Zillow is looking to flip houses

There's a new trend for real estate flippers, where algorithms, along with capital donated from Silicon Valley ventures, aid in the purchase of massive properties.

With its tan stucco exterior and red tile roof, the Rittenhouse home on South Star Canyon Drive looks a lot like the other houses in Power Ranch, a large planned community southeast of Phoenix.

Mark, a meat buyer for a grocery chain, and Anne, a nurse, bought the house for $293,000 in 2010 during the U.S. foreclosure crisis, which hit the Phoenix area particularly hard. At the time, local home prices were down about 50 percent from their peak in 2006. By late last year the market had recovered, and Mark and Anne were thinking about moving on.

They still liked Power Ranch, which had good schools and a network of parks and hiking trails where they walked their golden retriever. But a quirk in the 3,000-square-foot home’s layout was grating. The kids’ rooms were the size of typical master bedrooms, and the master was even bigger. But the living room was the only usable common space, a vexing issue when the family’s two boys brought friends over. Mark suggested they could throw up a couple of walls and create a teenage quarantine zone. Anne shot him down. They needed a new place—fast. So they went house hunting.

To buy a new home, the Rittenhouses would have to sell their old one. They started pricing repairs and debated whether it made more sense to sell first and move into a temporary rental, or if they should try to manage two transactions at once. Then they met a buyer willing to pay cash, who wasn’t hung up on the big bedrooms or a little bit of dog damage. Their dream buyer? An algorithm.

The company behind the algorithm was Zillow Group Inc., better known for operating apps and websites that help buyers find homes. In May 2018 the Seattle-based company, whose home value estimates—“Zestimates,” they’re called—have become a sort of Kelley Blue Book for American homes, started an “instant offers” business. Zillow would buy houses, fix them up, and resell them, earning a fee for providing a simple, fast transaction.

For the Rittenhouses, who sold their home to Zillow for $513,800 and bought one with more living space, the process was easy enough. They entered some basic information into a website and then set up a time for a Zillow home inspector to come by. After that, it was a question of setting priorities. They could sell their home the traditional way. “Or we go with the Zillow route,” Mark says. “We just accept their offer on the house and, you know, we don’t have to worry about anything.” For the privilege of taking the no-fuss all-cash offer, they paid Zillow a fee. The company charges 6 percent to 9 percent, more than the 5 percent commission typical for real estate agents in Phoenix.

For decades, selling a house in the U.S. was a low-tech, high-stress affair. You hired an agent, fixed your mind on a number, and decided how much time and money you wanted to spend repainting walls, redoing bathrooms, and making other repairs that had seemed too costly or inconvenient to make for your own benefit. You locked up your pets, lit some scented candles, and opened the door to a parade of strangers. Then you waited for an offer—ideally, more than one—and hoped your agent would be able to deliver the price you needed so you could afford your next abode.

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