Zillow Ignored The Two Most Important Rules In House Flipping

Zillow showed the world how to create a multi-million dollar “train wreck” in the real estate industry. They forgot about the human element – experience and judgment. First they paid too much for the houses they purchased and then they spent too much on repair and renovation. It is a sure-fire formula for losing money in the real estate business.

It was a spectacular “train wreck“. An explosion of artificial intelligence, computer analysis, and too much human optimism that resulted in Zillow’s iBuyer business, named Zillow Offers, to fall to Earth in a heap of smoldering and broken dreams. The company had to lay off 25% of its workforce and its stock price was hammered. On October 25, 2021 Zillow’s stock price was at $103. Seven months later it is sitting at $39, noted Houston Home Buyers based in the Houston metro area. Home sellers in Houston were the winners because they sold their homes at above market prices to Zillow. The losers are the local real estate investors who were out-bid by Zillow.

Many houses in Houston have concrete slab foundation issues.

Although other divisions of Zillow, such as the home-listing and advertising, have been profitable the Zillow Offers division racked up a $881 million loss in 2021. Zillow declared a consolidated net loss in 2021 of $528 million. 

Zillow has become a huge factor in the real estate business in the United States.  It is an “aggregator” in that it combines data from different sources and present the data in their format. They are the largest residential real estate coverage business in the country with a huge and well-known internet presence. They also estimate the value of houses across the United States using their algorithms and machine learning but Houston real estate experts have little confidence in these estimates.

What Was Zillow Offers?

Zillow Offers was basically a house renovation and resale company, commonly referred to as “flippers” or “home-flipping”. Their goal was to buy houses, make the repairs and renovations, and then sell the houses to retail buyers at a profit. Unfortunately for Zillow they found themselves owning thousands of houses that were worth less than their investments in the houses. Real estate investors who find themselves in this position usually have three options as follows.

  1. sell the house at a loss
  2. rent the house and hope that house values improve over time
  3. hold a vacant house hoping that values improve while having to pay for taxes and insurance

So What Happened With Zillow Offers?

There are some very obvious reasons Zillow Offers was losing money. Real estate investors and realtors could see the three year train wreck in slow motion. The major flaws in their strategy are as follows.

The Business Plan

It was either a poor plan or it was a good plan that was poorly executed. Most real estate critics believe it was a poor plan from the start.

They Paid Too Much For The Houses

They purchased many houses in Houston. Making the highest offer for a house usually will result in a contract for sale but it is no guarantee for a house-flipping profit. Local real estate investors know that their success in having a profitable real estate deal begins with a purchase price that has room for at least six months of holding time plus a realtor’s commission at the time of sale.

They Underestimated The Cost Of Repairs And Renovations

Every city in the United States has a different “Cost of Living” and real estate costs in Houston are different from other cities.

Difficulty Of Hiring Contractors

They underestimated the difficulty of hiring contractors in local markets. Finding reliable and fairly priced contractors is one of the keys to the success of a real estate investor. Every city, including Houston, is a challenge because contractor relationships are usually built over time.

Seasonal Trends

They failed to account for the seasonal nature of the real estate industry. For example, the last six weeks of the year are the slowest because people are busy with Thanksgiving and Christmas.

Trying To Sell Over-Priced Houses

With their higher purchase price and generally higher repair/renovation expenses they had to sell their houses at prices that were higher than the market.  Home buyers in Houston simply were not interested in buying over-priced houses.

House renovations often include beautiful bathtubs.

What Is Next For Home Sellers and Home Buyers in Houston

According to the owner of Houston Home Buyers, Raymond Campbell, the residential real estate market in Houston will continue to experiment with artificial intelligence in an effort to “standardize” the home selling and home buying process. However, the list of variables is long and a successful real estate transaction that includes repairs and renovation requires individuals with a history of home buying experience and renovation experience. There are a lot of “moving parts” and any one of them can turn a profitable scenario into a losing one. House-flipping is not easy and plenty of people have lost money and left the profession.

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