2018 was the start of Zillow flipping homes, and many investors across the nation began speculating and worrying about the new competition. Zillow CEO Richard Barton had high hopes when he forecasted Zillow flipping 5,000 homes a month by 2024."
So how did a large successful company with deep pockets like Zillow miss their mark and their ibuying house flipping business flop? By not having accurate property valuation, an experienced rehab team, fast flip turnaround, and multiple exit strategies.
The mission statement had changed, however, the company wasn't
restructured to support the new, flipping homes strategy. Did Zillow
have an acquisition team, national contractors, and discounts from major suppliers in
place and ready to go? No, they did not. But that did not stop Zillow
from quickly jumping in and frantically buying properties to flip all over the
Now Zillow has announced that it has taken a beating trying to flip houses with 2/3 of the properties it bought underwater. And most real estate flippers, rehabbers, and investors are snickering.
Zillow projects more than a $550 million loss with a 1/4 of its staff to be laid off. KeyBanc analyst Edward Yruma analyzed 650 which represents about 1/5 of the properties Zillow owns and discovered 66% listed below the purchase price and with an average discount of 4.5%. The cities with the highest percentage of underwater properties held by Zillow are San Diego at 94.3%, Phoenix at 93.4%, and Mesa, Ariz. at 92.6%.
What made Zillow think they could pull off a complicated real estate strategy like flipping houses anyway? Especially since Zillow cannot get their Zestimate to reflect the actual current market value, no wonder they overpaid when purchasing properties and underestimated the (ARV) after repaired value and resell price.
Had Zillow ever heard of the 70% rule? Or (MAO) Maximum Allowable Offer? The first step to a successful house flip is accurate property evaluation then buying the property at a deep discount, which means below market value.
Many investors and agents noticed Zillow was having a problem with accurately evaluating properties and saw an opportunity. Kat Sullivan, a Colorado real estate agent said, "I helped my clients sell their home to Zillow at the end of August. The Z offer was $643,000, my market analysis showed it was worth 590,000 tops. I told them to jump on it and move twice if needed as this was too good to pass up and Zillow’s algorithms had messed up. We closed, Z just put it on the market 3 weeks ago for $622,000, the home sat for 21 days with no offers, they just reduced it to $599,900 and went under contract today. They’re underwater at least $42,000 on this one in northern COLO. Goes to show you the algos aren’t always so smart. But I was and my clients are THRILLED."
Buying, rehabbing, and flipping properties is not for the faint of heart.
Barbara Corcoran pointed out, "He never predicted how difficult it is to renovate a home and close it and put it back for sale." read the complete article
Everyone watches the HGTV shows Property Brothers, Fix or Flop, Fixer to Fabulous, and thinks of flipping as a fun and easy way to invest in real estate. None of them realize; the intricate process of flipping a property, amount of organization, or the team needed to evaluate properties, closing and holding costs, rehab amount and materials, and project management to complete the rehab on time and budget.
Zillow had an endless supply of sellers and buyers available on its platforms and ibuying site, so why was Zillow flipping homes a failure? Because Zillow did not have a national rehab team in place and was ready to go. Instead, Zillow thought it could use local contractors and rehabbers to complete the repairs on the properties.
Without preexisting relationships or a local presence, it's challenging under the best of circumstances to complete a long-distance fix and flip. Zillow found this out the hard way, with slow rehab turnaround and a large number of their properties not completed. A better alternative would have been to partner with national contractors and supply companies for the repairs and materials. The partnerships would have provided a workforce, and consistency in rehab quality and pricing for labor and materials.
So, if Zillow flipping homes is a thing of the past, what are they doing with those underwater properties? Currently, Zillow has homes on the market below value; the properties are clean but most are not rehabbed. How long can Zillow hold, and how low can it discount properties and take a loss, or can they regroup and find a solution using a different exit strategy?
Could Zillow reposition their properties into the rental market and provide tenants with affordable homes for the next few years and then slowly sell off their inventory as the value of the properties appreciate? And have they learned the hard lessons that all successful rehabbers, flippers, and investors know- buy below market value, be prepared with a team of professionals, and quickly execute the house flipping strategy.