Well THAT Escalated Fast! - Zillow Fires 25% of employees

Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes

When you run the numbers like this guy did, you can see why Zillow has gone down in flames. https://sellhousecashaz.com/zi... "

“In Phoenix, 36.5% of properties currently for sale were listed below their purchase price, while the remainder of the 93% started higher, only to have price reductions.”

Zillow plans to take writedowns of as much as $569 million, according to Bloomberg.

The stock, needless to say, is not happy after hours - dropping as much as 10% in extended trading, only to see buyers reel it in to flat as of this writing.

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Doug Lovett

Investor · Tampa, FL · Member since 2015 · 63 posts · 59 votes

Who could have guessed that paying market price for homes and betting on price appreciation wouldn’t work out?

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Scott Mac
Austin, TX · Member since 2019 · 5k+ posts · 5k+ votes
4y
Some things are better left to the Experts.
I figured they would crash in flames when they started this, no different than if they decided to build skyscrapers en-mass.
If it was easy--everybody would be rich!
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Russell BrazilBusiness Member
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Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
4y
That will put their 3 year total loss on flipping homes at over $1 billion.
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David Song
Real Estate Broker · Redwood City, CA · Member since 2014 · 679 posts · 888 votes
4y
Zillow owned homes are now REO homes. They are bleeding with all the carrying cost, taxes, insurance, maintenance, vandalism, etc. Nobody is going to take care those properties, and eventually squatters will move in.
The locations where they own a lot of homes will likely see a price correction, very soon.

8 Reply
Melanie Johnston
Real Estate Agent · Scottsdale, AZ · Member since 2018 · 412 posts · 366 votes
4y
We have about 7,422 active listings in Metro Phoenix at this moment. In a balanced market, we would have 25,000 active listings. Currently Zillow has 276 active listings and 246 pending listings. Zillow's announcement makes compelling headlines, but will only be a blip on our radar, even if they brought shadow inventory into the light.
The other iBuyers, Opendoor, OfferPad and local player 72Sold.com must be thrilled by losing a competitor.
Don't look for any market adjustments here anytime soon. As our analysts say, inventory has to exceed demand, and with our economy growing and diversifying, there is no chance of that in the near term.
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Canesha Edwards
Developer · Atlanta, GA · Member since 2014 · 475 posts · 424 votes
4y
As someone previously stated, this is a great headline, but 7,000 homes is just a drop in the bucket in the grand scheme of things.
Inventory is around 1.3 months here in Atlanta, so we could use the 7,000 back on the market. However,
the fact that a large percentage of the homes being sold are underwater is worth paying attention to. Are the homes underwater because Zillow over paid in the beginning? Or is the market starting to shift? If other companies like Zillow start making similar moves, I think it’s something to pay attention too.
Canesha
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OP
Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes
4y
Originally posted by @Russell Brazil:
That will put their 3 year total loss on flipping homes at over $1 billion.

Yikes! That's more than I made last year. I wouldn't keep it up either.

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Canesha Edwards
Developer · Atlanta, GA · Member since 2014 · 475 posts · 424 votes
4y
Also, the homes are being sold to institutional buyers. Which points more to a Zillow issue than a market issue.
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OP
Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes
4y
Originally posted by @Melanie Johnston:
We have about 7,422 active listings in Metro Phoenix at this moment. In a balanced market, we would have 25,000 active listings. Currently Zillow has 276 active listings and 246 pending listings. Zillow's announcement makes compelling headlines, but will only be a blip on our radar, even if they brought shadow inventory into the light.
The other iBuyers, Opendoor, OfferPad and local player 72Sold.com must be thrilled by losing a competitor.
Don't look for any market adjustments here anytime soon. As our analysts say, inventory has to exceed demand, and with our economy growing and diversifying, there is no chance of that in the near term.
Offerpad down 2.75%
Open Door stock down nearly 15%

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Doug Lovett
Investor · Tampa, FL · Member since 2015 · 63 posts · 59 votes
4y
Who could have guessed that paying market price for homes and betting on price appreciation wouldn’t work out?
28 Reply
Jason Brown
Investor · Miami, FL · Member since 2017 · 229 posts · 271 votes
4y
@Doug Lovett
Hahaha........... Everyone.
4 Reply
Mary M.
Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
4y
the most basic question is who is the website where this was posted? seems like they are a competitor? I would want a bit more of a balanced reporting.......
3 Reply
Nick C.
Investor · Tampa, FL · Member since 2011 · 2k+ posts · 3k+ votes
4y
I hope Zillow doesn't let the door hit them on the way out. So their entire business model was predicated on predicting the future correctly? And it's going to take them 3 years and $1B in losses to realize that doesn't work? An infant could have written a better business plan.
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David Song
Real Estate Broker · Redwood City, CA · Member since 2014 · 679 posts · 888 votes
4y
The last year saw the biggest RE appreciation across the country. Zillow, having the buying power, somehow still screws it up is simply amazing.
Their participation in certain markets contributes to the bidding war frenzy. Their sudden withdrawal will also cause some issues.
Unfortunately, they do not have any properties in the bay areas. Otherwise, there might be some purchasing opportunities.
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J Zev J.
CPA · Colorado Springs, CO · Member since 2016 · 413 posts · 258 votes
4y
From MarketWatch: Zillow’s exit “calls into question whether Zillow is just really bad at this, or whether they see stuff in the data — keep in mind Zillow’s got access to a lot of unique data,” D.A. Davidson analyst Tom White told MarketWatch.
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JD MartinBusiness Member
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Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
4y
I haven't seen anything on Zillow firing 25% of its employees - source?
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Taylor L.
Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes
4y
Originally posted by @JD Martin:
I haven't seen anything on Zillow firing 25% of its employees - source?

https://www.geekwire.com/2021/...

It was obvious to us real estate investors that paying market or over market price is a losing strategy. However, if one spends a small amount of time on other sites (like Reddit) you'll see that there was considerable panic about these 'evil companies' that were going to price regular people out of the market. Those of us with real estate experience knew that wouldn't happen, but most people don't understand real estate.

Turns out, losing money is not a good way to make money.
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Joe SplitrockPro Member
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Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
4y
Zillow basically has two sides to their business. The core/original business is data driven analytics that sells leads and advertising. This business is roughly $1.8B over the last 12 months. This was a $1.2B business in 2018, so the growth has been steady. This $1.8B business produced $836M worth of net income over the last 12 months, so it is very profitable.

The other (newer) side of the business is their iBuyer house buying and resale business. This business launched three years ago. Revenue quickly grew because selling $500K houses can quickly grow revenue number. Keep in mind revenue is different than net income. This business never made money. They stated up front it would lose money for a period of time, but they scaled too fast and were paying reckless prices. All the employees they are laying off were hires since 2018, specifically for this house buying business.

They are trying to dump the houses on institutional buyers to recover as much value as possible. Selling 7000 houses one at a time, through agents, is painful and costly. If they can sell packages to institutional investors, they will recover the most value. The benefit to institutional investors is the ability to buy large packages of houses without the expenses of one-by-one acquisition. There are institutional investors that want into the single family house business, so this could actually work out fine for Zillow.

Lets look at the numbers. @Russell Brazil said they lost $1B on their flipping business over three years. Even if they lost a billion more through this sell off, that additional billion only represents the next years worth of net income. This means the business takes a loss this year and next year. There is no effect on the core business over the long term.
Using the Mark Twain quote, I am going to say that "tales of Zillows death are greatly exaggerated". They will never enter the house buying business again, but this was never a profit stream in the first place. It is actually just removing a dead weight that has just been dragging them down for three years.

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Kerry BairdPro Member
Rental Property Investor · Melbourne, FL · Member since 2011 · 3k+ posts · 2k+ votes
4y
Zillow Owned Houses
1 Reply
Joe SplitrockPro Member
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Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
4y
Originally posted by @Taylor L.:
Originally posted by @JD Martin:
I haven't seen anything on Zillow firing 25% of its employees - source?

https://www.geekwire.com/2021/...

It was obvious to us real estate investors that paying market or over market price is a losing strategy. However, if one spends a small amount of time on other sites (like Reddit) you'll see that there was considerable panic about these 'evil companies' that were going to price regular people out of the market. Those of us with real estate experience knew that wouldn't happen, but most people don't understand real estate.

Turns out, losing money is not a good way to make money.

I agree in theory, but also keep in mind many large businesses lose money as they invade a new market. Amazon, Tesla, Uber, AirBNB were all loosing money for years as they scaled their business. During that time retailer warned that Amazon would go bankrupt, taxi drivers questioned how Uber could undercut their price and stay in business, hotels said AirBNB was a flawed business model.
A company does need to make money eventually, but if you can grow market share and scale, profits can come later. The trouble with house buying is the stakes are much higher, due to average sales price of houses. There is also carrying cost and asset protection while you hold it. It is also not a repeat customer business like all these other industries. That doesn't mean someone, like Opendoor, can't make it work. Cash buying wholesalers are notorious for paying 20% to even 50% below market value. The margins are there, so it is just a matter of a national buyer connecting successfully with the right sellers. It is not impossible or a flawed in concept. It just needs better execution.
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James Wise
Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes
4y
Zillow is going to star in Squid Game Season 2.
12 Reply
Matt Greer
Real Estate Agent · Mesa, AZ · Member since 2017 · 231 posts · 169 votes
4y
I'm in AZ where a lot of this stuff is going down. It's crazy to see them pay so much then sell for so little. It's annoying when trying to figure comps in a neighborhood with a lot of zillow deals, because I've noticed a lot of times when people see a zillow sign in their neighborhood that's who they call to sell.
At the end of the day. It's just not what zillow does and it just didn't make sense for them to burn that much cash to get to the level they needed in order to get the volume to control the market.
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Chris MasonPro Member
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Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
4y
One thing to note here is the implicit assumption that "everything can be scaled with tech" fell flat on it's face. I don't think there's any good reason to believe that flipping houses scales well. For two reasons.

1) This is a space where the individual profit-motivated entrepreneur, who really knows her stuff well, is typically going to outperform the W2 salary corporate employee. The stuff that successful flippers know, the experiences in terms of what a "can of worms" does, and doesn't look like, isn't stuff you're going to learn in a book, from a class, etc, and the people that do know that stuff probably aren't interested in being W2 salary employees.

2) Robots. If you are building 50,000 cars, using robots is great, and the more cars you're looking to pump out, the more that robots/algorithms/automation will make sense. But each house is different, these don't scale up like that, even two model match homes, same year, same blueprints, same community, etc, are going to be different. Having 5,000 houses you're trying to flip means 5,000 individual human general contractors, 5,000 unique cases. One thing we know about independent contractors is that the bigger the customer/client is, and the deeper the pockets, the more profit the independent contractors will be able to squeeze out, one way or another. In fact, I would argue that the more houses you're trying to turn over, the GREATER the per unit input/labor costs, since no one managing 5000 things at once can tell if the GC is full of it, or not, when they say this big extra surprise $30,000 thing needs to be done (does your "local boots on the ground" agree that this $30k thing needs to be done b/c they agree, or b/c the GC slipped them $1,000? No one is going to feel bad about ripping zillow off...). I think Zillow recognized this, that's why they were mostly buying complete/functional houses and just throwing carpet+paint in them. Note even here, though, that from all that I've read (a lot of this is reddit anecdotes), it was almost a one-size-fits-all approach, they were tearing out 1-3 year old carpets for new(er) carpet, painting over freshly painted walls, and so on.

Also, Zillow has not responded to my message or called me back.

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Jim K.
Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes
4y
Originally posted by @Chris Mason:
One thing to note here is the implicit assumption that "everything can be scaled with tech" fell flat on it's face. I don't think there's any good reason to believe that flipping houses scales well. For two reasons.

1) This is a space where the individual profit-motivated entrepreneur, who really knows her stuff well, is typically going to outperform the W2 salary corporate employee. The stuff that successful flippers know, the experiences in terms of what a "can of worms" does, and doesn't look like, isn't stuff you're going to learn in a book, from a class, etc, and the people that do know that stuff probably aren't interested in being W2 salary employees.

2) Robots. If you are building 50,000 cars, using robots is great, and the more cars you're looking to pump out, the more that robots/algorithms/automation will make sense. But each house is different, these don't scale up like that, even two model match homes, same year, same blueprints, same community, etc, are going to be different. Having 5,000 houses you're trying to flip means 5,000 individual human general contractors, 5,000 unique cases. One thing we know about independent contractors is that the bigger the customer/client is, and the deeper the pockets, the more profit the independent contractors will be able to squeeze out, one way or another. In fact, I would argue that the more houses you're trying to turn over, the GREATER the per unit input/labor costs, since no one managing 5000 things at once can tell if the GC is full of it, or not, when they say this big extra surprise $30,000 thing needs to be done (does your "local boots on the ground" agree that this $30k thing needs to be done b/c they agree, or b/c the GC slipped them $1,000? No one is going to feel bad about ripping zillow off...). I think Zillow recognized this, that's why they were mostly buying complete/functional houses and just throwing carpet+paint in them. Note even here, though, that from all that I've read (a lot of this is reddit anecdotes), it was almost a one-size-fits-all approach, they were tearing out 1-3 year old carpets for new(er) carpet, painting over freshly painted walls, and so on.

Also, Zillow has not responded to my message or called me back.

Brilliant post, Chris. Thank you.
3 Reply
Bud Gaffney
Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes
4y
Good. Zillow is a JOKE.
0 Reply
Mike Nelson
Investor · Oak Park, IL · Member since 2014 · 316 posts · 150 votes
4y
I was really suprised when Zillow got into this business. It is really tough to build an efficient organization and find qualified people to execute this business plan, and execute at many different markets. The carrying costs and vacancy costs are huge. An example of a company which needs to stick to doing what they do best, their core.
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