have heard by now, the well-known online real estate company Zillow had a blunder and their algorithm went a little too far. Now, the company is facing $569 million or more in debt if they can’t offload a few thousand properties.

What began as an algorithm-based way to buy, renovate, and sell a large quantity of homes has become a nightmare scenario for Zillow. But it’s not the computer’s fault. Rather, it’s the unaccounted-for situations that real estate agents see all too often. It is the very act of having a real pair of eyes on a house that lies at the root of the program’s downfall.

The good news is that where Zillow fell short, you can take note and learn a thing or two before entering the real estate market yourself. That’s true for anyone looking to buy and/or sell a home, as well as budding real estate agents.

So what exactly can you learn from Zillow’s downfall?

Real World vs. Ideal Conditions

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Real estate agents will be the first to tell you there’s a limit to how much you can ask for your house when selling it. Determining that price range includes identifying the physical aspects of the structure itself including those that can not be identified from a quick glance or through examination of the numbers.

A large part of a home’s market value comes from looking at the values of homes in the same area that have sold recently. These are often referred to as “comps,” or comparable houses. They’re more or less a way to justify the asking price you come up with, because if someone paid a certain price for a comparable house, they should (in theory) pay about the same for your house. However, an investor can not judge the value based purely on comps alone.

In the beginning, Zillow based their home values on these comparisons. The company hired real estate agents to do all the work behind the scenes. Then, it taught the software what to look for, setting parameters to then buy, flip, and sell houses. It sounded all well and good in the ideal world, but when it comes to real estate, hardly any piece of property meets these impossible standards.

Home Values are Not Plug and Play

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Whereas a computer might pick out parameters from a data set to determine that house’s value, real estate agents are the ones actually stepping foot in those houses. And what they find isn’t always caught by the algorithms. It takes an in-person inspection to truly determine the state of a home. There are factors such as the mold smell inside a house, or poor plumbing that can only be found through the eyes “and nose” of someone with experience.

In fact, this is where Zillow Offers truly set itself up for failure. It’s no secret the housing market has exploded as of late, but that doesn’t mean the houses going up for sale are perfect specimens. Zillow’s algorithm assumed that the repairs necessary to prepare these houses for market were (a) quick, (b) cheap, or (c) easily identified and addressed.

As time went on, Zillow’s software soon learned how hard it is to flip a large number of houses, especially with the rise in building materials prices and the aftereffects of a global pandemic. The get in, fix up quick, get out approach may work for reality TV stars, but real life isn’t so predictable. It takes expert eyes to gather the information about a home and come up with a well-researched estimate that goes beyond the facts to consider reality.

Real-World Warning Signs to Look For

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We’ve been talking a lot about what real estate agents can see that a computer can’t. So what exactly are examples of aspects of a home that don’t show up online?

Here are just a few warning signs to paint a picture for you:

● Water damage: rust, leaks, mold, etc.
● Warped walls
● Vintage fixtures
● Doors that stick
● Misshapen insulation
● Uncodumented work with no building permit(s)
● Water flow issues
● Cracks in walls, ceiling, foundation
● Damage otherwise (poorly) covered up

As you can see, there’s much more to buying and selling a house than just what shows up in the pictures. If you want to make a house your home, choose wisely. It could end up saving you thousands, both in terms of dollars and hours lost to headaches and frustration.

The Value of a Real Estate Agent

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Real estate agents know the home better than almost anyone else. They know what to look for when it comes to pushing past the staging to seek out the cracks. When you hire a real estate agent, you’re setting yourself up for success by choosing experience.

As Zillow found out, it’s real-world experience that separates the computer algorithm from reality. A computer might just see the three bedroom, two bath home as a prime buy for the area in which it’s located. The experienced real estate agent, however, knows that this particular house, so close to a school, may appeal more to young families than anyone else.

Hiring a real estate agent might seem unnecessary for some folks. But when you enter into a relationship with a real person, you’re gaining their experience and their connection to a world you may not know a lot about. Think of them more as a guide and you may begin to see the value of a real estate agent, no matter if you’re looking for a property to buy or wanting to sell the one you’re in.

Take it From Zillow

As Zillow prepares to attempt to unload roughly 7,000 homes in order to pay off its debts, rest assured you don’t have to make the same mistakes. Hire an experienced real estate agent to guide you in your home search and you could save tens of thousands of dollars. After all, you should be enjoying your new home, not drowning in buyer’s remorse.

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