Why is Zillow Planning to Flip Houses?

Zillow has announced plans to start rehabbing homes, beginning with the hot flipping markets of Phoenix and Las Vegas, and investors in the company are not happy about it. This new plan marks a huge shift in the Zillow business model and could have major – potentially disastrous – consequences for the housing markets where they choose to invest.

Why Zillow decided to start rehabbing houses is pretty straight forward – they stand to make a killing. They’re not the first big company to make this move. Opendoor is a startup that created a platform where people can sell their homes sight unseen. The benefits for sellers are an immediate closing, no need to show their homes, and no need to work with a realtor. But that means that many of these sellers are likely missing out on much more lucrative sales, and they’re also paying a hefty 6% service fee to Opendoor during the selling process.

After Opendoor buys these houses, they make minor repairs recommended by inspectors and then list them again, flipping the homes they buy as quickly as possible. This model isn’t much different than the model used by many private flippers, but Opendoor is doing this on a huge scale – Forbes reports that they’re investing in homes at a rate of $1.3 billion per year.

That level of flipping has the potential to completely upend the housing market. And now Zillow says they’re going to do the same thing.

Zillow plans to start buying and reselling homes using Opendoor’s same basic model in Phoenix and Las Vegas. (Opendoor similarly is only rolled out in certain markets.) But Zillow has perhaps more data than any other company on every major housing market in America. That means they could potentially go national with their plan.

What does all of this mean for house flippers and for the housing market at large? We’ve put together a few possible scenarios:

Zillow and Opendoor could create massive bubbles.

We’re talking really, really big bubbles beyond what we saw before the Great Recession. Zillow is taking on debt to start its flipping business, and they’re going to be playing with so much money that they will plan for a certain level of failure. But what happens when the whole market dips? So much investment by one company in a given metro area has the potential to decimate that market if housing prices crash.

Zillow could artificially control the housing market.

When the company that we all rely on for accurate data about homes for sale, neighborhood information, and housing trends starts selling homes on their own platform, we can no longer trust the data that they provide. The impartial source of information becomes biased and, frankly, too powerful.

Of course, these are worst case scenarios that may never come to fruition, but it seems that Zillow has their own investors worried – shares dropped 9% the day after Zillow announced its plan. That drop seems unlikely to slow Zillow down. We’ll be watching as closely as all of you to see what happens next.