Failing Slow

This Month in Seattle Tech: What Doomed Zillow’s Home-Flipping Biz?

Plus: Wayfair is opening an office in Seattle, and a prenup startup with local ties appears on Shark Tank.

By Benjamin Cassidy November 30, 2021

Like many other tech companies, Zillow seemed like it was having an uncomfortably good pandemic. Its stock price soared during shutdowns as millennials and boomers scrolled endlessly through home listings. This property voyeurism was so common among quarantining couples that Saturday Night Live compared it to sex. You couldn’t have paid for a better plug. “Z-Day is the new V-Day,” Zillow tweeted in response, adding a heart emoji.

But less than a year later, the internet’s fallen out of love with the Seattle-based real estate giant. In September, a viral TikTok video accused Zillow and other iBuyers, or tech companies who instantly buy and sell homes, of manipulating the housing market. The critique was a little off in Zillow’s case. By the summer, the company’s relationship to the real estate market was not one of control but a lack thereof; the algorithm that informed its home-flipping business couldn’t account for the volatility of pricing during a public health crisis, leaving Zillow on the hook for thousands of homes it had overpaid for. “Don’t Buy Zillow Homes!” digital decriers posted amid the offloading.

Most wouldn’t get the chance to pass in protest. Earlier this month, the company shuttered its “Offers” division, laying off approximately 25 percent of its employees and taking an immediate financial “L” of about a half-billion dollars. “Fundamentally, we have been unable to predict future pricing of homes to a level of accuracy that makes this a safe business to be in,” CEO Rich Barton said during a November 2 earnings call.

It was a stunning turn for both Zillow—the once advertising-centric company had bet big on becoming a major player in the iBuying space—and the broader tech landscape. Algorithms have recently conquered industries with little resistance. The demise of Zillow Offers represented a rare setback in the march toward the metaverse. You can’t automate home-buying! a chorus of grizzled real estate agents said on social media.

But Seattle competitor Redfin and other iBuyers have managed to cope amid this bonkers real estate market (at least thus far). Zillow’s mistake, it appears, was ramping up its home-flipping operation at just the wrong time (and, perhaps, not being forthcoming enough about its struggles).

Zillow started Offers in 2018 with the intent of turning a “search-and-find company” into one that helps customers buy or sell homes, Barton reminded shareholders during the call. While its ballyhooed property Zestimates have been inaccurate at times, the company was confident that its use of historical data and simulations could predict the prices of homes three to six months in the future. Zillow would submit all-cash bids on houses, fix them up, and then resell them for profit.

A “black swan” event—the pandemic—partially foiled the algorithm, which weighed historical factors such as square footage and location but couldn’t anticipate the sudden value of, say, a home office. Still, the venture was actually more profitable than expected as of the spring, The Wall Street Journal reported. The problem: Zillow wasn’t buying enough homes to keep up with fellow iBuyer Opendoor.

So the company upped the ante. In the third quarter of 2021, Zillow bought 9,680 homes, compared to 3,805 in the second quarter. But the market cooled off a bit during the summer, and labor shortages and supply chain hang-ups stunted renovations. As a result, Zillow sold just 3,032 properties during Q3, losing nearly $81,000 per acquisition. “Our observed error rate has been far more volatile than we ever expected possible,” Barton said, “and makes us look far more like leveraged housing traders than the market makers we set out to be.” Translation: We messed up.

The Journal article notes that employees, including pricing analysts, had raised concerns about the company’s increasingly high bids. One former employee wrote on LinkedIn that executives dismissed passed-along complaints from home sellers who were never able to complete the Offers process, saying the higher-ups “were more pissed that we were bringing negative information to them than they were motivated to fix a broken product experience built on a faulty asset acquisition and resale strategy.” Barton acknowledged in the earnings call that Zillow has “been able to convert only about 10 percent of the serious sellers who ask for a Zillow Offer, and we have tended to disappoint the roughly 90 percent who didn’t sell to us.”

Zillow’s failed iBuying experiment may not have as big of an impact locally as you might expect. Thus far, the company has filed 47 layoffs in Washington state, where it employs roughly 2,000 people. And while iBuyers have acquired many cookie-cutter homes in cities like Phoenix and Atlanta, Zillow and others have generally avoided entering Seattle’s red-hot real estate market. A Zillow report in September showed that iBuyers controlled less than 1 percent of the market in Seattle, one of the lowest figures of any major city.

So while you can blame Zillow for housing hubris, you can’t fault them for paying $100,000 above asking. That’s what Amazon’s for, remember?

A Real Estate Unicorn Grows in Bellingham

Despite the Zillow news, entrepreneurs are apparently still bullish on real estate tech. Place, a startup based about 90 miles north of Seattle, landed $100 million in Series A funding based on a $1 billion valuation. The company targets top real estate agents with a platform that allows brokers to easily share info with prospective buyers. Sounds a lot more appealing to agents than being, you know, replaced.

HelloPrenup Appears on ABC’s Shark Tank

If there’s anything rich people can understand, it’s the value of a prenup. So it’s not surprising that a startup aimed at limiting the awkwardness and expense of these arrangements would go over well with the affluent investors on ABC’s Shark Tank.

HelloPrenup cofounders Julia Rodgers and Sarabeth Jaffe, a Seattle-based software engineer, made their pitch on an episode of the show that aired earlier this month, sporting mock wedding attire and tossing bouquets as part of their spiel. Their company allows couples to answer a questionnaire and, ultimately, draft a prenuptial agreement for $599—a fraction of what it might cost to enlist an attorney to do so. More young couples are increasingly seeking out these contracts, they said, but don’t want to go through the hassle of hiring lawyers. Rodgers and Jaffe were convincing enough; recurring panelist Kevin O’Leary (aka Mr. Wonderful) and Nextdoor founder Nirav Tolia agreed to fork over $150,000 for a 30 percent stake in the business.

HelloPrenup cofounders Julia Rodgers (left) and Sarabeth Jaffe, together, in person, at last.

The founders’ story is a bit more charming than marital insurance policies. As a divorce attorney in Massachusetts, Rodgers had come up with the idea a couple of years ago, but tech problems had plagued the startup since its 2020 launch. Enter Jaffe, a Microsoft alum with technical know-how who discovered HelloPrenup after her own engagement. She cold-emailed Rodgers, and in March of 2021 they became business partners. Months of Zoom meetings preceded the Shark Tank appearance. They didn’t meet in person for the first time until the night before the show.

You can watch the episode here; the HelloPrenup pitch begins at the 13:40 mark.

Bits and Bytes from Satya Nadella, Wayfair, and Pure Watercraft 

Microsoft’s CEO ducks the new capital gains tax in Washington, selling half of his Microsoft shares before it takes effect. Move over, Amazon: another major e-commerce brand is coming to town after this holiday season. And GM invests in a local electric boating startup.

Hello! This is monthly column recapping news at the intersection of local tech and culture—happenings you may have missed in this mercilessly fast, and often quite nebulous, cycle of innovationBut even the beat writers can’t keep up with everything. Do you know of a Seattle startup doing things that don’t make eyes glaze over at parties? A corporation behaving badly? A developer trying to hack the Mercer light cycle? We’re interestedSend your tips to [email protected] or @bybencassidy on Twitter. DMs are always open. 

Share
Show Comments