What better symbolizes America's real estate obsession than Zillow? As the pandemic-fueled U.S. housing market soared, buyers, sellers and onlookers flocked to the Zillow site and app. Zillow averages more than 200 million users a month, roughly double the number who check the latest scores on ESPN.com. The Zillow phenomenon even made an appearance on Saturday Night Live recently, where cast members ostentatiously whispered, “Do you need a new fantasy? Then you need Zillow,” as they ogle properties they have no intention of buying.
But for all the attention, the real driving force behind Zillow's business isn't window shoppers or even potential buyers, it's Leslie Turner and her husband.
Turner is a Zillow Premier Agent, which means she pays the company for contact information that interested buyers submit through the site. In 2018, one of her Zillow leads connected her with a couple looking for a second home in Charleston, South Carolina, where Turner is a broker with Maison Real Estate. With Turner's help, the buyers secured a $335,000 cottage that checked all their boxes. Two years later, they contacted Turner to help them sell the cottage ($373,000), purchase a nearby investment property ($450,000), and invest in a luxury permanent home in the heart of downtown ($845,000). That's four big sales from just one lead.
That's part of business. You're taking big gambles. Some will work, some won't.
Susan Daimler, President, Zillow
Zillow leads aren't a perfect solution for a real estate agent like Turner: She pays Zillow about a quarter of a million yen a year for information, and says only 12 percent of her sales come from Zillow. But Zillow's reach and scale offer her local boutique real estate agent something she can't get any other way. “And that's branding and marketing awareness,” she says. “When people are looking for homes on Zillow in downtown Charleston, our listings are what they see.”
This aspect of Zillow's business hasn't been the most sexy part of the company's business — after all, lead generation has been around for decades, dating back to the days of telemarketers and door-to-door salespeople — but the company's financials might get you excited: In 2021, the division that includes lead generation was the company's second-largest and the only profitable part of its balance sheet.
What's the biggest slice of the revenue pie? It's something else entirely: the company's home-flip business, which exploded spectacularly last year. In November, Zillow announced it was shutting down the business, known as Zillow Offers, laying off 2,000 employees, and scrambling to sell its remaining homes. But after a year of selling a ton of homes, the company's revenue has already hit $8.1 billion in 2021, up from $3.3 billion the year before. That was enough to catapult Zillow into the Fortune 500 for the first time in history, but it wasn't exactly good news for the future. Despite that massive influx, the company lost $528 million in the midst of the most booming real estate market in the country's history.
Zillow's road to the home-flip debacle began with the launch of small test programs in Phoenix and Las Vegas in 2018. The company, which started out in 2006 with the launch of its home-price estimator tool Zestimate, believed its algorithms could pinpoint a home's current value and predict how it might change in the future. The plan was to identify properties that were rapidly appreciating in value and had sellers willing to pay Zillow's 5% to 9% service fee to buy the home and then resell it at a profit.
Zillow hasn't released details of its Phoenix and Las Vegas results, but the results clearly have inspired founder and CEO Rich Barton. He has announced plans to expand, telling investors that he expects Zillow Offers to bring in $20 billion in annual revenue within the next three to five years. Looking back at the business today, Zillow COO Jeremy Waxman argues that Zillow Offers had no choice but to scale up to succeed. Buying and selling homes is a costly, complex, low-margin business, and you can't make money without scaling up. Waxman says, “We needed to automate transactions efficiently so we could cover the fixed costs of running a business. That requires a lot of technology, a lot of data, a lot of automation, and again, a lot of capital.”
It's not a bad theory, but it's doomed by two problems, one outside of Zillow's control and one that's clearly of Zillow's own making. First came the pandemic, which led many, including Zillow, to assume the worst. The company halved the lead fees it charged real estate agents in preparation for a slowing market. But that slowdown never came. In fact, the summer of 2020 ushered in a historic boom. The booming market boosted Zillow's confidence, and the company is spurring home buying as Zillow Offers generated a record $52 million in profits in the first quarter of 2021.
Then things started to go wrong. By spring 2021, the market was so overheated that Zillow's much-admired algorithms, the backbone of its home-flipping strategy, struggled to accurately predict prices. Analysts say the company believed its own inflated numbers and began paying inflated prices for homes across the country.
One of those homes was a two-story Midwestern home in Union Township, a Cincinnati suburb. Public records and real estate databases tell the story in miniature: The owners put it on the market in the summer of 2021 for $338,500. Zillow bought it for $350,000 and almost immediately relisted it for $366,000. Despite a booming market, no one wanted to buy it. Three months later, Zillow sold the property for $329,000, a loss that doesn't include closing or storage costs.
Zillow's short-sighted algorithms didn't just hurt the company. Zillow bought the most expensive homes across the country, likely driving up prices during the most booming period in U.S. housing market history. The company also competed with, and often beat out, people looking for a place to live. The company said it was targeting homes in the $200,000 to $400,000 range, a price range favored by first-time homebuyers. (Zillow disputes that it was competing with buyers, saying it quickly flipped homes and that most of the homes it bought were not even for sale yet.) Zillow is unlikely to be the only company driving the macro housing environment, but it was part of a larger wave of individual investors that undoubtedly influenced home prices during the pandemic. In January, investors accounted for 33% of U.S. home sales, the largest percentage since John Burns Real Estate Consulting began tracking the data in 2012.
Zillow executives are unconcerned about the company's algorithm failures, millions of dollars lost and the collapse of Zillow Offers. “It's part of the business. There are big fluctuations. Some things work, some things don't,” says Susan Daimler, president of Zillow.
Far from being self-reflective, the company is already working on what it sees as the next big thing: a “home super app.” Despite the hyperbolic name, the app actually looks like a return to Zillow’s core business of serving the needs of real estate agents and homeowners.
While focusing on buying homes, Zillow continued its track record of big acquisitions, which it began with StreetEasy in 2013 ($50 million) and Trulia in 2015 ($2.5 billion). In 2018, it began to dip its toe into lending, acquiring Mortgage Lenders of America for $65 million. In 2021, it acquired Showing Time, a site used by real estate agents to schedule home showings, for $500 million. These acquisitions, and the fact that Zillow has also begun offering options for homebuyers, such as title, closing, and escrow services, put the company in a position to begin putting together what Stevens analyst John Campbell calls a “mosaic” of all things real estate, many of which will likely end up on the company's super app. “Everything you need to know to get from house A to house B, [Zillow’s] “This is our specialty,” said Campbell, who would like to see the company become more aggressive and expand into areas such as moving assistance.
Outrage: When Zillow tries to resell properties like this Florida home, it often ends up costing the company money.
Bob Self — The Florida Times Union/USA Today Network/Reuters
Zillow believes it hasn't yet reached its potential, despite the services it offers and the brand recognition it's built. And it may have a point. Of the roughly 6 million people who bought a home in the U.S. last year, about 4 million visited zillow.com at some point in the process, according to the company. Of those, about 1.5 million asked Zillow to introduce them to a real estate agent. But of all U.S. home transactions in 2021, only 3% of buyers connected with agents through Zillow. The company thinks it can double that share by 2025, bringing annual revenue to more than $5 billion. Why stop there, Waxman asks? “Even at 6%… [of transactions]We still have a long way to go and there is still 94% of the field where we are not on board.”
Industry watchers are cautiously optimistic. To achieve those goals, Zillow will need to expand its reach into all corners of the real estate industry and keep up its pace of acquisitions, said Mark Mahaney, senior managing director at Evercore ISI. “The bullish outlook is that they’re going to be a big player in the industry.” [real estate] It is a platform company.”
It would help if the housing market cooperated. As Zillow's algorithmic meltdown shows, predicting the future of the U.S. real estate market is a virtually impossible task. But with the economy cooling and mortgage rates rising, you don't need to be Nostradamus to predict that the market will eventually stabilize.
In fact, the situation seems pretty strained already. A Moody's Analytics analysis this spring found that 96% of the U.S. housing market is “overvalued.” A correction in home prices will be tough for Zillow. Fewer buyers and sellers means less demand for the company's services. More importantly, that means fewer good leads to sell to agents, and fewer agents to buy them, as real estate agents often exit the industry during market downturns.
In 2010, Steve Jobs wore his iconic black turtleneck as he walked onto the stage at Apple's headquarters in Cupertino to rapturous applause. The legendary CEO was demoing the just-released iPad, and the app he used in his presentation was Zillow.
At the time, Jobs was doing what he did best: capturing people's imaginations. So was Zillow. Since its founding in 2006, Zillow has been at the forefront of bringing the real estate market to life on screen. The company's home-flipping experiment was a step away from that mission. Perhaps the company's new direction will return to its roots: helping homebuyers, rather than competing with them.
This article appears in the June/July 2022 issue of Fortune under the headline “Can Zillow Get Back Home?”