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BIGGEST SCAM IN REAL ESTATE

by eiga



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Why is Zillow buying houses? A video on TikTok received millions of views talking about Zillow allegedly manipulating the real estate market. (https://www.tiktok.com/@seangotcher). Let’s figure out if this is the case.

WHAT IS ZILLOW?
Zillow is an online broker that millions of people use to look at homes across the country.

WHAT IS THE ALLEGATION AGAINST ZILLOW?
The theory is that Zillow will buy up homes in a concentrated area (example: 30 homes at $300k a piece within a few miles of each other), and the 31st home they buy they pay a premium ($340k). Since they have all the data, and access to cash, they don’t need to run comps (or comparables). This alleges that since they overpaid for the 31st home, it increases the value of the other 30 holdings they previously purchased. This makes housing more unaffordable for the average person.

HOW DOES ZILLOW ACTUALLY MAKE MONEY?
They make money in 3 main ways: IMT, Mortgages, and Homes.

1. Internet, Media and Technology (IMT). It makes money by charging property management companies to list their homes on Zillow. They made about 1.45 billion dollars from IMT in 2020.

2. Mortgages. They bought a company called Mortgage Lenders of America and they became a fully licensed lender. Through Zillow, you can get a loan on a house or refinance your current mortgage. They made $174 million dollars in 2020 through this segment.

3. Homes. In 2018 they launched a service called Zillow Offers where sellers could sell their homes almost instantly. The way it works is Zillow will use its massive data and everything it knows about the real estate market in an area to make an accurate estimation on your home (Zestimate) and based on that it will give sellers a cash offer – almost instantly. They made roughly 1.7 billion dollars in 2020 from the Homes segment.

ARE THEY ACTUALLY OVER PAYING?
Yes. In some cases they are but it’s not for the reasons laid out in the original TikTok video. Instead, Zillow will use its algorithm to make a guess on the value of a home and buy it. Sometimes the algorithm overestimates how much a home is worth and makes an offer above asking. This is because Zillow expects to sell the house for a profit but in the case of the Las Vegas real estate market (as shown in the video), sometimes they have to resell for less than their original purchase price which means they are losing money.

IS ZILLOW ACTUALLY MANIPULATING THE PRICE THEN?
One comp doesn’t reset the other 30, that’s not how it works. Home values aren’t based off of the last sale price. Instead it’s compared using an average in the area over a long period of time. Also, iBrokers like Zillow represent only a small % of the real estate market (less than 1%) they would need exponentially more billions of dollars to make a dent on the market on a national level.

Furthermore, Zillow would have to buy up dozens and dozens of homes within a few mile radius which is clearly not the case (as shown in the video).

WHAT IS ZILLOW DOING?
They’re trying to do to real estate what Amazon did to retail. It’s all about volume and Zillow is subsidizing that growth (sometimes at a loss) by offering sellers more money.

WHY IS REAL ESTATE BECOMING SO EXPENSIVE THEN?
In January 2015, the average hourly rate was about $25. That same year the average home in the US cost 191k. Fast forward to this year and the average hourly rate has grown to $31; meanwhile, the average home has grown to $307,000.

Real estate has grown 60%, and wages have grown 24%. Real estate is outpacing our annual wage growth and supply is not keeping up with demand.

*None of this is meant to be construed as investment advice, it’s for entertainment purposes only. Links above include affiliate commission or referrals. I’m part of an affiliate network and I receive compensation from partnering websites. The video is accurate as of the posting date but may not be accurate in the future.