Zillow in the Real Estate Industry, and 1031 Exchanges

Wallace Smith:
Well, I know we’re jumping around a little bit, but that just reminds me. Zillow, what a force in the industry. And they made a huge change of direction. Can you tell me a little about that? I see a lot of homes offered by Zillow.

MJ:
Yes. So they’re what is called an iBuyer, which is an instant buyer. And they have a pool of money that they buy homes. And they bought too many homes. And also, they have algorithms and they have metrics that they calculate how much they should pay for a home. Everyone knows about it.

Wallace Smith:
So is that when I get unsolicited offers where it’ll just be an email or something in the mail saying, we’ll buy your house?

MJ:
Yes.

Wallace Smith:
Sight unseen.

MJ:
Right. And so they have a certain amount that they’ll pay. Zillow has always had a Zestimate, or people call it a Z estimate. But I call it a Zestimate. And that’s where they have an algorithm. They’re an aggregator, and they figure out this is what this is worth. Sometimes it’s accurate, sometimes not.

Wallace Smith:
So are they still buying homes?

MJ:
They’re not buying homes. They stopped the 1st of November in 2021.

Wallace Smith:
Does that mean they’re getting out of it or they feel it’s just toppy at this point?

MJ:
They are getting out of it because they realize that their system couldn’t figure out the forecasting of the pricing. And so some homes, they paid too much because they would have realtors go out, look at the home, make a recommendation. And then they would buy it for that. Well, if the realtor doesn’t know how to do comparables, they would be buying a home. In fact, one of my clients put in an offer on a Zillow home and it had been priced, I would say 60,000 or 70,000 higher. And then we went in at their list price and we were able to get it. But then there were too many things on inspection. But after further review of the comparables, we were paying market rates. So they paid way too much for that particular home. I’m sure that they bought some and they were able to make a good-

Wallace Smith:
So it’s a tough business. And even with their sophisticated algorithms, they still decided they were going to stay in their lane and not be the-

MJ:
Right. And there still are a few out there, Opendoor and a few others. But now there are power buyers. That’s where a company will come, like Homeward, and they will buy the home for you. The buyer moves in, they move out of their home. Then that power buyer sells that home. And then they finance it. So the house they’re living in has been purchased by the power buyer. And then their home sells, then they have the financing. And then they finance with that same power buyer.

Wallace Smith:
So it’s basically serving a bridge or a mezzanine role.

MJ:
Yes. It’s similar to a bridge loan.

Wallace Smith:
With the 1031 exchange business, we occasionally will do a reverse 1031 exchange. Somebody sees what they want to buy. They don’t have the cash for it yet, but they have to figure out some way to buy that property because they know they’re going to sell and get into it. So very, very similar.