Zillow is selling thousands of homes in hot markets. What's that mean for buyers?

Zillow's online house-flipping unit has turned into an embarrassing flop, forcing the real estate company to exit the business and dump thousands of its own properties on local real estate markets. 

Zillow plans to sell roughly 18,000 homes it already owns or has under contract through its home-flipping business, called Zillow Offers, according a letter to shareholders. It expects to lose about 5% to 7% on the failed venture, the company told investors last week.

Zillow's enemy was its own algorithm as well as underestimating the risks inherent in buying homes en masse with the intention of quickly selling it for a profit. As one Sacramento, California-based appraiser told Money.com, "Zillow can't smell if 20 cats live there."

Though Zillow gobbled up thousands of properties in recent months at inflated prices, it's unlikely ordinary consumers will be snapping up bargains when the company unloads them, experts said. Here are a few reasons why:

House flipping becoming less lucrative

HGTV-style house flipping — buying a run-down home on the cheap, renovating it quickly and selling it for a profit — is becoming less lucrative, even for experienced flippers. Supply-chain snags and labor shortages during the pandemic mean it's more expensive and takes longer to turn run-down homes into pricier, renovated gems.

Though house flipping accounted for 1 in 20 transactions nationwide in the three months ended in June, sales of flipped homes were the least profitable in a decade, according to Attom Home Solutions, which tracks the practice.

"Resale prices rose at a slower pace than they were going up when the latest round of home flippers originally bought their properties," Todd Teta, Attom's chief product officer, told CBS MoneyWatch.

That's part of the reason why the bulk of Zillow homes will likely either be sold to corporate buyers for rental housing or "not be put on the market quickly," Teta said.

Corporate buyers lining up

Zillow agreed to sell about 2,000 of its homes to Pretium Partners, according to the Wall Street Journal. Earlier this week, the paper noted that institutional investors were already appraising Zillow's property portfolio. Suitors also include American Homes 4 Rent, and Invitation Homes, the Journal reported.

Zillow said last week it still planned to market its properties to everyone.

"We are continuing to sell our remaining inventory the same way we always have. We sell our homes to buyers of all types, which includes individuals, families, individual investors, institutional investors and nonprofits," a Zillow spokesman told CBS MoneyWatch.

Existing home prices are still rising

In September, the median price for existing U.S. single-family homes — the kind flippers buy — rose 13% from the same month a year earlier, according to the National Association of Realtors. 

Yet Zillow continued to speed up its purchases this year until halting them in mid-October. Almost two-thirds of the homes Zillow owned in its five biggest markets were listed at a loss, according to Business Insider. In Phoenix alone, some 93% of Zillow homes were posted at lower prices than Zillow paid for them, according to the news outlet's calculations.

Even in Phoenix, where online flipping companies account for 12% of active listings, according to one local realtor interviewed by Business Insider, Zillow isn't seen as likely to sell in the open market at bargain prices. That differs from the housing crisis more than a decade ago, when foreclosures forced a glut of properties onto many markets.

"That would be noticeable, but they're not going to do that — they're not in foreclosure. They're going to sell over time," Susan Wachter, a real estate professor at the Wharton School of Business told CBS MoneyWatch.

"And in a rising market, there will be losses, but it doesn't necessarily affect housing prices noticeably," Wachter said.

"Be cautious"

RedFin, which has a unit called RedFinNow that competes with Zillow Offers, Opendoor and Offerpad, told analysts in an earnings call last week that unlike Zillow it had slowed its flipping purchases through early September.

Flipping a home, on average, took RedFin 37 days in the third quarter, versus 28 days in the second quarter. Property-holding costs and "renovation bottlenecks" will cut profit margins for the rest of the year — though the company expects RedFinNow to remain profitable, Chief Executive Glenn Kelman said in the call.

"Our ability to renovate homes fast is often the difference between a home that can only rise or fall in value with the market, and one that sells for a premium within days of its debut," Kelman said.

Opendoor and Offerpad are expanding their home-flipping businesses, the companies said this week. Though neither firm is yet profitable, third-quarter losses weren't as steep as analysts predicted, the Wall Street Journal noted. 

Opendoor said it will slow home purchases for the rest of this year after it bought a record 15,000 in the third quarter, citing "proactive volume management, as well as typical seasonality slowdown," in a letter to shareholders.

The company will keep "investing aggressively in our internal operations, vendor network, and tooling and automation to lay the foundation for another very strong year of growth in 2022," the letter reads.

Individual home buyers or small flipping businesses should take note, Teta said. 

"Considering [that] returns on each deal generally allow for the next one, flippers should be cautious in what they are paying for homes so as not to chase the market," Teta advised.