patrick.net

Well if they are holding off on buying houses for now, maybe they miscalculated. But if they are still buying, somethings not right

WineHorror1 says

What % of "kids" are making $50/hr?

My point exactly..

The housing market is completely impenetrable for many people and the vast majority of the young.

The price Zillow "paid" for a property doesn't include a 6 - 12 % "rehab fee" that they charge the sellers. Granted they do some rehab but I don't believe it's anywhere near what they charge the sellers.

The process is (or was) : Zillow makes offer, buyer agrees to proceed. Zillow does thorough home inspection. At this point Zillow either passes on the property and gives this lead to a local "premium Zillow agent" (presuming the home owner is now a motivated seller) ... OR Zillow agrees to proceed and informs buyer of the rehab discount. In the first case the entire exercise was Zillow overpaying for a sales lead for their local premium agent and in the second case the buyer can still back out if they don't like the rehab discount. If the buyer proceeds the sales price stays at the original number and the rehab discount is not deducted from the selling price so it doesn't show up in the county data.

Now, consider this operation from Zillow's viewpoint. They really are not in the business of making a profit (and may never be). They are in the business of enriching insiders and major stake holders. Their real product is stock. Losses don't even matter to the exec's in the C-Suite. The share price is the only metric and as long as revenue continues to grow they are happy. They are thrilled to spend $1.50 for an additional $1.00 in revenue. Don't worry, it made perfect sense in Harvard business school. the Wizards will do their MBA debt to equity calculation and balance it out at 55% equity/ 45% debt and can do this nearly forever with no downside in a ZIRP world.

Did zillow have a nice little business plan once upon a time? You bet they did. For the cost of coding and data center rentals they were printing money. But their ceiling was fixed and they had to figure out how to 'leverage' their first mover advantage in order to grow revenue - otherwise the top level people would end up with a measly 9 figure net worth when they really deserved so much more. Now they are getting into areas that are guaranteed to lose money and at some point they will have to go to war with the MLS and the realtors who own it. Good luck with that.

I'm a big fan of Zillow because they've increased transparency. I was sorry to see them go public.

stfu says

at some point they will have to go to war with the MLS and the realtors who own it. Good luck with that.

Tell me why you think they couldn't beat the MLS system.

They have the best customer facing site and finding a Realtor is as easy as clicking a button. Hell, you don't even have to be a Realtor to sell or list a home.

stfu says

the rehab discount is not deducted from the selling price so it doesn't show up in the county data.

Very interesting post. Funnily enough, today I was thinking about things like future conflict of interest allegations. To address your point, I would literally expand on it and say to you to consider the implications of a company that sets the Zestimate is also the company buying or selling a home. Does this not reek of a conflict of interest?

Malcolm says

Funnily enough, today I was thinking about things like future conflict of interest allegations. To address your point, I would literally expand on it and say to you to consider the implications of a company that sets the Zestimate is also the company buying or selling a home. Does this not reek of a conflict of interest?

Now THAT'S interesting.

WineHorror1 says

stfu says

at some point they will have to go to war with the MLS and the realtors who own it. Good luck with that.

Tell me why you think they couldn't beat the MLS system.

They have the best customer facing site and finding a Realtor is as easy as clicking a button. Hell, you don't even have to be a Realtor to sell or list a home.

I worked for Zillow for a year and a half.

They can't take over the MLS because their whole business model is selling sheep to wolves. That is, they get a commission for referring buyers to realtors.

If they try to muscle in on realtor turf, the realtors will scream bloody murder and Zillow will lose its customers (who are the realtors, not the buyers).

BTW, there are actually many many independent MLS systems with incompatible formats, not just one MLS. Zillow doesn't even have agreements with them all so there are plenty of houses you cannot find on Zillow.

Fuck Zillow!

Patrick says

If they try to muscle in on realtor turf, the realtors will scream bloody murder and Zillow will lose its customers (who are realtors).

BTW, there are actually many many independent MLS systems with incompatible formats, not just one.

If Zillow becomes a broker...BAM. They'll have the one and only contiguous MLS in the country. Plus they don't need Realtors. They need real estate agents...there's a difference.

Not only that but if/when they list a large enough % of homes, they could decide to block any other MLS from displaying those listing photos. It could be quite a war. Plus the retail client is by far more familiar with Zillow AND they are much more used to "shopping" for a home all by themselves. Realtors aren't much more than door openers...access to view the home.

Hircus says

Interesting. In the Sacramento area, I filtered the search to show only zillow-owned homes

Wow, that is even more dramatic than my single listing. It really shows a pattern, concerning to some, but welcome news for others.

This is a nice example of greater fool theory from your search. They won't make these losses up in volume, that's for sure.

https://www.zillow.com/homedetails/3800-Graham-Isl-Rd-West-Sacramento-CA-95691/61224950_zpid/

It's like Zillow just became to real estate what Movie Pass became to the cinema business.

As usual, we aren't the only ones noticing this. This is interesting because we are getting some recent feedback from two other markets, and the observations are similar.

https://www.reddit.com/r/RealEstate/comments/od3mys/are_ibuyers_zillowopendooretc_severely_overpaying/

WineHorror1 says

If Zillow becomes a broker...BAM. They'll have the one and only contiguous MLS in the country. Plus they don't need Realtors. They need real estate agents...there's a difference.

I don't disagree with this. I would like to see them try.

It doesn't appear that Zillow execs share our confidence though.

Patrick is right. We are not Zillows customers nor end users. Look into Zillow's financials and you will see that almost all of their revenue is derived from ad sales for Property managers and mortgage lenders and also their Premier services to Real Estate Agents (not just realtors). In a sense the realtors already own Zillow even if they hate zillow at the same time.

And how would Zillow switch direction mid-stream? They would lose essentially ALL of their current revenue and replace it with, what? Consumer subscription service? ( I wouldn't pay it - I would just mosey on over to Redfin, Trulia, or Realtor.com). Charging a commission on real estate transactions? That might fly but can they survive the transition period? Also, how many agents really make money? Real Estate is a tough business because there is no moat and anyone who is unemployed can do it. I don't have any idea but would not be surprised if 80% of agents lose money at their job. Is this the business that Zillow really wants to be in versus their current money printing operation?

I think they are testing those waters with Zillow Offers but as you can probably gather it is not a money maker for them right now. While they are thrilled that flipping homes juices the revenue stream they can't expect to carry these losses indefinitely. I think that they knew that going in too which just makes them bad managers.

At the end of the day I think Zillow is past the point of making a better product/ service offering. I think they have opted for the easy money of grifting a fraction of a percent out of the real estate market.

stfu says

At the end of the day I think Zillow is past the point of making a better product/ service offering. I think they have opted for the easy money of grifting a fraction of a percent out of the real estate market.

Yes, in this situation though, they might learn that leverage can be a bitch when the market goes south.

Watch for if 3 to 8T budget passes and still maintain 0% interest rates, its hard to think re will crash.

WineHorror1 says

Plus the retail client is by far more familiar with Zillow AND they are much more used to "shopping" for a home all by themselves. Realtors aren't much more than door openers...access to view the home.

Door openers is true. I did most of the photography, but had my license and had to open doors at certain times. Those days are done though as far as the license goes and paying $2k/yr roughly to NAR/IAR/MLS.

Issue is NAR is basically a union. It's just a weird one that members are independent contractors, many of which have their own brokerage(s). You'd be talking of union busting probably one of the largest ones if not the largest one in the country. They just don't call themselves a union because of the IC status of their members and they don't and technically can't negotiate wages by law. But it's a union or lobby I suppose. Not real sure the difference since the money is just pissed away to those connected in the NAR.

I don't think you can break the NAR or MLS system. Realistically it does make sense to have one database of information so everything is consistent for the customers, agents, web designers, etc. When I'd market for the office I managed it was a pure pain in the ass. Trulia, Zillow, Craigslist, local sites and a whole shit load of other sites. Data input and uploads could be 3-4 hours per listing on all these various sites. Never sold a house itself off of those sources. It would be just to get buyer leads. Sold more during open houses and that was rare as well. At least here in IL/Chicago.

Look at this gem. https://www.reddit.com/r/RealEstate/comments/od3mys/are_ibuyers_zillowopendooretc_severely_overpaying/

Back in May Zillow paid $912,700. After several price reductions, it is sitting for sale at $859K. The beauty this time is that there won't be a taxpayer funded bailout for Zillow even though this time around it is Zillow who will be holding an inflated portfolio, not the FDIC banks. So when one conceptualizes this crash compared to the last one, simply take out the subprime lenders who ended up with the houses, and substitute Zillow, who instead of foreclosing on subprime borrowers decided to behave like one.

Hircus says

Interesting. In the Sacramento area, I filtered the search to show only zillow-owned homes

I did the same for my neck of the woods. All Zillow owned homes in San Diego and Los Angeles.

https://www.zillow.com/homes/for_sale/?searchQueryState=%7B%22pagination%22%3A%7B%7D%2C%22mapBounds%22%3A%7B%22west%22%3A-118.93008944978365%2C%22east%22%3A-115.71658847322115%2C%22south%22%3A32.4245325322289%2C%22north%22%3A34.350738656769444%7D%2C%22isMapVisible%22%3Atrue%2C%22filterState%22%3A%7B%22sort%22%3A%7B%22value%22%3A%22globalrelevanceex%22%7D%2C%22ah%22%3A%7B%22value%22%3Atrue%7D%2C%22cmsn%22%3A%7B%22value%22%3Afalse%7D%2C%22auc%22%3A%7B%22value%22%3Afalse%7D%2C%22pmf%22%3A%7B%22value%22%3Atrue%7D%2C%22zo%22%3A%7B%22value%22%3Atrue%7D%7D%2C%22isListVisible%22%3Atrue%2C%22mapZoom%22%3A9%7D

I realize I am beating a dead horse here, but people who paid $200k over asking are going to feel pretty dumb when they realize they were bidding against Zillow.

Macolm, thanks for bringing this to our attention. And I thought all we had to worry about was small time, local syndicates flipping.
I just noticed that Softbank backed Compass, Inc had an IPO earlier this year. Looks like Real Estate may lead us down again.
Let’s start with the positive for Compass: Its new $7.4 billion market cap is roughly four times larger than that of Realogy, a holding company that owns Century 21, Coldwell Banker, and Corcoran, among others, and which has twice as much revenue as Compass. This valuation suggests that the mere possibility of disrupting the multitrillion-dollar housing market, at a moment when the competition for homes couldn’t be hotter, was enough to make investors want a piece of Compass at a premium.

I get hard every time I hear about Zillow listing a house for sale at a loss.

EBGuy says

Macolm, thanks for bringing this to our attention. And I thought all we had to worry about was small time, local syndicates flipping.

CA is a different animal I don't understand, but I'd avoid most real estate nationwide if you can unless you know it's a deal or a rehab you can handle.

My ranch in rural IL, is worth of $300k now. Bought for $81k in 2013/14ish. Super high property taxes here (not mine). I'd sell, but I'd be buying into an inflated market and taking on $10k/yr property taxes for a $400-500k property.

Oldest is 11. Youngest 8. I'm 6-7 years from not needing the extra space for the kids and we manage now. And yes, they will move out. I'm saying fuck it. We'll be home 2 weeks for October as is, so what's the point? I'd rather suck it up and move out of state once the kids are gone. 7 years in a new to me home seems stupid when we'll likely pay this one off in that time. I'm sick of debt I can't pay off monthly and I have minimal. It's more lucrative to invest it though than to pay the debt off.

HunterTits says

..except Zillow is not constrained by REO regulations like bank foreclosed properties are. They can rehab them and then rent them out. They can even create a REIT and IPO it.

Yes, they could, they could do anything that makes business sense. No, they don't have a regulator telling them they have to sell a certain number to keep to some ratio like a bank, but in their case, the market will force it. Consider all the debt servicing and whether it makes sense to rent a million dollar house out.

HunterTits says

How do you know how they are financing that operation? :)

Besides, all they need is cash flow to stay afloat to operate for a while.

Financing or not is irrelevant. It is still a losing proposition.

Exactly, all they need is cash flow to stay afloat, not a good situation when it is a cash drain.

"Last year, according to Zillow’s public reports, its home flipping business lost $66.6 million. Independent analysis indicates it’s a lot more. A study of Zillow’s fourth-quarter reports by the Real Estate Technology Center at the University of Colorado shows, after operational expenses, Zillow lost $72,000 for every home it purchased and sold. That’s an improvement according to Mike DelPret, a resident scholar at the Technology Center, who estimates Zillow lost $129,000 per house in the third quarter."

Wow! this year will probably be even worse.

https://www.mtdemocrat.com/business-real-estate/zillow-looses-millions-on-house-flipping-venture/

Malcolm says

Real Estate Technology Center at the University of Colorado

Exactly what is Real Estate "Technology?" Stuff like profit/loss and investments falls well within the scope of plain old Accounting.

"Technology?" - heard that they are using "AI" to extract every last$ from every shack.

Malcolm says

Wow! this year will probably be even worse.

Maybe they're gong with the Change Bank model.
“How do you make money doing this?”
The answer is simple: Volume. That’s what we do.
Innovation never sleeps...

How can they’re Zestimate model be anymore than a steaming pile of horseshit than when they continuously adjust previous historical values that are 10 years old??? Fuck these assholes.

Is it possible that Zillow doesn’t care if they lose money on their real estate transactions? They make their money on advertising (monetizing web traffic) so their footprint in the real world, even if they lose money, probably still drives revenue to their web presence.

MisdemeanorRebellionNoCoupForYou says

Some still have the original cabinets and kitchen appliances

In avocado green and harvest gold with orange shag carpet.

Zillow, like Amazon when it was starting out, does not care about making money off buying/selling houses. They simply want the top line to show improvement. ie continuously increasing sales. That is what Wall Street is focused on --- a growing business. As long as they are selling more houses than the quarter before then their sales are increasing and so should their stock price.

Amazon supposedly loses money on its merchandise sales, but it has always increased these sales so its stock price has soared. If you look at its market cap compared to its earnings people would giggle.

stfu says

The process is (or was) : ... Zillow agrees to proceed and informs buyer of the rehab discount. ... If the buyer proceeds the sales price stays at the original number and the rehab discount is not deducted from the selling price so it doesn't show up in the county data.

How does that work out with seller's capital gains on the house? Is the rehab cost a selling cost for the seller and thus a deduction from capital gains? Are those costs somehow reflected in the sales history of the house or is Zillow magically able to record the inflated purchase price, which will help them get a good sale price in the future.

Just checked Zillow and they aren't offering to purchase anything in 94087. Maybe they figure they can flip 2 or more houses elsewhere for the price of 94087. I tried RedFin and ... ha ha ha ... they somehow think my house is worth over $2.58MM (the big Z gives my "only" $2.1MM). Alas, Redfin isn't offering to buy my shack either.

I'll note for others that last decade I used Zillow to find my mortgage refinance agent. That really was helpful, and I felt I got better deals than I could find elsewhere (2.875% 5/1 ARM with negative costs to cover inspection). As noted by others on this thread, homeowners and homebuyers are the "product." But that sure seemed to work out great with respect to refinaning.

SunnyvaleCA says

How does that work out with seller's capital gains on the house?

My understanding is that is it no different than "cash back at closing". The seller pays capital gains on the sales price, NOT NET of the rehab fee.

I've used this when selling into a slow market before. I offered $10,000 cash back at closing in order to bring in motivated buyers that didn't have enough liquid cash to close on a house in the price range I was at. You may also see this described as "carpet allowance" or "paint allowance" but it's really just a technique to entice buyers with little liquid assets into the contract. In my case (not Zillows) I didn't pay any capital gains because it was a primary residence for the required time and I was still under my lifetime exemption. It was not a taxable event.

I get that people in California would scoff at the notion that you can't sell a house for whatever number you can dream up but in many parts of the country people are broke ass and have never had the $30,000 liquid it takes to qualify for a loan and close on a modest home. In fact, my gut feeling is that the current craziness is a combination of two primary things :

1) Investors like Blackrock have no other productive outlet for all of the excess liquidity that the FED has injected so they've decided to buy up all available real estate
2) For the first time in their lives, broke ass couples have $20,000 in the bank from the Stimi checks (no joke, I know a couple w/ 4 kids who've received over $35k in stimi checks).

Misc says

Zillow, like Amazon when it was starting out, does not care about making money off buying/selling houses. They simply want the top line to show improvement. ie continuously increasing sales. That is what Wall Street is focused on --- a growing business. As long as they are selling more houses than the quarter before then their sales are increasing and so should their stock price.

Amazon supposedly loses money on its merchandise sales, but it has always increased these sales so its stock price has soared. If you look at its market cap compared to its earnings people would giggle.

I think in the short term it appears like this, but I disagree. The fundamental valuation is on actual earnings. I still believe in the FANG bubble, but there is no telling how far wreckless investors will go when a stock is sexy. Yes, penetrating into a new market calls for investor patience through initial losses, but it is not a growth strategy to simply have high sales with negative margins. I used the example of MoviePass earlier. I think it was appropriate to compare to Zillow and what you are describing. I still have no idea WTF MoviePass was trying to do. I suspect their real goal was to market the viewer data. That is different than just trying to blow up sales to seem impressive, they simply miscalculated the value of the data and treated the net loss on admission prices and member subscriptions as the cost of that knowledge. So yes, investors need to understand that it costs money to find a new revenue stream, but they don't stand for continuous losses. There is usually a plan in place with expected milestones in new business development.

stfu says

My understanding is that is it no different than "cash back at closing". The seller pays capital gains on the sales price, NOT NET of the rehab fee

Capital gains are paid on the difference between total purchase price and any costs then subtracted from the net proceeds of a sale. Accumulated depreciation is added back into the equation. It also has the same effect of lowering the cost basis. Cash back lowers the cost basis unless it is actually spent on something like a carpet allowance. It I buy a $100,000 property and I get $10,000 back, my cost basis is $90,000. If I spend the $10,000 on carpeting and appliances, my cost basis is back to $100,000. The MLS will show the sale price as $100,000 regardless. The agent's commission will be on the $100,000 regardless as well.

One other interesting note I can share from experience, in California the assessed price is the market value of the home at the time of the sale, not just the sales price, though it is usually the same. We bought a condo for $45,000 from the VA, but the assessor said I had bought below market and they assessed it at $55,000.

I hope this will one day become an MBA course topic to not do things just because a competitor starts doing it. I can't believe what I just read here.

https://www.cnn.com/2020/02/21/business/zillow-rich-barton-risk-takers/index.html

I found the article funny. I was right it is all about increasing sales profits be damned.

The CEO stated that in 3-5 years he wants the sales from homes to be about 9 times the current revenues of the company.

https://www.youtube.com/watch?v=GTm0qV5lb7o

Recommends buying puts on Zillow and others. I don't necessarily agree with his time frame, but the rest is spot on.