Zillow just lost about half a billion dollars flipping houses, and over the next few months
and quarters, as more of the numbers come out, it's probably going to be closer to a
billion, if not even over that.
That's what some people have been saying.
So in this video, I'm going to cover everything you need to know about Zillow's iBuying, house
flipping disaster.
And not only that, but I'm also going to talk about the lessons that you can learn as a
real estate investor from the mistakes that they made.
And then at the end of this video, I'm going to give you my prediction on what I think
is going to happen to Zillow as a company.
Because a lot of companies, if you lose $500 million or a billion dollars, that could mean
the end of the company.
So some people have even been talking about that with Zillow, and I'm going to give you
my opinion at the end, what I think is going to happen to them as a company.
But that being said, let's jump into the video.
All right.
So what exactly happened?
So basically in 2018, Zillow started iBuying along with several other companies.
There's Offerpad, there's Redfin.
I think there's a few others, but those are the big ones.
And they would basically just make offers to homeowners for straight cash.
So there wouldn't be any inspections involved.
It would just be a cash, hassle-free, close in two weeks type of offer.
And the idea was that they would do minor renovations and then resell the properties.
So they typically weren't doing gut renovation projects or condo conversions or crazy stuff
like that.
It was more light rehabs.
And they figured if they could do it on a large enough scale that they could turn a
profit because their margins were already pretty thin.
So as it turned out, they actually were not turning any margin at all.
According to one article, they were actually losing about $80,000 per house.
I saw another one that said they were losing about $100,000 per house.
And they figured, they have so much capital to work with, so they figured they could eventually
turn it around and start making a profit, even if it was a small profit on each house.
However, after about three years of doing this, making no profit and actually losing
significance amounts of money, they realized it's just not worth it.
And they have no, as of now, they have no model to actually make this work.
So they are looking to sell 7,000 different houses right now, and I'm assuming they'll
probably sell them to some hedge fund.
I think they're going to sell it in a bundle.
They're not just going to list individually every single house.
I don't think they will.
But they basically need to liquidate about $2.8 billion worth of real estate.
In the third quarter, they had a pre-tax loss of over $400 million.
They just recently laid off 25% of its staff.
According to one report, 66% of the houses that are listed are listed below what they
paid for them.
And so if you think about that for a little bit, not only did they probably do renovations,
but even if you just purchase a house and just resold it immediately and sold it, even
for a gain of let's say $5,000, $10,00, $15,000, with all the transaction costs that go into
a real estate purchase and sale, they're probably losing significant amounts of money.
The transaction costs in real estate, just when you're you're purchasing or selling a
house, when you're selling a house, it can easily be 6%, 7%, 8%, with closing costs,
transfer taxes, realtor, commissions, credits, different things like that.
Not to mention the time involved with selling those properties, the cost of the financing
for just all the months that they have those properties.
So Zillow has actually come out and said they expect to lose about 5% to 7% on every single
house they own.
And I don't know how they're doing those numbers, but I think it's going to be significantly
more than that.
They might just be talking about the gross price and not necessarily taking into account
closing costs and transaction fees and commissions and everything else, like I just mentioned.
And yes, Zillow can list its own properties and save some money there, but there's still
a significant amount of closing costs to pay.
The CEO of Zillow just recently came out and said, "The reason for these losses were that
it was hard to predict the prices."
There's of supply chain issues, which there are significant supply chain issues going
on right now.
But in a nutshell, at least my opinion, and 99.99% of experienced real estate investors
saw this coming from a mile away.
If you buy bad deals with razor-thin margins, if any margin at all, and then you try to
scale that up to a nationwide house buying thing, it just, how are you going to make
any money?
And Zillow is a smart company for a lot of things, but obviously house flipping was not
one of them and you can't scale something that doesn't work locally and scale it nationally
and expect to make any profit.
So here's a few lessons that real estate investors like yourself can learn from Zillow's house
flipping mistakes, because there are a lot of good lessons in here.
Number one.
And this is more if you're investing in someone else's deal or investing in a company or anything
for that matter, if the company can't show you how they're going to make money and you
don't know how they're going to make money, it's probably not a good business model.
And I don't know, I heard that somewhere, so I'm probably paraphrasing the quote a little
bit.
But you should be very wary of those types of models.
And you can call the model whatever you want.
They called it iBuying.
It's really just real estate investing.
And if you really look at the numbers and you just see what they're doing and they're
buying very mediocre, in some cases just bad deals.
And you're just trying to do that on a much higher level on a national scale, I just don't
see where the profit is.
I know maybe that's too simple, but a lot of real estate investors were kind of thinking
the same thing and it's a little ... Like I said, they have some very smart things that
they do, but this was not one of them.
The next lesson you can learn from this is that when you're trying to do any new endeavor,
this was house flipping, this goes for anything, try to see, try to find out and do some research
about people who might have tried to do this before.
Because Zillow, if they did a little research, maybe if they listened to a few BiggerPockets
podcasts, they would've learned that people have tried to do national house flipping.
People that are local successful investors have tried to do the household model nationwide
and have failed.
Now there's people that do nationwide rentals, obviously multifamily is something that you
can do nationwide.
However, with house flipping, there's just too many moving pieces, too many different
markets, dealing with contractors.
Every single house is basically a full-time job.
And if they had listened to a few podcasts or done a little bit of research on some of
the trials and tribulations of other companies that have tried to do this, they would've
found it's basically impossible.
As far as I know, there's no nationwide house flipping company.
There's people that do wholesaling nationwide, and now with the pandemic and everything,
it's people have gotten more open to the idea of just kind of accepting offers, just without
even seeing the house in some cases.
But to do house flipping on the scale that they were doing, 7,000 houses, that's just,
that's insanity.
The next lesson you want to take from this is that you don't want to over-leverage yourself.
Obviously Zillow, they had their model where they started in a few markets.
And from what I could tell and from what I was reading, they weren't even making money
in those first initial markets that they started in.
And then they scaled to some nationwide house buying company.
And if something doesn't work locally, I think the last thing you should do is try to 10x
that, like Grant Cardone says.
You don't want 10x something that's not working.
Now, if their model had been working, I understand that, and that's something you can take.
Look, as far as finding deals or doing marketing strategies or different projects, find something
that's like your cookie-cutter type of deal that you can do that you know the ins and
out of.
Or if it's with a marketing campaign, for example, maybe try three marketing campaigns,
see which one works, and then scale that one up.
If you scale up a marketing campaign and it doesn't work from your initial tests, it's
probably not going to work on a higher level either.
The next problem Zillow ran into was honestly having too much capital.
They had too many resources available.
They're such a well-funded company that when you have that much cash just sitting around,
sometimes you buy bad deals.
When I was getting started, I had basically no money whatsoever.
So the only people that would give me money were basically loan sharks.
I was working with some pretty tough, hard money lenders, where if I brought them a deal,
they wanted ... Everything can go wrong with this deal and they would still make a significant
profit.
And with Zillow, they just had so much money sitting around that they were just, they got
lazy with their underwriting, if they even had any underwriting at all, and they purchased
a lot of bad deals.
So you always want to be raising money, of course, you always want to be talking to people
about that.
But when you're getting started, you don't necessarily need millions and millions of
dollars because that can go away pretty quickly if you don't know what you're doing.
You should more focus on evaluating the deals, then oftentimes you'll find the money.
A story related to that is a local house flipping company in my area who also went out of business.
I remember meeting with them at one point, I think I wholesaled them a few deals, and
they were saying that they were just buying deals to keep their guys busy.
As in, they weren't made any profit whatsoever.
They just had so much overhead and so much staff that they needed for their guys to do
something all day.
And as soon as I heard that, I was like, there's just no way this company's going to stay in
business.
That is not a sustainable business model in any way.
The next lesson ties into the having access to capital.
Zillow might lose, let's say $500 million, a billion dollars.
If Zillow had been using hard money on these deals, because I'm assuming their source of
financing is super inexpensive from what I could gather, if they were using hard money
on these deals, their losses would probably be in the multi-billions of dollars.
So although they're still losing a lot of money, because they have access to cheap financing,
from what I can tell, they're losing a lot less money.
So when you're looking for lenders and trying to find different people to finance your deals,
it is worth it to shop around.
Because Zillow, because they have cheap financing and because they're also agents, they can
pretty much list their own properties, they're going to save a significant amount of money.
They're not going to lose as much as some investors might, who might be using very expensive
hard money, and might not also be licensed as agents.
So as an investor, you should always shop around for money, and you should also get
your license because it will save you.
I know some investors that are saving hundreds of thousands of dollars every single year
just by listing their own properties.
The next thing to know is that Zillow is trying to get rid of 7,000 houses.
So they purchased 7,000 houses, really a lot more than that, but they're trying to dump
them right now.
And I can guarantee you that when they're evaluating their deals, they weren't being
very selective with them.
I can just tell you that.
I can look up some of the properties Zillow has purchased in the past.
And I actually had someone that got an offer.
It was a Redfin offer, but it was the same type of deal.
And I could tell you as a real estate investor, I wouldn't have paid anything close to what
they were paying for these deals.
Oftentimes when I'm purchasing a property or if you talk to other real estate investors
that are doing this full-time that are buying properties, they might look at, they might
send out 10,000 different letters to get, let's say, 50 or 100 different leads to purchase
just like one deal.
So you have to be very selective.
If you're just buying five, hundreds and thousands and thousands of houses, you need to have
some type of criteria in there.
And I know they had their algorithm, is what they talked about and everything.
But myself personally, I would never purchase a fix and flip if I wasn't making a minimum
of a 10% margin.
And that's just like if it sells for 300K, I want to make a minimum of 30K.
And that just goes back into margin of error.
And I think Warren Buffett another investors talk about this, but they want just a grand
slam type of deal.
A deal that's obviously a deal.
If you're operating on these razor-thin margins, yeah, supply chain issues can come up.
There could be changes in the economy.
There could be a million different things.
Your contractor could run off with all the money.
There could be a million different things that could happen.
That's why you need to build in some profit there.
And I can almost guarantee you that Zillow wasn't evaluating 100 houses to purchase one.
My sense is that they were probably just if it came close to whatever criteria they were
looking for, they would purchase it.
But you need to be selective.
The next lesson is just keep in mind the logistics of doing this many deals.
They have 7,000 different projects going on.
7,000 different contractors they have to hire, projects they need to manage, scopes of work
they need to get done.
I can't even fathom that.
And I think as an investor, the lesson you can take from that is oftentimes it makes
sense to do focus on one or two highly profitable deals, rather than doing 20 or 30 mediocre
deals where you're pulling your hair out and you're running around and trying to manage
everything.
There's some investors I know that might only do two to three deals per year, but these
deals might be 100 unit apartment buildings or different things like that that are extremely
profitable.
Rather than having all these deals all over the place that are just making a small, small
amount of profit, if any profit at all.
The next lesson to know is that Zillow was talking about they use all these algorithms
and all these spreadsheets and everything, and obviously it didn't work out.
And I'll tell you, the only algorithm you need to know as a house flipper is this, the
MAO formula.
If Zillow had used the MAO formula, they wouldn't, I can guarantee you, they wouldn't have these
problems.
And I can guarantee you they wouldn't have bought 7,000 houses either.
But the MAO formula basically states you take the after renovated value, so let's say 300,000.
You multiply that times 0.7.
So that would get you to 210K, and then you subtract for the cost for repairs, and that
should be the most that you can offer on a deal.
And if you find a deal like that, that's going to be a really, really good deal.
But that formula just takes into account all these different variables, builds in a margin
of error, builds in a good enough profit.
And that's what investors have been doing for years and years and years.
That's why when all these iBuyers started happening, real estate investors are looking
at themselves like, "These guys are going to lose a lot of money here."
And I don't know what's happening with Openpad, Opendoor, and also Redfin offers.
But I don't think they're losing as much as Zillow, but I can't imagine they're making
much profit with everything going on right now.
Another thing I wanted to add in is that everyone said, "Oh, this proves that this Zestimate
is incorrect, that it doesn't work."
And I would actually disagree with that.
I think the Zestimate is actually fairly accurate.
10 years ago, five years ago, it was pretty much completely off.
Sellers would always be like, "Well, look at my Zestimate, it's a million dollars.
So my house should sell for that."
And now they've made their algorithm a little bit better.
But that being said, when you're buying a property as a flip, as a short term flip,
like Zillow was doing.
At least my short term flips and most of the successful investors I know, we are 100K to
200K to sometimes 300K under this estimate.
So when you're buying a flip, and I think Zillow was paying pretty close to this estimates
or somewhere in that ballpark, when you're buying a flip, just a good rule of thumb is
you want to be sometimes half of what the estimate actually is.
You need to be so far under what the estimate is that it's almost unusual.
It almost looks like if you showed it to someone and what you could purchase it for and what
this estimate is, there should be a very big difference.
Because that takes into account profit, repairs, closing costs.
There's so many expenses that people don't think of when it comes to real estate investing.
The most important lesson from this whole debacle is when the Zillow CEO was talking
about predicting prices, it was hard to predict prices.
Well, yeah, it is hard to predict prices because that's impossible to do.
You can't predict the prices.
That's why good real estate investors or even hard money lenders who have been through up
and down markets and have survived through up and down markets, they don't factor on
appreciation whatsoever.
Appreciation is a bonus, but you never bank on the market appreciating by 5%, 10%, 20%
or 30%.
You evaluate deals based on where the market currently is.
So if all the renovated properties are selling for $300,000 now, and maybe the spring market's
coming up in a few months and you think it could be higher, you still use the 300K number
because you need to be conservative.
You need to be safe.
You can't predict what's going to happen in a few months from now.
The market could crash.
Maybe it could skyrocket, who knows?
No one has a crystal ball.
So you use comps or comparable sales from today, and then you work your numbers backwards
and building that margin of error.
Another thing to keep in mind is that this is one of the best real estate markets of
all time.
And if Zillow's losing half a billion, maybe more than a billion dollars in the best real
estate market of all time, what's going to happen if the market drops, which it's looking
like it's slowing down quite a bit over the next month or two or three or four months,
if they can't liquidate those properties?
They could be facing some very serious issues if they're not able to sell 7,000 houses,
which there's not many buyers for 7,000 houses.
And if they do it individually, that's just going to take forever and it's probably going
to sit on the market for months and months and months, if not years.
Now, what do I think is going to happen with Zillow as a company?
I think Zillow is going to be just fine.
I think of all the companies out there, Zillow is a very smart company in terms of technology
and that type of thing.
In terms of house flipping, they tried to make house flipping somehow technology-based
and they failed completely.
However, Zillow is the top.
Everyone uses Zillow for their search engine.
They have Premier Agent, they have a lending company, a mortgage company now.
They have some other are things that they're working on.
They even have a pretty good book, Zillow Talk.
I would highly recommend it.
But I think Zillow will do just fine.
They laid off 25% of their employees, which sucks, but they will bounce back.
They will focus more on what they're good at.
And I think the future for Zillow is actually pretty bright.
I think actually now might even be a good time to buy their stock because it's in the
dumpster right now.
And of course, I'm not a financial advisor or stock picker or anything like that.
So completely ignore any of my financial advice.
But I think long-term, Zillow is going to do just fine.
So thanks for watching this video.
Watch this one right here, and I'll see you in the next one.