Like with most market making operations, your main risk is adverse selection. I strongly suspect that this was what killed the zillow operation. Suppose zillow is on average right with their house price prediction, but in 50% of cases they offer 10% too much and in 50% of cases they offer 10% too little. In their backtest this will show as a fair price prediction. However in reality, they will mostly end up buying the houses where they overpay 10%. Only their bad quotes are being hit so they keep consistently overpaying for properties.

I like this point, since it does resonate with what much of the anecdotal evidence was, i.e., Zillow offering too much for houses around the country. The high offers would be the ones accepted (and memorable), meaning Zillow would tend to over pay for houses (leading to the rut they are in).