What has Zillow Taught Us

Zillow was one of the many iBuyers looking to flip homes on a large, nationwide scale.  Their model was simple:

1. Reach out to Sellers directly and buy their properties, collecting approximately 7% in fees.
2. Make some improvements (if any).
3. Sell on the general market.

The intention was to use their data analytics, ride the appreciation train, and make money off of their other services such as the escrow and title companies.

The problem is that it failed miserably.  They lost hundreds of millions of dollars and ended the program and cutting 25% of their staff.

So, what can we all learn from Zillow’s debacle?  Here are three takeaways:

1. The first step to flipping a home is the buy.  They were paying full market value, regardless of condition.  That meant no margin from the get-go.  As an experiment, I submitted one of my rentals to see what they would offer.  They responded that they would give me a set number that was close enough to where if I were the average consumer, it would make sense to sell to them.  However, there is no way they could make money on it because it was already move in condition.  Had they proceeded with the purchase, they would have lost out.
2. Their Zestimate is inaccurate.  In Southern California, I’ve seen the numbers off by tens of thousands of dollars.  This is because Zillow can’t factor in details that are more emotional.  This can include views, condition, the topography of land, etc. 
3. A good investor doesn’t account for appreciation with flipping.  Many good investors look at recent sales to determine the after-rehab value (commonly known as the “ARV”).  Because the market changes day by day, many investors take a snapshot in time and use that to determine the value.  Making assumptions on how the home is going to appreciate over the next three months is too small of a window to calculate. 
4. This is not likely an indication of market crash.  Zillow pulling out of the flipping business has brought up this question.  However, keep in mind Zillow owned about 7,000 homes when they ended the program that were still on the market.  Although that is a lot of homes, it isn’t when you factor in that it is spread across the 3,006 counties in the United States.  They likely pulled out because they kept losing money.  It was a business decision to end this process, not necessarily the market.

This is not going to be the end of Zillow.  They tried something new, and it didn’t work for them.  They are a technology company in the real estate sector.  There is plenty of opportunity for them. It is important as an agent and investor to keep an eye out and to pivot when necessary.