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Zillow Seriously Miscalculated


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2021 Sep 18, 9:20pm   3,603 views  129 comments

by Malcolm   ➕follow (0)   💰tip ($0.10 in tips)  

Zillow's new business of flipping houses may have created this recent price surge in California. Unfortunately, that means that they have to be the high bidder in bidding wars. It is a very dangerous business model to be such a large player in a self perpetuated price bubble. I am seeing major discounting in San Diego and this example could signal a real problem for Zillow.



Note the current asking price. Note that it is a Zillow owned home.




Note what Zillow paid for it on July 9th.




Now note what they listed it at, the prices changes, and the current asking price.

How many million dollar homes can Zillow afford to buy, to rehab, and then to sell for less than they paid for it in the first place?

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1   Booger   2021 Sep 19, 3:52am  

Malcolm says
How many million dollar homes can Zillow afford to buy, to rehab, and then to sell for less than they paid for it in the first place?


Zillow isn't rehabbing these houses.
2   BayArea   2021 Sep 19, 5:47am  

No price drops here in the Tri Valley
3   Booger   2021 Sep 19, 6:00am  

I've stumbled across plenty of Zillow houses for sale for less than what Zillow paid for it. Those are the only Zillow houses that I would consider.
4   richwicks   2021 Sep 19, 6:14am  

Malcolm says
How many million dollar homes can Zillow afford to buy, to rehab, and then to sell for less than they paid for it in the first place?


Well, who are they getting their "loan" from? If they are getting a 0% rate from the Federal Reserve, they can basically do this forever - can't they?

The housing bubble is going to make kids scream for collectivism just so they can live in security. A shithole condo is 1 million bucks, and what kid making $50 an hour wants to have 20 years worth of debt to commit to that?

The greatest loss of freedom I'm aware of in and beyond my lifetime, is mobility tied to a property.
5   AmericanKulak   2021 Sep 19, 9:31am  

Malcolm says
Zillow's new business of flipping houses may have created this recent price surge in California. Unfortunately, that means that they have to be the high bidder in bidding wars. It is a very dangerous business model to be such a large player in a self perpetuated price bubble. I am seeing major discounting in San Diego and this example could signal a real problem for Zillow.


I saw a house like this in Seminole County, FL (Sanford, suburbs north of Orlando area). Zillow brought it and now the market is plateauing.

It's a hoot to see how much home prices have exploded here. There are 1970s manufactured homes on 1/4 acres, that sold in around $50k just 5 years ago... now asking $200k+. Usually with nothing but an updated floor. Some still have the original cabinets and kitchen appliances (so much for "Made in America sucks" when they are still working almost 50 years on).



Everybody knows it nuts, and almost nobody is buying, but there is little supply. I do notice, however, week by week, some sellers are getting nervous and starting to drop their prices $5-10k
6   GNL   2021 Sep 19, 9:47am  

richwicks says
Malcolm says
How many million dollar homes can Zillow afford to buy, to rehab, and then to sell for less than they paid for it in the first place?


Well, who are they getting their "loan" from? If they are getting a 0% rate from the Federal Reserve, they can basically do this forever - can't they?

The housing bubble is going to make kids scream for collectivism just so they can live in security. A shithole condo is 1 million bucks, and what kid making $50 an hour wants to have 20 years worth of debt to commit to that?

The greatest loss of freedom I'm aware of in and beyond my lifetime, is mobility tied to a property.

How can they do it forever if they sell for less than purchase price? Regardless if the rate is ZERO.

What % of "kids" are making $50/hr?
7   AmericanKulak   2021 Sep 19, 10:36am  

"Economics is a science!!! According to our pricing model..."
6 months later
"Bailout needed!!! Nobody could have seen this coming. We and the rest of the experts expected permanent plateaus...."
8   mell   2021 Sep 19, 10:39am  

MisdemeanorRebellionNoCoupForYou says
"Economics is a science!!! According to our pricing model..."
6 months later
"Bailout needed!!! Nobody could have seen this coming. We and the rest of the experts expected permanent plateaus...."


Lol same with the taking of Kabul. I just don't know if they're that fucking incompetent or do this on purpose to check how quickly they can change the narrative that we're in war with oceania.
9   Blue   2021 Sep 19, 10:53am  

richwicks says
The greatest loss of freedom I'm aware of in and beyond my lifetime, is mobility tied to a property.


This expense comes from the freedom to the banks. I do not see any change in the course with 0% interest(wealth transfer), that reflected at many places in the country within the last one year. In Bay Area I have seen went up more than 50% (80% bought by people I know at far east bay) particularly at all new construction places. Now the 30y loans becomes common. Not surprised to become 99y like Japan soon. Freedom is dead back to slavery like Patrick originally mentioned on this site.
10   Hircus   2021 Sep 19, 11:23am  

Interesting. In the Sacramento area, I filtered the search to show only zillow-owned homes

https://www.zillow.com/homes/for_sale/?searchQueryState=%7B%22mapBounds%22%3A%7B%22west%22%3A-121.65434868641316%2C%22east%22%3A-121.11464531727253%2C%22south%22%3A38.424397891442744%2C%22north%22%3A38.74440380412909%7D%2C%22isMapVisible%22%3Atrue%2C%22filterState%22%3A%7B%22price%22%3A%7B%22min%22%3A0%7D%2C%22con%22%3A%7B%22value%22%3Afalse%7D%2C%22apa%22%3A%7B%22value%22%3Afalse%7D%2C%22mf%22%3A%7B%22value%22%3Afalse%7D%2C%22tow%22%3A%7B%22value%22%3Afalse%7D%2C%22manu%22%3A%7B%22value%22%3Afalse%7D%2C%22sort%22%3A%7B%22value%22%3A%22globalrelevanceex%22%7D%2C%22apco%22%3A%7B%22value%22%3Afalse%7D%2C%22zo%22%3A%7B%22value%22%3Atrue%7D%7D%2C%22isListVisible%22%3Atrue%2C%22mapZoom%22%3A11%2C%22pagination%22%3A%7B%7D%7D

1) they own a decent # of homes in this area
2) I spot checked 10, and most of them were purchased in the past 2 months, "rehabbed", listed for ~10% more, followed by a price drop back down to about what they paid within a few weeks.

It's like they thought summer would see good appreciation, but they then realized the market turned around on them and now theyre panic selling.

It's possible they're selling some of these at a good profit though, as there doesn't seem to be an easy filter to show zillow-owned homes that they then sold. But I doubt many if they're dropping prices like this.

Even if they just sell the home at the price they paid, they still lose money due to transaction fees, as well as whatever it costs them to prepare/inspect/rehab the home. Many are purchased and relisted 1-6 weeks later, which makes me think they're actually doing non-trivial rehab work on some of these, while others are relisted the very next day. Well, on second thought, I suppose the month delay to relist could also be strategic sometimes - they have such great RE data that they might wait to list each home some # of weeks until its favorable, avoiding listing it when other similar homes are also on the market. Like, buy when there's 2-3 of the same house on the market, getting a low price due to competition, wait for the other 2 to sell, then relist now that they're selling the only home w/ this config.

Anyway, looks like prices are softening pretty well. I wonder how far this will go, especially with the new CA rule that makes it easier to build duplexes etc...
11   Waitup   2021 Sep 19, 12:04pm  

Well if they are holding off on buying houses for now, maybe they miscalculated. But if they are still buying, somethings not right
12   richwicks   2021 Sep 19, 12:17pm  

WineHorror1 says
What % of "kids" are making $50/hr?


My point exactly..

The housing market is completely impenetrable for many people and the vast majority of the young.
13   stfu   2021 Sep 19, 1:22pm  

The price Zillow "paid" for a property doesn't include a 6 - 12 % "rehab fee" that they charge the sellers. Granted they do some rehab but I don't believe it's anywhere near what they charge the sellers.

The process is (or was) : Zillow makes offer, buyer agrees to proceed. Zillow does thorough home inspection. At this point Zillow either passes on the property and gives this lead to a local "premium Zillow agent" (presuming the home owner is now a motivated seller) ... OR Zillow agrees to proceed and informs buyer of the rehab discount. In the first case the entire exercise was Zillow overpaying for a sales lead for their local premium agent and in the second case the buyer can still back out if they don't like the rehab discount. If the buyer proceeds the sales price stays at the original number and the rehab discount is not deducted from the selling price so it doesn't show up in the county data.

Now, consider this operation from Zillow's viewpoint. They really are not in the business of making a profit (and may never be). They are in the business of enriching insiders and major stake holders. Their real product is stock. Losses don't even matter to the exec's in the C-Suite. The share price is the only metric and as long as revenue continues to grow they are happy. They are thrilled to spend $1.50 for an additional $1.00 in revenue. Don't worry, it made perfect sense in Harvard business school. the Wizards will do their MBA debt to equity calculation and balance it out at 55% equity/ 45% debt and can do this nearly forever with no downside in a ZIRP world.

Did zillow have a nice little business plan once upon a time? You bet they did. For the cost of coding and data center rentals they were printing money. But their ceiling was fixed and they had to figure out how to 'leverage' their first mover advantage in order to grow revenue - otherwise the top level people would end up with a measly 9 figure net worth when they really deserved so much more. Now they are getting into areas that are guaranteed to lose money and at some point they will have to go to war with the MLS and the realtors who own it. Good luck with that.

I'm a big fan of Zillow because they've increased transparency. I was sorry to see them go public.
14   GNL   2021 Sep 19, 1:47pm  

stfu says
at some point they will have to go to war with the MLS and the realtors who own it. Good luck with that.

Tell me why you think they couldn't beat the MLS system.

They have the best customer facing site and finding a Realtor is as easy as clicking a button. Hell, you don't even have to be a Realtor to sell or list a home.
15   Malcolm   2021 Sep 19, 8:49pm  

stfu says
the rehab discount is not deducted from the selling price so it doesn't show up in the county data.


Very interesting post. Funnily enough, today I was thinking about things like future conflict of interest allegations. To address your point, I would literally expand on it and say to you to consider the implications of a company that sets the Zestimate is also the company buying or selling a home. Does this not reek of a conflict of interest?
16   GNL   2021 Sep 19, 8:56pm  

Malcolm says
Funnily enough, today I was thinking about things like future conflict of interest allegations. To address your point, I would literally expand on it and say to you to consider the implications of a company that sets the Zestimate is also the company buying or selling a home. Does this not reek of a conflict of interest?

Now THAT'S interesting.
17   Patrick   2021 Sep 19, 9:37pm  

WineHorror1 says
stfu says
at some point they will have to go to war with the MLS and the realtors who own it. Good luck with that.

Tell me why you think they couldn't beat the MLS system.

They have the best customer facing site and finding a Realtor is as easy as clicking a button. Hell, you don't even have to be a Realtor to sell or list a home.


I worked for Zillow for a year and a half.

They can't take over the MLS because their whole business model is selling sheep to wolves. That is, they get a commission for referring buyers to realtors.

If they try to muscle in on realtor turf, the realtors will scream bloody murder and Zillow will lose its customers (who are the realtors, not the buyers).

BTW, there are actually many many independent MLS systems with incompatible formats, not just one MLS. Zillow doesn't even have agreements with them all so there are plenty of houses you cannot find on Zillow.
18   zzyzzx   2021 Sep 20, 5:42am  

Fuck Zillow!
19   GNL   2021 Sep 20, 5:50am  

Patrick says
If they try to muscle in on realtor turf, the realtors will scream bloody murder and Zillow will lose its customers (who are realtors).

BTW, there are actually many many independent MLS systems with incompatible formats, not just one.

If Zillow becomes a broker...BAM. They'll have the one and only contiguous MLS in the country. Plus they don't need Realtors. They need real estate agents...there's a difference.

Not only that but if/when they list a large enough % of homes, they could decide to block any other MLS from displaying those listing photos. It could be quite a war. Plus the retail client is by far more familiar with Zillow AND they are much more used to "shopping" for a home all by themselves. Realtors aren't much more than door openers...access to view the home.
20   Malcolm   2021 Sep 20, 9:07am  

Hircus says
Interesting. In the Sacramento area, I filtered the search to show only zillow-owned homes


Wow, that is even more dramatic than my single listing. It really shows a pattern, concerning to some, but welcome news for others.

This is a nice example of greater fool theory from your search. They won't make these losses up in volume, that's for sure.

https://www.zillow.com/homedetails/3800-Graham-Isl-Rd-West-Sacramento-CA-95691/61224950_zpid/
21   Malcolm   2021 Sep 20, 9:10am  

It's like Zillow just became to real estate what Movie Pass became to the cinema business.
22   Malcolm   2021 Sep 20, 9:14am  

As usual, we aren't the only ones noticing this. This is interesting because we are getting some recent feedback from two other markets, and the observations are similar.

https://www.reddit.com/r/RealEstate/comments/od3mys/are_ibuyers_zillowopendooretc_severely_overpaying/
23   stfu   2021 Sep 20, 9:33am  

WineHorror1 says
If Zillow becomes a broker...BAM. They'll have the one and only contiguous MLS in the country. Plus they don't need Realtors. They need real estate agents...there's a difference.


I don't disagree with this. I would like to see them try.

It doesn't appear that Zillow execs share our confidence though.

Patrick is right. We are not Zillows customers nor end users. Look into Zillow's financials and you will see that almost all of their revenue is derived from ad sales for Property managers and mortgage lenders and also their Premier services to Real Estate Agents (not just realtors). In a sense the realtors already own Zillow even if they hate zillow at the same time.

And how would Zillow switch direction mid-stream? They would lose essentially ALL of their current revenue and replace it with, what? Consumer subscription service? ( I wouldn't pay it - I would just mosey on over to Redfin, Trulia, or Realtor.com). Charging a commission on real estate transactions? That might fly but can they survive the transition period? Also, how many agents really make money? Real Estate is a tough business because there is no moat and anyone who is unemployed can do it. I don't have any idea but would not be surprised if 80% of agents lose money at their job. Is this the business that Zillow really wants to be in versus their current money printing operation?

I think they are testing those waters with Zillow Offers but as you can probably gather it is not a money maker for them right now. While they are thrilled that flipping homes juices the revenue stream they can't expect to carry these losses indefinitely. I think that they knew that going in too which just makes them bad managers.

At the end of the day I think Zillow is past the point of making a better product/ service offering. I think they have opted for the easy money of grifting a fraction of a percent out of the real estate market.
24   Malcolm   2021 Sep 20, 10:04am  

stfu says
At the end of the day I think Zillow is past the point of making a better product/ service offering. I think they have opted for the easy money of grifting a fraction of a percent out of the real estate market.


Yes, in this situation though, they might learn that leverage can be a bitch when the market goes south.
25   Blue   2021 Sep 20, 12:25pm  

Watch for if 3 to 8T budget passes and still maintain 0% interest rates, its hard to think re will crash.
26   WookieMan   2021 Sep 20, 12:38pm  

WineHorror1 says
Plus the retail client is by far more familiar with Zillow AND they are much more used to "shopping" for a home all by themselves. Realtors aren't much more than door openers...access to view the home.

Door openers is true. I did most of the photography, but had my license and had to open doors at certain times. Those days are done though as far as the license goes and paying $2k/yr roughly to NAR/IAR/MLS.

Issue is NAR is basically a union. It's just a weird one that members are independent contractors, many of which have their own brokerage(s). You'd be talking of union busting probably one of the largest ones if not the largest one in the country. They just don't call themselves a union because of the IC status of their members and they don't and technically can't negotiate wages by law. But it's a union or lobby I suppose. Not real sure the difference since the money is just pissed away to those connected in the NAR.

I don't think you can break the NAR or MLS system. Realistically it does make sense to have one database of information so everything is consistent for the customers, agents, web designers, etc. When I'd market for the office I managed it was a pure pain in the ass. Trulia, Zillow, Craigslist, local sites and a whole shit load of other sites. Data input and uploads could be 3-4 hours per listing on all these various sites. Never sold a house itself off of those sources. It would be just to get buyer leads. Sold more during open houses and that was rare as well. At least here in IL/Chicago.
27   Malcolm   2021 Sep 20, 1:34pm  

Look at this gem. https://www.reddit.com/r/RealEstate/comments/od3mys/are_ibuyers_zillowopendooretc_severely_overpaying/

Back in May Zillow paid $912,700. After several price reductions, it is sitting for sale at $859K. The beauty this time is that there won't be a taxpayer funded bailout for Zillow even though this time around it is Zillow who will be holding an inflated portfolio, not the FDIC banks. So when one conceptualizes this crash compared to the last one, simply take out the subprime lenders who ended up with the houses, and substitute Zillow, who instead of foreclosing on subprime borrowers decided to behave like one.
29   Malcolm   2021 Sep 20, 1:49pm  

I realize I am beating a dead horse here, but people who paid $200k over asking are going to feel pretty dumb when they realize they were bidding against Zillow.
30   EBGuy   2021 Sep 20, 2:52pm  

Macolm, thanks for bringing this to our attention. And I thought all we had to worry about was small time, local syndicates flipping.
I just noticed that Softbank backed Compass, Inc had an IPO earlier this year. Looks like Real Estate may lead us down again.
Let’s start with the positive for Compass: Its new $7.4 billion market cap is roughly four times larger than that of Realogy, a holding company that owns Century 21, Coldwell Banker, and Corcoran, among others, and which has twice as much revenue as Compass. This valuation suggests that the mere possibility of disrupting the multitrillion-dollar housing market, at a moment when the competition for homes couldn’t be hotter, was enough to make investors want a piece of Compass at a premium.
31   cisTits   2021 Sep 20, 3:17pm  

Malcolm says
Look at this gem. https://www.reddit.com/r/RealEstate/comments/od3mys/are_ibuyers_zillowopendooretc_severely_overpaying/

Back in May Zillow paid $912,700. After several price reductions, it is sitting for sale at $859K. The beauty this time is that there won't be a taxpayer funded bailout for Zillow even though this time around it is Zillow who will be holding an inflated portfolio, not the FDIC banks. So when one conceptualizes this crash compared to the last one, simply take out the subprime lenders who ended up with the houses, and substitute Zillow, who instead of foreclosing on subprime borrowers decided to behave like one.


..except Zillow is not constrained by REO regulations like bank foreclosed properties are. They can rehab them and then rent them out. They can even create a REIT and IPO it.
32   Booger   2021 Sep 20, 3:22pm  

I get hard every time I hear about Zillow listing a house for sale at a loss.
33   WookieMan   2021 Sep 20, 3:24pm  

EBGuy says
Macolm, thanks for bringing this to our attention. And I thought all we had to worry about was small time, local syndicates flipping.

CA is a different animal I don't understand, but I'd avoid most real estate nationwide if you can unless you know it's a deal or a rehab you can handle.

My ranch in rural IL, is worth of $300k now. Bought for $81k in 2013/14ish. Super high property taxes here (not mine). I'd sell, but I'd be buying into an inflated market and taking on $10k/yr property taxes for a $400-500k property.

Oldest is 11. Youngest 8. I'm 6-7 years from not needing the extra space for the kids and we manage now. And yes, they will move out. I'm saying fuck it. We'll be home 2 weeks for October as is, so what's the point? I'd rather suck it up and move out of state once the kids are gone. 7 years in a new to me home seems stupid when we'll likely pay this one off in that time. I'm sick of debt I can't pay off monthly and I have minimal. It's more lucrative to invest it though than to pay the debt off.
34   Malcolm   2021 Sep 20, 4:54pm  

HunterTits says
..except Zillow is not constrained by REO regulations like bank foreclosed properties are. They can rehab them and then rent them out. They can even create a REIT and IPO it.


Yes, they could, they could do anything that makes business sense. No, they don't have a regulator telling them they have to sell a certain number to keep to some ratio like a bank, but in their case, the market will force it. Consider all the debt servicing and whether it makes sense to rent a million dollar house out.
35   cisTits   2021 Sep 20, 7:46pm  

Malcolm says
Consider all the debt servicing and whether it makes sense to rent a million dollar house out.


How do you know how they are financing that operation? :)

Besides, all they need is cash flow to stay afloat to operate for a while.
36   Malcolm   2021 Sep 21, 9:06am  

HunterTits says
How do you know how they are financing that operation? :)

Besides, all they need is cash flow to stay afloat to operate for a while.


Financing or not is irrelevant. It is still a losing proposition.

Exactly, all they need is cash flow to stay afloat, not a good situation when it is a cash drain.
37   Malcolm   2021 Sep 21, 9:51am  

"Last year, according to Zillow’s public reports, its home flipping business lost $66.6 million. Independent analysis indicates it’s a lot more. A study of Zillow’s fourth-quarter reports by the Real Estate Technology Center at the University of Colorado shows, after operational expenses, Zillow lost $72,000 for every home it purchased and sold. That’s an improvement according to Mike DelPret, a resident scholar at the Technology Center, who estimates Zillow lost $129,000 per house in the third quarter."

Wow! this year will probably be even worse.

https://www.mtdemocrat.com/business-real-estate/zillow-looses-millions-on-house-flipping-venture/
38   HeadSet   2021 Sep 21, 5:12pm  

Malcolm says
Real Estate Technology Center at the University of Colorado

Exactly what is Real Estate "Technology?" Stuff like profit/loss and investments falls well within the scope of plain old Accounting.
39   Blue   2021 Sep 21, 5:26pm  

"Technology?" - heard that they are using "AI" to extract every last$ from every shack.
40   EBGuy   2021 Sep 21, 5:42pm  

Malcolm says
Wow! this year will probably be even worse.

Maybe they're gong with the Change Bank model.
“How do you make money doing this?”
The answer is simple: Volume. That’s what we do.

Innovation never sleeps...

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