• Zillow abruptly shut down its home-flipping business, blaming labor and supply shortages.
• Current and former employees described an internal initiative called Project Ketchup.
• They said the desire to “catch up” with Opendoor led to overpaying for homes and other issues.

When Zillow Group announced last week that it would close its multibillion-dollar home-flipping arm, senior executives at the company blamed the unpredictability of the nation’s housing market and a supply and labor shortage that has plagued businesses across the economy.

Current and former employees at the company said those explanations omitted Zillow’s role in the debacle, which sent its shares plummeting and shuttered a business line that executives had, until recently, described as essential to its growth.

At the beginning of 2021, four employees told Insider, Zillow launched an initiative to supercharge its homebuying and gain ground on Opendoor, the nation’s largest instant buyer, or iBuyer, and Zillow’s chief rival in the emerging business. That effort, a play on the words “catch up,” was called “Project Ketchup” internally.

The plan worked but began to bleed ink as red as the condiment it was named for, employees said.

The employees’ accounts suggested that Zillow’s iBuying problems had less to do with a glitch in its computer-driven, algorithmic approach to purchasing homes or unpredictable swings in prices and more to do with the overexuberance of human managers. Employees said leaders at the company failed to heed signs that Project Ketchup was prompting it to pay too much for homes and damaging key business relationships with contractors who fixed up properties before Zillow relisted them. 

Zillow declined to comment for this story.

Zillow spent more money and won more bidding wars

Zillow’s iBuying business, along with competitors like Opendoor, Offerpad, and Redfin, allowed home sellers to receive a preliminary offer online, giving the business its “instant-buying” nickname. After that, a human from the iBuying companies surveys the property, either in person or via a virtual tour. Most iBuyers mark down thousands of dollars of deductions from their initial offering price to make repairs that are essential to a resale, such as those related to carpeting, paint, or kitchen countertops.

Through its Project Ketchup initiative, employees said, Zillow sought to increase the competitiveness of its bidding by offering sellers fewer deductions from the purchase price. Homeowners were thrilled — and Zillow began to win thousands of homes.

In 2020, the company reported that it purchased 4,162 homes — fewer than half the number acquired by Opendoor during that period — and sold 5,337. But in the first three quarters of 2021, the company purchased 15,000 homes. It has sold over 7,000 of those, it reported. Opendoor has purchased almost 6,000 homes in the first two quarters of the year and is set to announce its third-quarter volume on Wednesday.

“We began to buy properties at an unreal rate,” a current employee said, describing the company’s volume of deals this year in Los Angeles and Orange County in Southern California, where that person works. “We were buying 74% of the homes that were asking for an offer. What Zillow Offers executives wanted was a success rate in the 50 to 60% range. No one pumped the brakes.”

Higher purchase prices led to thin repair budgets

The higher prices that Zillow was paying left it with precariously thin budgets for repairs, the source, along with another current employee and a contractor who works with the company, told Insider.

The contractor, who also worked in Southern California, said Zillow began to reduce the price it was willing to pay for specific types of renovation work and shrink the scope of many jobs. Those adjustments, rolled out across the company’s sprawling portfolio of homes, began to strain the relationships it had with hundreds of contractors whom it relied on to fix up the homes it bought and prepare them for resale.

Employees said contractors who were used to tackling a few jobs at a time for Zillow that totaled in the tens of thousands of dollars, were asked to complete as many as dozens of jobs a month, each one now paying only a few thousand dollars. Contractors had to manage a growing number of construction projects across a wider geography and buy a host of materials for a variety of repairs. The work, employees added, was less profitable and more taxing logistically.

The Southern California contractor, along with another contractor in Texas, said that other iBuyers, such as Opendoor and Redfin, often paid more for the same work, which prompted some to de-prioritize Zillow jobs or cut ties with the company.

“Redfin pays $2.25 a foot to paint a home, and Zillow would give you $1.35,” the Southern California contractor said, adding that his company had renovated over 300 Zillow-owned homes. “They had a lot of difficulty finding contractors because their pricing was terrible.”

The squeeze gave Zillow a bad reputation

The Zillow employee in Southern California said that much of the company’s labor problems stemmed from those strains brought on by Project Ketchup, not the economywide shortages that top Zillow executives, including CEO Rich Barton, said were responsible for its backlog of homes. In its third-quarter earnings call, Zillow executives said the company had about 7,000 unsold homes on its balance sheet.  

Another former Zillow employee who worked with contractors across all markets told Insider that he believed Project Ketchup had hurt the firm’s reputation with contractors.

“Our name on the street was squandered,” the employee said.

With a scarcity of labor, Zillow’s problems began to cascade. Homes it had acquired lingered on its balance sheet for longer periods because it couldn’t make the necessary repairs to bring them back to market for resale. Holding onto properties ate into the business’ profitability.

The Zillow employee said the company told employees who worked within its iBuying business that it cost the company on average about $225 a day to hold a property — a total that came from the price of the capital it used to acquire homes, plus other charges, such as taxes, insurance, and maintenance.

Homebuyers also began to notice the more frugal improvements that Zillow was making to homes, which made them harder to sell.

“The phrase that we heard over and over again was, ‘This doesn’t look like a Zillow home,'” the Southern California source said. “Zillow had stopped putting the work in.”‘

Unbowed by the troubling signs, the firm pushed ahead on Project Ketchup, going so far as to send some Zillow employees Project Ketchup-branded swag in recent weeks: a T-shirt and water bottle emblazoned with the initiative’s name and the Zillow logo in red font that looks like dollops of the condiment, along with a glass bottle of Heinz ketchup.

A Zillow accountant told Insider that they noticed a higher volume of home purchases and were told by company managers that it was a result of Project Ketchup. They also said they noticed that more homes were sitting for longer periods before relisting and then selling at a loss.

Managers weren’t concerned, the person said. The company had made it clear that it expected to lose cash to grow market share, the accountant added.

The financial fallout

As part of Zillow’s third-quarter earnings release on November 2, the company made the surprise announcement that it was closing its iBuying business after the unit suffered heavy losses during the quarter, despite a solid housing market.

The accountant told Insider that panic had begun to build within the company in the days leading up to the earnings announcement as it started to calculate the $569 million in losses it said it could sustain from selling homes it had purchased at a loss. Even then, the person said they and their colleagues did not expect the company to abruptly quit the home-flipping business.

“Fundamentally, we have been unable to predict future pricing of homes to a level of accuracy that makes this a safe business to be in,” Barton, the company’s CEO, said during a public call to discuss the company’s financial performance.

As a result of the decision, Zillow said it would lay off about 25% of its staff, roughly 2,000 workers, after hiring about 2,500 employees this year to staff up its iBuying business.

“I worked so closely with the financials, and it still came as a rug pulled out from under me,” the accountant said.

Work for Zillow? Have a story to tell? Contact reporter Alex Nicoll via encrypted messaging app Signal at +1 (646) 768-4772 using a nonwork phone, email at anicoll@insider.com, or Twitter DM at @AlexONicoll. You can also contact Business Insider securely via SecureDrop.

James Rodriguez contributed reporting to this story.