Zillow is having a hard time right now, as it’s losing money on homes it initially bought, intending to flip. So what’s going wrong for the real estate mega-company?

Zillow Offers Is Pausing

The home buying operation at Zillow is called Zillow Offers. Zillow Offers combines technology with home flipping. Zillow recently changed its algorithm to make higher home offers but still hasn’t been able to keep up with the market, according to Bloomberg.

The result of the algorithm change is Zillow overpaying for homes that it can’t sell even for the sales price, and certainly not a profit.

Some homeowners have done well as a result of Zillow’s recent failures, however.

Many homeowners sold properties to the company at over-market rates.

For example, Richard Flor, a resident of Tolleson, a Phoenix suburb, recently decided to sell to Zillow. Zillow paid him around $412,000 for his home, charging only a 1% fee. Two weeks later, after making minimal repairs, Zillow listed the property for $387,000. That was $3,000 less than what an agent initially offered Flor.

On October 18, Zillow said it would stop making home buying offers. Before its pause on the home-flipping program, Zillow Offers hadn’t turned a profit since its inception in 2018.

What’s the Problem?

The issue with Zillow’s iBuying program appears to be two-fold. First, their online algorithm seems to be problematic. Second, it doesn’t seem like the staff at Zillow are taking a look at things like property history before these offers go through.

The other iBuying companies, including Opendoor, Offerpad and Redfin, are taking full advantage of Zillow’s announcement.

For example, Offerpad’s CEO recently spoke out and said they were ready to jump in where Zillow is leaving off.

Zillow’s press release on October 18 about the situation cited labor and supply chain constraints, saying their home buying program hit occupational capacity.

According to the release, Zillow says it will complete purchases under contract but not closed, and will keep selling its existing inventory.

All of this comes after Zillow bought more houses in the third quarter than ever before. With what looks to be ongoing slowdowns in price appreciation, the homes still in the pipeline that Zillow is committed to will likely be sold at a loss.

According to research from YipitData, Zillow put a record number of properties on the market in September, listing them at the lowest markups since November 2018.

The company also cut prices on almost half of its U.S. listings in the third quarter, indicating inventory was bringing in lower prices than expected.

Atlanta and Phoenix have been two areas where these changes have been on display in particular.

For example, there are around 250 active listings from Zillow in Phoenix right now, and on average, they’re priced 6% lower than what the company paid for the properties.

Opendoor, on the other hand, has continued to sell properties for more than what it’s buying them for, based on independent analysis. For example, in Atlanta, Opendoor is listing homes at an average of a 6.5% premium compared to the purchase price.

Following Zillow’s October announcement, stock shares plummeted 9.4%, although it’s since recovered those losses.