Zillow's House Flipping Disaster Explained
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- Опубликовано: 7 ноя 2021
- Real estate company Zillow recently announced it is shutting down its house flipping unit Zillow Offers. They currently have thousands of homes in their inventory which they will have to dump at fire sale prices which will lead to hundreds of millions of dollars in looses. The stock price fell ~35% on the news wiping out nearly $10 billion of market cap. In this video we go over what Zillow's house flipping business was, why it failed, and what the future prospects is for the company.
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i cannot imagine buying a house without seeing the real product
You're in for a shock when you learn about China's housing market
Lol it’s common in Asia where you wait 4 years for your home to be built
Stupidity at its finest lol
I'm a journeyman carpenter and I have to say that it is completely entirely totally IMPOSSIBLE to flip a house by some algorithm. Each house has to be inspected by a HUMAN BEING to check and test all aspects of the house. Pipes, roofs, wires, foundations.....the list is endless of potential issues that can be detrimental to the bottom line.
Yes, you need a professional builder to inspect and assess, a reliable group of tradesmen, plumbers, electricians, carpenters etc and to be able to get in and out quickly to make a profit. Finance needs to be controlled ruthlessly , that in itself means that most "flips" on this scale need to be similar in scope to try to standardise what you put in the house. and you need everything to go right.
Which is why they are teaming up with Elon Musk to build the Inspecto-bot 5000.
Boom. Problem solved.
@@jeffsetter213 LOL!
Imagine how awesome that was for sellers to unload their garbage onto Zillow? I wish I knew about this. Anyone who's ever worked any trade would immediately understand how impossible flipping on a large scale would be. It's sketchy in the best of times.
@@jeffsetter213 nice shouldn't take mure than 20 years and billions of dollars to develop.
I'm glad that this didn't work out. If it did they'd just squeeze out more profits by making housing prices rise even more than they already do, theoretically as much as possible if they did it "right"
Nobody but Zillow actually believes those Zestimates are accurate. Nobody.
Yep and they backed fire on them
I looked up the neighborhood I grew up in the '60s. Houses were Zestimated in the $170K range. But 3 of them sold in the past 12 months for less than $80K. And even those 3 are still Zestimated around $170K. Quite the algorithm they have...
If it was in China before the Evergrande crisis, Zillow could have made millions if not billions of profits simply because everything really does go up due to speculation and lack of alternative investment vehicle.
Even Zillow admits their Zestimates have an error margin of +/- 10-20% lol
I agree, used Zillow a bit when I was looking for home half decade ago and took very much with a grain of salt. Noticed something was up when price estimates seemed to fluctuate randomly for no reason.
The guy across the street sold his house to Zillow. It was a 5bd4bth 2600sqft house on 3/4 Acre in Austin Texas. They gave him something like 640k for it. Spent months fixing dumb shit like the counters and floors. Didn't touch the roof or other issues the house actually had.
The house is in a low side of the lot and gets 8-10 inches of water in the front yard and porch when it rains. The house is listed for 949k and has been on the market for 60+ days.
They prolly wont even sell for 800 k.
one thing that I'm surprised more people aren't commenting on is that by having a business that bought houses, it implicitly creates a conflict of interest, because you just end up seeing the houses that zillow themselves decided not to buy; we just get the scraps.
I am even more surprised that people dont see that zillow has been pumping up housing prices for a few years
I'm glad it didn't work out. I wouldn't want a company to have a major influence on what I can sell my house for that also has an interest in buying houses low and reselling for high. Totally slimy.
Typically this scheme is called market, or price fixing. This is an illegal form of racketeering.
Large companies should be banned from buying houses. This is a mess that could have been avoided!
Yep!!! What once was for families has gone corporate...Crazy times we are living in 🥷🏾
They were so arrogant of their algorithm that they thought they could game the system, but got gamed on instead.
I wonder how many insiders had Zillow buy their home for above market value. Surely someone knew what was going on and took advantage.
How exactly would "an insider" have more information than the public on such an obvious thing, like I saw a house sell for 110k when it was purchased in 2016 for 40k
They didn't need to be industry insiders. The internet is filled with stories if ordinary people getting high offers from zillow and laughing all the way to the bank. You don't need to be an industry insider to know what your house is worth.
So, did they actually try to flip 10 houses first? And maybe 100 after that? Or they decided to go all-in and see if it is going to work? Nice business scaling.
YOLO
@@Hawking1969 😂
Given the housing market, they probably could’ve done so and still gotten good results from poor software
In a true WallStreetBets move, they went all-in being leveraged to the tits.
All in baby, WSB style!
Crazy - it’s like the folks @ Zillow watched a bunch of HGTV shows & said, yeah we can do this on a national level. What a bunch of clowns!
I wonder if Zillow had considered all the subjective elements that go into buying a house, things like reputation and history. People won't want to buy a house if the neighbors are loud and annoying or if a major crime took place in it years ago or if superstitious neighbors think it's haunted or cursed. Can their algorithms account for that?
What a great point, the problem with all these ibuyers. No real world connection
I wouldnt mind living in a murder house. I could cope with the screams
It can account for anything that can be counted and has been by someone willing to disperse of information. I'm sure the algorithm can account for it. The problem is that they'd have no idea how to fix them all. They probably paid contractors to do the work and didn't have the decision makers on site to evaluate each situation properly.
It warms my heart to know that Zillow’s bots royally fucked them here. Not to mention it’s an ugly look when a corporation is trying to make a buck flipping single family homes during a time of already skyrocketing housing costs.
Flipping is ok, it's the giant funds that bought in '08 on who then rent that hurts society.
@@seandelaney1700 How?
Built on a premise that all home prices will rise forever...
Never mind Zillow. Tell me how new giant apartment buildings in southern CA can be profitable with 15% occupancy rates.
That CEO is a looser, he is pulling the plug already???? Come on man, you dont pull the plug until you loose $30-40 Billion. Look at all the softbank companies!! DUH!!!!
He was so nervous on CNBC talking like a true moron that he is. Can’t wait for this garbage company to become another Stain in the history books!
The CEO looks like the kind of guy who thinks he knows everything.
I’m sure he would disagree with you completely not realizing the fact that by doing so he validated your point. 😂
Zillow has my house listed as having a fireplace. After 10 years, I still haven't found it.
Lol
It's not a disaster. They just won't double their money like they thought. They can sell them at normal prices.
They bought them over market price. Sometimes by a lot
This is honestly so good for the overall health of the market. The more stocks like peloton Snapchat and moderna tank the better my TQQQ position feels
Unfortunately it's not. This detail wasn't covered here, but the vast majority of Zillow's houses are being offloaded for pennies on the dollar hundreds at a time to large institutional investors. Very little of Zillow's inventory is being put up for sale on retail markets where it could have had a healthy effect on the market, increasing supply and making homes more affordable. The incompetence of Zillow's move is covered in much more detail on the Heresy Financial channel, explaining why this will have a poor overall effect on the market as thousands more homes are controlled by large institutional investors looking to be permanent landlords.
@@anuzis I’m speaking just strictly stock market. These stocks had no reason to trade so high. Them coming back down to reality is good for broad based indexes
@@anuzis no, they sell 15% to institutions and 85% to retail through mls
@@anuzis That’s crazy to hear but I believe you…. My dad is a contractor and does inspections for Zillow. I went with him a couple months ago, and there were no signs outside any of the houses we looked at that said it was up for sale. He has been staying very busy recently doing these inspections for Zillow… they must have a ton of houses or something.
@Michael Anuzis not correct. Look in Sacramento a hundred homes for sale listed by zillow. They are holding on to their homes. If they sell them for pennies on the dollar they will tank the entire market causing foreclosures..
What? They couldn't predict the future? Shocking!!
Eisman called it back in 2018 and he hit the nail on the head. Barton (Zillow's CEO who came up with this bright idea) thought he could outsmart the real estate industry with some silly ass math formula and computer program, and it blew up in his face. Now there's 70,000 homes out there that Zillow has got to unload, probably at below market values just to pad their losses, and those markets are going to get clobbered in terms of relative home value, sort of like a miniature version of the 2008-9 debacle when all the foreclosures came on the market. Oh, and there's a bunch of Zillow folks who got laid off over this. Take home lesson? Real estate is a local business dictated by local trends, local supply and local demand, as well as numerous other variables unique to a region that do not apply elsewhere. This is why you have real estate agents- those people are trained to operate within their respective markets and understand these things. I work as a realtor in Mississippi, and even in this relatively low population state, there are numerous regions with their own individual markets that are completely independent of each other.
As a lawyer who has made more money in law school flipping than the first 7 years (maybe more after tax) of my law career. This was self evidently not going to work without excellent ai that had general intelligence.
I don't know what Zillow was thinking. Their entire core business model was to make the real estate market more transparent and efficient. Which they did. But then they came in and said "hmm, this market it not very efficient, we can play the spread here by flipping houses", which just seems to undermine their core business?
I think they got caught up chasing the bright shiny object that is *risk minimisation through diversification*. This wonderful factor when thrown into an appropriately designed spreadsheet, can turbocharge securities.
Zillows story is so bizarre. I understand the idea of using an algorithm but for it to be so flawed. Especially for a company like Zillow who specialize in home sales. They have so much data available to them. Just a crazy situation.
When you know NOTHING about an industry, how can you possibly have a "narrow margin of error"?
I am so glad they flopped on this. They get what they deserve.
I hope Zillow goes under. They messed with too many families hopes of owning a home. Now there leaving families unemployed. Evil company
I'd rather see Amazon crumble
@@milkboi2386 love Amazon….
This is a really good explanation! Thank you! Sharing ....
Amazing breakdown!
Always great content thanks!
Big Business Shooting from the hip looks cool AF though
I love your videos so much, you do such a good job going in-debth researching the subjects for your videos, you are genuinely underrated
It’s like the Zillow CEO went to one of those free real estate seminars back in 2018 and got hooked
Excellent video
So in English…..Zillow tried to corner the market by buying up all available housing in that area and then tried to inflate the prices to their liking. Flipping a bunch of house hasn’t been profitable for over a decade since the fed changed the rules.
mmm i sold my house to zillow lol we havnt closed but we have signed contract
Sounds like you may have got a good deal.
If they fleeced you and got a bargain themselves they probably wouldn't be leaving the business, right?
@@jonahfaulkner1211 yea I got a sweet deal and don’t have to close until my new home is done with construction.
Sounds like you sold them a bag. Great job. You can also short the stock.
@@anthonyyoung6489 savage lmfao
@@anthonyyoung6489love this energy
One of my favorite subs!!!
The wisest thing that should be on every wise individual's list is to invest in different stream of income and don't depend on the government to bring in money especially now the pandemic is hitting the economy
you are definitely right , waiting on the government is a big waste
Investments are the stepping Stones to success especially if you been guided by a professional
Investing is good but investing in the right thing is the actual key to success . who is your pro ?
There are so many investment out there but if profits must be considered then not all investments are good to go into.
I trade with Tamara Diane Hagan
It's sad that they now have to lay off a quarter of their employees over this. I'm betting that the people who came up with the flipping business model, however, will remain with the company.
They probably got promoted.
@@jmitterii2 Yep, failing upward.
CEO should resign in shame
Techie stepped into the real world.....he didn't stay in his lane....
Using OTHER PEOPLE'S money is easy. Giving it back is harder!!
Greed blinds people and make them stupid, that`s what happens to Zillow.
If you’re going to inflate home values you are supposed to use that to trick the customers not yourself 🤣
Good I cannot stand him
Tech egos run amok. The environmental intangibles (steep driveway, interstate in the backyard, power lines, etc.) aren't data points that can plug into an algorithm.
Good explanation.
real estate or the stock market which is the best investment?
I would definitely say real estate at first, and would be the best investment overall. but investing in properties you don’t live in takes physical effort.. where investing in the computer is passive and becoming very lucrative.
stock and its like is becoming really lucrative, but its not lucrative for some people making rookie mistakes and loosing money lol .
@@johnclinton8710 < I invest across the top markets but not by myself tho. i follow the trades of "Katherine Rae Lobe' . She is a popular broker you might have heard of. I can correctly say she's worth her salt as a financial adviser as her diversification skils are top notch/ I say because i see that in her results as my portfolio grows by averages of 10 to 15% on a monthly basis,>
@@amandedora9047 By following trades do you mean copying her trades, as is done in etoro? Are you giving her your money or the money stays in your account? I have heard about copying trades but have not looked into it but i have an idea of what it is.
@@justineddy4517 Yea exactly. My money stays right in my account. that's the idea behind copy trading. my account just mirrors her trades in realtime
It barely couldn't have happen to a more deserving company than Zillow.
Zillow was founded and run by technology people - not a single real estate professional - what could possibly go wrong?
The business model was flawed:
They linked county records of sales to the homes sold. They took that and extrapolated over all the neighborhoods within the subdiv - it may work in some condos in a multi-storied building. However, it does NOT work for sub-divisions, and definitely not for individual homes.
Secondly, Z started using the inquiries from the public as "leads" to the REALTORS. As such REALTORS would pay for ZIP CODES. And you can guess that expensive ZIP CODES came with a huge price. And many REALTORS shared the same ZIP code. They would guarantee that by paying for the lead service, you would get example: 1,000 impressions a month. Impressions they would say led to talking opportunities with potential clients.
It didn't work! Every quarter or so they would raise the price of the service, and since an average REALTOR only makes about $60-100K a year, there's no room to keep spending money uselessly. And that's how Z income came closer to zero net gain every year.
Initially, their pricing models generated by regression analysis were "behind the market price" in many cases about 3-4 months. Title companies would send their recorded sales once a week to the county. In turn, the county would have a backlog of about 4-8 weeks of displaying the sale on public records.
FF to more recent handling of record-keeping, as websites were improved by the counties, there was a "daily" transmission of sales, directly into the county website, and no interaction from the county staff. It serves well for efficiency, however, software and systems cost money, and only wealthy counties can budget for this expense.
As such the richer counties became more predictable in forwarding pricing and the big Z software started using scalable forward pricing based on the past price.
Any well-educated real estate professional can advise you that the pulse of the market is NOT past sales, it is a good reference point - what is more accurate for pricing is PENDING sales. And therein is the problem. Pending sales are highly unique, in that you don't know what the final sale will be because the deals are made within that number. A pending sale is just a REALTOR putting the home pending and cannot be shown. So if the price was advertised for say $350,000, the REALTOR puts it pending when under contract. The final sale number could be 10-15% lower of the advertised price depending on the agreement between buyer and seller.
Bottom line: Work with professionals, it comes with a hefty price of a commission, however, everyone is entitled to earn a living.
Well that explains a lot. Seen a few of their flipped houses and they seemed incredibly overpriced to me.
Awesome video
I don't get it. They were a sillyCon valley high growth company that lost money
That should be a trillion dollar valuation
Housing should not be a market, it should be a home, and a place to raise a family. When we view housing as a commodity, we diminish all of society.
Zillow has no clue. If you look even at your local zip and find home values. Cookie cutter floor plans can vary. In mine....the exact same home plan 2 houses apart. One is valued at $690K and the other $818k. How can they get it so wrong!! Frankly....the few homes that have sold in last 3mons are $845k + -.
Love it!
So instead of concentrating on a predictable but profitable business with steady pool of customers, they borrowed billions to get into a volatile side venture they had little understanding of, no doubt to please the ever greedy investors unsatisfied with just making consistent returns. Where have I heard this story before.
I missed them buying my house for 418k, I had it listed for only 375k lol. Then the whole scheme collapsed!!! Uggg
Silicon Valley jumping into the house flipping business.......brilliant!
The TAM thing is just a distraction by many CEOs. At the end of the day, if your business model isn't viable, then it doesn't matter. Profits are what matter. You're not going to make it up on volume if you're not making a single cent on each sale!
I also seen Zillow driving home prices up. I seen couple of neighborhoods go up in price by 100 to 150k in 3-6 month. Most of the homes were bought buy Zillow and accouple of other like wise companies. Out here in CA
Yep. Technically illegal.
they actually thought the market was going up forever
Currently trying to buy a house. There's no way to even look at a house before it's sold. You need to make a full or over full asking price offer if you want a chance at getting the house sight unseen.
I got one word for Zillow. Hubris
For the company writes off the houses today and sits on them for a few months or years the returns will probably be very good. This could lead to long term profit for short term loss
They still have to pay taxes, utilities and maintenance. A house that isn't lived it is a timebomb for infestation, leaks, whatever you please. Plus you still have to mow the lawn...plus the marker. After 08 it took me 10 years to sell a house I owned at a profit. Some places taxes are 5-10k per year.
@@jessicabixler1658 oh!! I never accouted the property taxes because here in india you only have to pay the taxes once while buying the house/property and nothing after that. Property taxes are really that high in USA?
My opinion is a high-level overview at best, but it seems like any time the word "tech" or "disruption" is perceived as either the core or the lever used to differentiate a company in an industry/market (whether it's true or not), a good portion of them end up committing too much to either providing an all-encompassing platform of related services or trying to fix something that isn't broken. I guess I'm just saying, that "growth" moniker on some of these companies is making them focus less on their strengths and willing to take risks that may not be worth it just to impress investors or keep that "constant growth" persona alive.
Flipping houses via some hokey computer algorithm is an astonishingly short-sighted approach and only employed by someone who doesn't know the first thing about what putting a structurally sound, fully-functional home together actually entails. Way, WAY too many factors involved.
Growth at all costs reaching it's inevitable conclusion in my opinion.
They simply needed to hire a team to inspect each flip to see what they would actually have to invest in it.
That's not scale-able.
That almost makes it not worth it. How is the manager getting paid.
Let’s Go, Zillow!!
To be successful, you probably have to have done it before - if you have never flipped a house, you probably can't write an algorithim that is realistic
Predicting house prices is like predicting stock prices in the next 6 months. Good Luck!
Definitely bought this dip👀
They went from clicking to brick and mortar
the CEO will always make money
It's the axiom that applies in most cases in life- there are no shortcuts
Why would someone consider the stock, even cheaper, with the current management? 7:30 not understanding the risks of your own business is not something you would want as management as an investor.
Wonder how much $$ they cost retail home buyers that were looking to own a home to live in and raise a family. Zillow offers bid prices up. hope they lose another 10 billion $$ next quarter.
This is called racketeering. Price fixing and manipulation.
Another issue is COVID where the labor and material shortage also drags Zillow's turnaround time. If it wasn't Covid, I believe Zillow will still be in the flipping business or gradually quitting it.
The pandemic exposed many flaws in such a model. I also think the Zillow website needs many changes to make it more user-friendly.
Great episode man 👌🏼👌🏼
Where are the Reddit meme videos? Haven’t seen one in many weeks. One of the reasons I subbed. I do like this content as well
We are in a bubble that when it pops; it’s going to be ugly for valuations for a long time. The next 20 years; maintenance of purchasing power is really tough.
This is so random but can someone explain wtf the stock footage at 8:50 is?? Idk why I've become obsessed with it but the more I look the more confused I am. It looks like a neighborhood full of absolutely massive houses, mansions, except they're crammed in on relatively tiny lots despite there being a ton of surrounding space, they are all nearly identical, and they don't even have their own pools/courts/amenities houses that size should have. WHAT IS THIS PLACE
Debacle is the right word
Wow they went all in, you’d think they’d do a small pilot program first
If they were looking for new ventures based on their pricing models they should have opened a consultancy. This venture screams elite arrogance, thinking that the tradesmen and middle class don't know anything they don't.
ultimate bagholder
They over invested by doing renovations and flipping at higher prices to pay off the bills of renovation.
Zillow was trying at *front running* home purchases and even failed at that. There are some lessons to learn here.
their hubris also helped drive up home prices artificially in certain markets, hurting consumers - now local property owners will be hurt as Zillow unloads their properties at fire sale prices, driving down prices on comps. I hope they face many lawsuits!
Wonder what will happen to open door since it has a similar business. Fliping homes is capital intensive and assets heavy.
All these companies want to somehow redefine themselves as a tech company, when in fact they’re just traditional businesses. It’s like WeWork. They were (and are) just a commercial real estate company. Not a tech unicorn.
Just one of so many examples where companies over-reach in their confidence in Machine Learning or Artificial Intelligence. These technologies can work well when you get reliable information with good feedback loops with large sample sizes. None of those things really apply in the real estate market as their are many thousands of factors which effect a property's value, many of them intangible or subjective. It seems to me that a better way to make money is to buy duds that look good on paper and for the 'next fool' algorithms to buy, in much the way that people sell empty graphics card boxes to bots on eBay.
Long story short, if you have some exec that clearly doesn't understand the nuances of data science claiming it's the future of their business, it's best to steer well clear - it's gambling, though you may be able to make money short term during the hype phase.
All Zillow really could of done after a renovation is mark it as a higher probability of maximum buying price of the original estimate. Instead they were reevaluatung the price of the house.
Zillow thank you for interfering in my business. Now stay in your lane. Love how society thinks I'm unskilled labor.
I wonder if the other hedge fund companies that are snatching up properties will continue to do so or not, after seeing what has happened to Zillow.
They aren’t flipping those houses, they are rental properties, so my guess is that they will continue to purchase houses.
Once again, I'm sure all execs and insiders were out already. Would be interesting to see stats on insider selling YTD. -70% since March. Chock up another big win for Steve Eisman.