Did you hear the news about Zillow? The juggernaut real estate company that’s been buying houses left and right just decided to cease all of its house flipping operations. That’s right, if you didn’t put it together previously, Zillow was in the house flipping business. They weren’t just making offers for the sake of building a rental portfolio, they were also buying, fixing, and attempting to resell houses for a profit.
Turns out flipping houses isn’t as easy as it looks on paper. Trust me, I know this first hand. In fact, our new HGTV show, “Flipping Showdown,” (premiering November 17, 2021) completely pulls the curtain back on just how difficult flipping can be (sorry, shameless plug)!
Lack of profits
At the end of the day, Zillow found out that it just wasn’t profitable for them. Even with values skyrocketing over the last year, they struggled to make the model work. For one, Zillow learned what we’ve been feeling for the last several months: Labor and supply shortages are a real kick in the butt right now. For a house flipper, sitting on a property while you wait for material or crews to show up is like a slow, painful death to your bottom line.
Try sitting on 9,800 homes across the country just hoping that the next subcontractor will actually show up to the house. Or crossing your fingers that you can find windows, doors, or appliances sometime before the 6-month delivery window you’ve been given.
Interestingly, the chief executive of Zillow cited the most recent reason for exiting the flipping business was that they had “failed to predict the pace of home-price appreciation accurately.”
Zillow, the go-to source for valuing properties has admitted their algorithms don’t work? I guess I can’t say that I’m shocked. When was the last time you looked at a Zestimate and felt like it was accurate?
But beyond the Zestimate, Zillow actually built an entire business model of flipping houses based on what their “algorithm” perceived to be anticipated appreciation. I’ve flipped houses for years, and the fundamentals of flipping a house have always been about buying at a discount, doing a value-add renovation of some sort, and creating profit. Turns out Zillow’s model was essentially: Buy a house pretty darn close to market value, and then trust an algorithm to predict appreciation and a future profitable position. Talk about speculative!
Unfortunately, Zillow is currently sitting on 9,800 houses and has another 8,200 houses under contract to buy. From what analysts have determined, 2/3rds of those houses are already being sold for less than what they paid for them. In fact, Zillow is actually laying off 25% of its workforce as a result of its dramatic miscalculation.
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So what’s the takeaway here?
One, leave the house flipping to the house flippers. I know we make it look easy on TV, but the bottom line is that it’s not as easy as it looks. The magic that makes house-flipping work is honestly done offscreen— it’s all the time and effort that goes into finding houses at a big discount. That’s really where we make our money—not appreciation. Now, sometimes appreciation is a nice cherry on top, but it’s not a fundamental element to the model.
Two, clearly the real estate market cycle we’ve been in for the last few quarters is slowing down. If Zillow, the biggest real estate analytics company out there is dumping their inventory, clearly they see something on the horizon. Now, I’m certainly not making any predictions about what values are going to do, but seeing what’s happening at Zillow to me is perhaps cautionary at the least.
Maybe your neighbor sold their house this summer for twice as much as he or she paid for it four years ago and you’re thinking you’re just gonna hang on a little bit longer so you can hit the next highest watermark in the neighborhood? Nobody knows for sure, perhaps that ship has sailed.
Today, the more likely scenario is that Zillow actually bought your neighbor’s house and it’s about to go on the market for less than they paid for it!