Zillow's Home Flipping Business Made No Sense

Patrick Boyle On Finance

Patrick Boyle

Investing, Business

4.9 • 320 Ratings

🗓️ 6 November 2021

⏱️ 11 minutes

🔗️ Recording | iTunes | RSS

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Summary

Send us a textZillow, the digital real estate company, said on Tuesday that it’s exiting Offers, its business that buys and flips homes, and eliminating 25% of its workforce.The announcement was attached to Zillow’s third-quarter earnings report. The company’s revenue and earnings missed analysts’ estimates.“We’ve determined the unpredictability in forecasting home prices far exceeds what we anticipated,” Zillow CEO Rich Barton said in the release. “Continuing to scale Zillow Offers would res...

Transcript

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0:00.0	Hello and welcome. You are listening to Patrick Boyle on Finance, a podcast exploring ideas from quantitative finance, examining events occurring in markets right now and financial history to see what lessons can be taken away, including interviews with some of the most interesting people in the world of finance. To learn more about the podcast, visit onfinance.org.
0:27.2	Back in 2018, the real estate listings company Zillow announced that they were getting into
0:33.1	the business of buying and selling homes rather than just listing them online. They claimed there was an
0:39.2	opportunity in acting as a market maker, flipping houses within months to earn small but
0:45.5	consistent profits. Zillow was already dominant in the online listing space where they charged
0:52.0	real estate agents for online leads. Now they wanted to capture
0:56.3	more of the economics of each transaction. So in 2018 they launched Zillow offers. They weren't
1:04.3	the first to this business. They joined a small group of tech-enabled home flippers known as
1:10.7	eye buyers or instant buyers who've grown
1:14.0	significantly in recent years.
1:16.9	The idea being that home sellers could request an offer on their house and Zillow would
1:22.4	use its algorithms to generate a price.
1:25.6	If the seller accepted, Zillow would buy the property, make
1:29.3	some light repairs and put it back on the market for sale. They would operate as industrial
1:35.0	scale flippers, earning money on price appreciation and the spread that they charged. A year
1:41.8	and a half ago, the pandemic kicked off a home buying frenzy,
1:46.0	which was distinguished by cash bids and fast closings. Ibuyers' pitch of speed and convenience
1:53.6	made them attractive to consumers who wanted to move quickly. In Southern California,
1:59.3	iBuyers accounted for between for between 1% of real estate transactions
2:04.9	during the second quarter of 2021. In some markets like Phoenix, Arizona, iBuyer market
2:11.7	share was above 5%. When asked about the risk of this business back at its launch in 2018, Zillow replied,
2:19.9	we've taken a lot of prudent measures to mitigate and minimize risk here.
	...

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