But this new & horrendous house flipping operation inflated revenues “more than expected.”
Zillow, which has generated an unbroken series of annual losses as a public company since its IPO in 2011, has figured out how to lose even more money, a lot more money, and at the same time boost revenues and get its shares to jump: house flipping.
In its quarterly earnings report Thursday evening, Zillow disclosed the dollars and cents of its newest enterprise, “Zillow Offers,” which buys and sells homes. The company describes this as “a new, hassle-free way to buy and sell homes directly through Zillow.”
The report splits out the business segments, including the “Homes” segment, which is its house flipping operation.
In terms of timing: The revenues, costs, and expenses associated with buying and selling the house are booked on the income statement in the quarter in which the sale of the house closes.
So let’s see how Zillow’s new thingy did in the quarter ended March 31:
- Sold 414 homes.
- Sales proceeds added $128.5 million to revenues, for an average selling price of $310,400 per home.
- The purchase cost of these homes added $122.4 million to cost of sales, for an average purchase price of $295,700 per home.
- This amounts to an average gross profit (selling price minus purchase cost) of a meager $14,700, or 4.9% per flip.
But it costs money to buy homes, get them ready to flip, market them, finance them until they’re sold, and deal with the transactions, in a corporate manner. So Zillow booked the following expenses associated with its home flipping operations:
- $20.8 million in sales and marketing expenses
- $12.3 million in technology and development expenses
- $14.4 million in general and administrative expenses
- $3.8 million in “segment interest” expenses.
So, revenues of $128.5 million from selling the homes, minus $173.7 million in costs and expenses associated with these home sales, for a loss on its home flipping operations of $45.2 million.
This loss of $45.2 million on 414 home flips means:
- Zillow lost $109,190 per flip on average.
- Zillow lost 37% on each flip on average.
So this is a horrendous business.
But it performed miracles because the sales of those houses – a business activity Zillow didn’t engage in a year ago – added $128.5 million to revenues. This constituted three-quarters of the total revenue increase of $154 million (or 51%) to $454 million in total revenues in the quarter.
And due to the loss at its home flipping business, Zillow’s total loss soared by 263%. In other words, a 51% increase in revenues caused its quarterly loss to soar by 263% to $67.5 million. This loss amounts to a stunning 15% of revenues.
Zillow isn’t a startup. It has over 4,000 employees. It has been a publicly traded company since 2011. And it has been on an acquisition binge, buying all kinds of other companies. And now it has figured out a way to lose a lot more money.
But Zillow is apparently not yet losing enough money, and so it is going to expand this ruinous home-flipping operation from the eight metropolitan areas at the end of March to more markets to boost its revenues and its losses. In home flipping, there are very few economies of scale; so we’re looking forward to seeing a beautiful cascade of losses.
Because revenues jumped like this – no matter that this caused Zillow’s losses to more than triple – shares soared 19% in evening trading on these “better than expected” revenues and the prospect that Zillow will expand its ruinous home flipping operation to many more markets and boost its losses further. Friday at about noon, some of the excitement of after-hours trading has tapered off and shares are up 8% and heading down.
When a stock market rewards companies that have always lost money, such as Zillow, for coming up with a way of losing even more money, it takes the incentive away for management to build a functional profitable business model. And it shows to what extent this market and the entire hype machine around it are twisted.
It’s a tough job, but someone’s doing it. Read… The State of the American Debt Slaves, Q1 2019
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I think the run up in Zillow is due to potential elimination of Realtors in the transaction. If Zillow can continue this business model until it eliminates Realtors altogether then it can raise rates in a monopolistic fashion a la Netflix. I think that is what investors are hoping for.
It may be the idea but I question, at least for the next 20 years, realtors will be necessary to handle the increasingly complicated home buying process. I used to be in car sales and there were always new programs and ides to eliminate the car salesman (and his 15-30% commission) from the process for higher dealership profits. People need a salesperson to explain the features and how to use them, especially on today’s complicated cars.
The car sales is through “dealers”. The house sales is through “brokers”. Zillow is transforming house buying from brokering into dealing. For the same house, would you want a broker to introduce you to the seller you don’t know and let him/her handle the process or do you want to buy from zillow that has clean titles, no under table dealings between buyer/seller agents, you bid houses like you bid items on ebay knowing zillow makes money in the tight 4.5% bid/ask spread?
I long for the day I can short houses like I short stocks. It is still far from that day but Zillow can get me one step closer. When that day comes, when house prices go into bubble territory, those house hoarders can NO longer control the supply to keep them out of market and keep price high. People will short the shit out of them and bubble solved.
JZ,
Just some add-on thought: new-car dealers still exist because state franchise laws outlawed auto manufacturers selling direct to customers. This is one of Tesla’s problems — it has to get those state franchise laws waved. Tesla still cannot sell cars in all states for that reason. If franchise laws that protect auto dealers from automakers are entirely rescinded in all states, in fairly short order, you would have manufacturers selling direct to customers everywhere, just like Tesla is doing, and cutting out the dealer entirely. With today’s technologies, you really don’t need the layer of “dealer” in the market.
Why would there suddenly be need for a “dealer” in the housing market? So if there is little need for something, it means that it’s unlikely to ever turn into a profitable business.
Sellers have the right to sell “By Owner”, with web sites dedicated to FSBO listings, yet 99+% elect to hire a Broker. You are delusional if you think Zillow, with all its faults and inaccuracies, will dethrone Realtors. Based on this article, Zillow is more likely to go bankrupt than it is to displace Realtors.
I remember a Taxi license in NYC used to cost 710K.
Yet Uber came and everybody become a Taxi driver without 710K license.
I don’t know what will happen to the way houses are sold, but what I do know is that I hate the existing house buying process. I can fantasize about a company that clean up the title, and do transparent bidding without conflict of interest between buyer/seller and their broker agents. Crypto can track everything on the internet about who owns what and I think house buying in the future can be as easy as buying/selling stocks. Yes, the NAR will block any attempt to undermine their businessss through lobbying. Still I can fantasize them being taken out by technologies that serve the mass like the electronic trading of stocks killed commission down to cents. It is friday, I can drink and dream.
Gian, FSBO hires broker because they can NOT sell to a dealer like Zillow. There is so much fraud and shit to deal with if you go sell to a buyer which you don’t know any background. Imagine you have a dealer do all the paper work and you know they only make the market with 5% bid ask spread. Nobody hires broker any more. All sells to Zillow.
Your impression is that Zillow replacing a class of decentralized intermediaries with a centralized service will lead to less corruption, less scandal, and less confusion than what currently exists in the market?
Agree with you that our industry is full of BS, but my money is on the opposite outcome– more consumer issues, larger-scale scandals and abuses, etc.
No one needs a car salesmen, hence the laws in many states requiring that buyers pay for them.
Same with thieving politicians.
Buying a car is a heck of a lot more transparent than what one faces going into a productive manufacturing business.
Greg, what about a strategy of Zillow acquiring startup companies in the flat-fee agenting space, such as Clever.com and Upnest.com? Doesn’t it make more sense to “flip as a transaction platform” rather than as a buyer of properties?
I would think there would be at least some economy of scale in home flipping, but only if you did it right. Doing it right would mean creating and training your own teams of workers, of carpenters, plumbers, roofers, etc. Some economy of scale, especially as you got these people trained to good standards, and started to build a brand name in a market where it means a Zillow house was rebuilt right. Add in a fleet operation for the trucks to save a bit over contractors with their own trucks. Add in buying in bulk building supplies and keeping a warehouse/yard, but letting you be the most powerful purchaser in the market and getting special deals from Home Depot or Lowes. Throw in your own building inspectors too. Seems like there is some economy of scale over hordes of independent sub-contractors. But it involves actually investing in people and building a business on a good, stable group of good people, and that is totally un-America these days.
Why not go one step further and create a federal Department of Home Building. Yes and it could be staffed with our illustrious federal progression mangers and then all those hired to do the actual labor could become federal employees with the standard wages, benefits, and pensions. This could be the way forward allowing the state to eliminate the inefficiencies of the private market.
Glad to hear someone’s losing money on this game. My son wants a house and is at wits end competing with stinking house flipper cockroaches and their overpriced crap when it hits the market. The sooner they all rot in bankruptcy hell, the sooner the next generation can bypass this form of intergenerational theft.
“Realtor” is a copyrighted trade name for a house broker. I don’t get why used car salesmen have not come up with such a distinguished title for their racket, At least it is far more legitimate than the “Health Insurance” racket.
No, Realtor is a member of the National Association of Realtors. That’s it. Nothing else. Brokers, agents, and appraisers can be Realtors. A Realtor is a mark of membership, not a vocation.
50% of the Homeowners seek agents via referrals, its going to be hard to upset the Realtor monopoly. I said this 25 years ago. Time will tell
I guess this is how all bubbles (or whatever they are being called) go. Nobody cares about debt, etc.- the intangible book-keeping- that ends up being the “only thing” that’s important in valuing a business in the long run.
The mis-allocation of resources (i.e. economic benefits) is very real; every day, all the time. It’s just that there is a mis-match in time of realization.
Good luck to all.
Funny how the people who end up from digging out from under the rubble from the crash always have a ‘stick-to-the-basics’ approach, and shun bankers and leverage and debt.
To quote Battlestar Gallactica, “All of this has happened before, and it will happen again.”
It’s déjà vu all over again.
>>This amounts to an average gross profit (selling price minus purchase cost) of a meager $14,700, or 4.9% per flip.
So the business model for Zillow Offers is basically to pay itself from the “saved commission”? While losing money on interest expenses and miscellaneous operational costs? This will work even less well in a falling market, but maybe it can save buyer some money …. ?
In a falling market, this doesn’t just work less-well (not being argumentative… just extending your point). It will be a total disaster because they will be forced to book losses on home sales independent of their operational expenses. If you have a huge portfolio of products, then maybe you can tolerate temporary losses on one or a few products. But with one big product, this is suicide. They’ll lose all of their talent during a housing bust.
Well if the talent is losing $45 million a quarter, losing them may not be all together a bad thing.
Just issue convertible bonz and all will be well.
With the added problem that real estate commissions are also under attack from other directions. So, I can see why those 6% total commissions that were almost standard might seem like a nice target, but when they fall you are left without a profit source in the equation. It seems like not only you but others are all hacking away and the only limb supporting this venture.
6% in the higher end markets has wavered for the most part down to about 5%. I think it will float down to what a FSBO seller will offer an agent to bring a buyer about 2.5% or so and 1% to list.
Many models have come and gone trying to disrupt.
Tesla, Amazon, Netflix, Zillow etc. are about gaining rapid market share.
They grow, they lose more money. So what. They are top of mind brand leaders.
I remember reading over 20 years ago that Starbucks lost money with every cup of coffee they sold during it’s early rapid expansion phase. So what.
Short sellers and value oriented Hedge Funds miss this fundamental reality over and over again. Therefore they get carried out on stretchers.
Genentech was very unprofitable for well over a decade in the late 1980’s and 1990’s. It’s stock went up more than 20 fold before it was sold to Roche holdings. Ditto Gilead Sciences. Up, up and more up.
People called Amazon a Not For Profit since the mid 1990’s. They totally missed the point. Again, market share gains of a rapidly growing addressable market is everything. History proves it.
Market share growth and top of mind brand awareness counts for everything. Losses can be supported for well over a decade.
History proves this over and over again.
What you describing is in complete violation of our anti-trust laws.
Funniest thing I’ve read all day!
I’m old, with a grey beard to prove it, so I can still remember back when America had anti-trust laws.
It’s product dumping, Hitachi power tools got caught doing it in the 90s, Chinese and Japanese steel do it. Why we tolerate it for so long with our own companies is a mystery.
Market share growth with no profit requires an endless inflow of greater and greater investment dollars. Does that seem likely? Sure, it’s been going on for 20 years now, goosed by ever easier monetary policies. But can it continue indefinitely? I’m not predicting the punch bowl will be taken away. Just saying it can be.
A ginormous market share does not preclude a credit crunch. Rolling over debt in the face of escalating losses might become impossible under some circumstances, regardless of market share. Can you at least imagine such a scenario? Again, I’m not predicting it, but there could come a time when easy credit isn’t quite so available, and investors might demand a more immediate return.
You are talking about the survivors.
Note also, that I believe Amazon’s integrated profit from retail sales remains about zero. They got lucky with another business (as often happens when you are in the right place at the right time- which, more power to them, they are/were).
I don’t agree about Starbucks- they lost money during their growth due to taking on lots of expenses/capital. There was a credible path to profits.
Genentech is in my field- very different animal. They had early phase biomedical research and weren’t in a simplistic transactional business.
Anyway, room for discussion.
I think this round (Tech 3.0? or whatever) is going to look very different at the end. Probably some part of Tesla survives as a takeover. Maybe Amazon spins some things. Uber and Lyft? If they get some kind of regulatory change, they will make it- which could happen.
These are cult/story stocks. Like lottery tickets. You might win.
Again, good luck.
Agreed. But you are suffering from selection bias. You’ve picked a few winners and said “look how dumb everyone is for missing this”. But in reality there are many more examples of failed companies that you are ignoring. Based on past experience, it’s far more likely that this will fail. But if it doesn’t, some people will make out big time.
You nailed it. You actually touched on exactly the mindset of where Zillow will be in years. For now it’s at a loss. The future could be Zillow easily if they keep backing underdogs with a dream.
I’ve already seen it locally. Upstart company’s hiring the best of the best in their trade, letting go under sufficient employees and underpaying talented new hires because they can’t negotiate a fair wage.
It’s cutthroat but it’s thriving. Proof is in estimates for work expected. 23,000+ for a 9 window replacement on a 47 year old home, is why people hire me for 300.00 a day as a homeowner helper, and the windows they chose are 3,000 off the shelf with 20 year warranty.
So for less than 5,000 I can, to all local codes replace and their windows and paint new trim to any color they want…..the state loses in permits, inspections ( everything documented in photos and receipts) and I don’t need to pay the state in licensing per county (31) for my rights to assist a homeowner with a bonded contractor.
Suck it up, nobody is falling for permission to improve a house you own. Zillow is already looking for people like me daily…I just don’t need them. But they are winning by playing the long game.
That is genius. Congrats to you. I’ve done full guts and reno’s on the last five of my own homes (permitted and passed in different states/different cities), saved tens of thousands, sold all in awful and in good markets, and you’re right. Exporting your DIY skills to make good money doing a good job at a great price for you and ridiculously low price for your customers, is entrepreneurship at its best. I hope you have more success and only nice problems.
That is a good point. Zillow might be trying to be dominant market share, they do in many aspects, but $100k per door loss is hard to swallow and scale.
Zillow has leap frogged and profited off the MLS provided data and in return is profitable by reselling leads to other agents. Adds insult to injury.
If the combined 800 MLS boards across the country banned together and made a national MLS it would hurt Zillow big time.
You can lose money in the coffee business (ads, leases etc,) but the loss can’t come from the price of a coffee minus the cost to produce. Coffee is every restaurants most profitable item. The barrier and overhead for SB was introducing Americans to the Italian coffee house concept (the founder’s inspiration) where the main product is coffee.
As for Genentech and similar bio-techs employing scientists to develop new molecules and testing for years before possible approval, it is hard to see a comparison to real estate flipping.
This could also be a commentary on trying to flip houses this late in the real estate cycle as opposed to Zillow’s money losing business model. Many flippers make most of their money not from their genius at picking and fixing up houses but in getting the appreciation during the time they own the home during a period of rapidly rising real estate prices. Once the market crests and heads down the other side Flipping becomes a money loser for everyone. Zillow just puts the accounting out there for everyone to see as opposed to the flippers who put 500 hours of their own labor in to a house and gain $5000 on the trade after all materials and commissions are accounted for and think they are making out.
Good points, to flip successfully you do have to buy at the right time and at the right price.
You make your money when you buy.
However you also have to control your costs carefully ( Including your labor) and do a decent or better job of upgrading the property.
Get sloppy and you will learn a valuable lesson.
I think, in Zillow’s defence, they are probably planning on making up the loss with volume.
It’s the Walmart approach.
Sounds like they have the Uber/Lyft business model – they lose money on every transaction, but they’re going to make up for it in volume.
Their P/E is listed at 20 on Yahoo finance. If they’re losing money, how do they have profit? I don’t get it. Sorry if it’s a dumb question, but you were forewarned by my monicker.
I’m referring to Uber’s IPO and listed P/E, to clarify.
Zero Brain,
Your brain is just fine, Yahoo is wrong. But you’re also very observant.
The listed P/E ratio should be blank.
Just google: share price uber
This will pull up Google’s chart and share data for Uber, including P/E. You will see that the P/E data is blank — and correctly so.
MarketWatch shows Uber’s PE ratio as 69, which is incorrect, and should also be blank.
With these IPOs, that kind of data is often unreliably displayed and is best ignored.
That’s crazy – from the consumer perspective, these sites only exist to convey information, and it turns out they’re just making up random values.
So what do you do after you have overpaid for outdated inventory. My guess is you slice and dice the paper and sell it to investors.
No, what you do is sell it to the national bank, who holds it because to sell at market price would destroy the economy (see Spain, Italy, et al.)
Or, check out Wolf’s regular and excellent updates on how much Mortgage Backed Securities the Fed still owns this long after the last crash.
The Fed is the USA national bank. It’s biggest advantage over most countries is it can print dollars which are still the default currency for business.
If the Fed sold all of the property it’s propping up the value of (at true market value) the world economy would take decades to recover. But housing prices would go down…
The Fed renewable energy.
The Niagara Falls potential energy converted into 4.9 millions Kilowatts.
The FedRate waterfall is converted into assets bubbles !!
It started in 1980 @ 20%. From there a dive all the way to the selling climax @ 3% in the 1990’s.
1) The response was sharp & fast.
In 1995 the FedRate hit 6%.
The FedRate osc for 5Y, in a trading range, between 1995 to March 2000.
The “event” of middle 1998 created the backbone of the SPX for the next 14 years, until 2013 and the NDX bubble all the way to March 2000.
In 1998, the FedRate was cut sharply, creating a spring board, that enabled the jump of the dotcom bubble.
2) From the upthrust of 2000 @ 6.5%, the FedRate lurch lower all the way to 1%, in 2003/04. After a while up again to 2007 lower high.
A new bubble was born, the RE bubble of 2006/07.
3) From 5% in 2007 the FedRate fell to zero, hugging the zero line until mid 2015.
Zero interest rate created easy debt, that gave birth to the multi assets bubble :
American have reached a high plateau never seen before, in 2019.
“American have reached a high plateau never seen before, in 2019.”
Funny, but isn’t that what is always heard right before a crash? That’s at least on ticked box. Seems like another is when people start saying they’ve reinvented a new economics and the old rules don’t apply.
Before the crash I watched all of the home repair, redesign, renovation, house flipping shows on TV. After the crash the sight of these shows made me sick. I thought all the flippers had leaned an expensive lesson but I was wrong.
You assume the work you is substandard. The tools used are used and old. The last 14 years I’ve ran a crew with the best of the best knowledge and skills and direction. You watch too much tv and have never seen and entire house flipped in days from destroyed to finished have you.
Major flippers have timelines, the partitioned crews don’t get distracted, they are there to get you in and out and collecting paychecks in hours.
EXACTLY
This is like the old quote
“Most men spend more time defending their laziness, than just doing the work”
I spent my 25-45 years of age, working alone buying houses as quick as I could and fixing them up, and putting in solid renters; and I never sold until I turned 50 ish, always bought on 15 year fixed; I think if you do your own work, or are your own contractor, how could you do wrong?
Lastly, of course, what kind of baboon goes on TV, just an IDIOT, as we all know most working men of any quality are too busy to play games for ‘hollywood’; Besides largely do the fixer-upper deal is being under the radar, once you were on TV every ‘inspector’ in your state would be tracking you, most IMPORTANT rule in REAL BIZ is keeping a LOW Profile.
Good business model. During the crash of 08, banks had millions of reo’s in their books. They kept most of them off the market or sold their “list” to investor groups, which held to rent. Banks lend money at the cost of their reserve rate, which can run 1-1/2 to 8%. There is no real risk to lending a $100,000 dollars for a mortgage, which costs them $1500 to $8000. The real cost is made in the first year (amortization is all interest the first several years) of the loan.
Buy and hold.
The house next door went on the market last year. I offered them a low ball bid, which was the value of the lot, plus something. The seller said to me, the house is a tear down. Flippers came in and put some lipstick on that pig. Basically did nothing to the structure including the flat roof, and the original septic tank (built in the 50s). They did manage to get a shed attached to the house permitted, and add to the sq footage which was still barely 1500. Amazing what you can hide with chicken wire and stucco. SoCa, I offered them 1/4M, and the flippers paid about 20 more, and sold it almost 1/2M. The water meter is still 1/4 mile off the property on private land. The foundation is compromised, you could see cracks in the floor and ceiling. They worked on it for six months, cheap mexican labor, off and on, they sold it to a lower blue collar hispanic family, citizens anyway. Everybody in the family has a job incl the mother in law. Nobody has time to go complain to the city, and they don’t understand that stuff anyway and they cannot afford an attorney.
The Zillow method is to price everything in a neighborhood within a narrow range, this house prices about 40K less than mine but it would take 200K to bring it up the same standard. The flipper sees this, and fills in the space. Now Zillow has said, why don’t we do this? They certainly can’t do any worse, and they will probably have a business check list and even a guarantee. If two houses are the same price they should have the same basic amenities. My neighbor has no recourse. Another 2008 and I feel sure he will lose it, and that might be the best result for him.
Reminder – ALL REAL ESTATE IS LOCAL
A friend of mine, has a suburban house in the Greater Toronto Area (Canada) local wisdom put the value at 1.4 Million Canadian Pesos :)
Local sellers on comps in the neighborhood have declined… Now even 1.1 or 1.2 Million is not clearing inventory. Local comps are indicating 850k to 900k is the real number where buyers and sellers can meet.
Funny… No one in the area is talking about Real Estate at parties anymore… Strange…
Why 1/4M. Do you mean $250k? They paid 20 more taking it $270k. See, it sounds better than useless fractions. Aside from that, I question how this blue collar family can afford to buy a “1/2M” house and not be able to afford a $1,000 attorney. I also question why the city doesn’t have standard inspections and due diligence upon the sale of a home like every city in this nation. Your post makes no sense and seems like you’re just butt hurt for not having your low-ball offer accepted.
This is hilarious.
“How to buy a flipped house” by Zillow.
…
“Be on the lookout for telltale signs of rushed worked”
“Do your due diligence”
“Learn all you can about the flipper”
https://www.zillow.com/blog/how-to-buy-a-flipped-house-157539/
It could be worse
https://www.bloomberg.com/news/articles/2019-05-09/young-real-estate-flippers-get-their-first-taste-of-losing
If Zillow moves to a hybrid (part free and part subscription) model then it could become profitable very quickly.
I subscribe to Morningstar. That company has a $5.7B Market Capitalisation versus $7.0B for Zillow.
As a brand, Zillow is a lot more valuable than Morningstar in my opinion.
Why would you pay to subscribe to Zillow?
Zillow is a joke.
When a home is placed on the market, Zillow automatically increases it estimated fair value to the asking price– completely eliminating any value to its estimation algorithm.
Some friends have had their house on the market for over 2 years. Zillow obligingly increased its estimated value to their asking price, and then obligingly trailed the asking price down by nearly 20% since then.
All of this in an area that Zillow insists is a ‘seller’s market’.
The evidence leads me to believe that Zillow *may* be subsidized by certain elements to try to prop up housing prices. Because otherwise — other than providing a useful way to access MLS plus historical sales information — they are completely useless.
Dale, I don’t think Zillow deliberately inflates values.
They are simply using an algorithm that is not suitable, it treats all homes in a certain area as though they were similar.
This works pretty well in a subdivision that’s less than 5 years old and that has sufficient transactions.
After 5 years or so even in a subdivision with 3 styles of home you start to see wide variations in the quality of the landscaping, the maintenance and the additions or upgrades.
In an area like Western Sonoma County the “Zestimate” isn’t even wrong.
Everyone thinks it is so easy after watching all those programs on tv, unfortunately they don’t get to see the “other” problems with flipping houses. One of my customers in 2008 had three houses that he was trying to sell when the crash happened, he lost all three houses, lost the millions of dollars that he had made the prior 5 years, lost his marriage and the dog died. Be very cautious when entering this line of work. If you can buy everything with cash, the bank can’t take it back when the next crash happens or when the Democrats take the white house again. GOOD LUCK
Obama became President in 2009, but of course he is responsible for the crash of 2008 due to his time machine.
But he wore a tan suit! That proves he caused the S&L crisis in the 80s, and the 1918 flue epidemic, too!
He didn’t have the right banker.
You think the Democrats are bad?
You should thank the Lord we don’t have Bolsheviks like President Dwight Eisenhower in the White House, who presided over 90% income tax rates, and destroyed the economy.
Calif has a 3.3% real estate transfer tax if you have owned the house for less then 2 years and the tax is on the sales price of the home. I have seen dozens of flip houses in Sac were the flipper purchased in Feb and put it up for sale in April or May. Overall flipping is already at the end of the RE lifecycle.
That two year rule only applies to your primary residence. If it is a rental or flip, it does not apply and CA will take their 3.3 pound of flesh. Additionally, the Feds will extract their share of your capital gain.
Thank you for that very interesting info.
Well, I guess shedding billions of dollars in losses and ransoming the reputations of bullish Wall Street analysts and venture capitalists is one kind of ‘moat.’
Isn’t Zillow playing both sides? Zillow gives an estimate on homes. So who is to say it did not quote a high number on a home it was selling (i.e. shilling for their own goods)? If they did this, may be it is time to regulate Zillow — they are the only place that comes to mind to check on data about homes (and they have been buying out competition).
How long will it be before the buyers lose trust in information offered on any home? Fake prices, anybody?
Your Realtor has the same information, and its on other places online as well.
I did read a very interesting article about how money laundering and the way the real estate industry finds a few ‘similar’ homes to base a price on, and how that appears to be very easily able to get out of control. Vancouver was the market they were looking at.
Who would have thought that selling $10 bills for $8 would be a viable business? And yet, all those people who get paid based on share prices are coining it in
I know some people who have been flipping successfully for many years, and even survived the housing bust. But they all spend a lot of time and money on rehabbing the houses. They buy run-down places that have potential. They spend time and money turning this potential into reality. And then they sell for a price that covers all their costs plus some to make a fairly good profit.
There is real “value added” in these flips – and they also involve know-how about rehabbing a house cost-effectively and for maximum effect.
But Zillow is more like a merchant that just buys and sells. There appears to be fairly little value added. So why would a home buyer buy the house from Zillow and pay more so that Zillow could make a profit, when it’s just as easy to buy the house directly from the seller?
In other words, Zillow tries to be another layer between buyer and seller. And I’m not sure where the profit margin is going to come from.
I flip houses in central Massachusetts. I don’t know how an algorithm can properly assess a homes current value, the repairs cost and timeline, and finally the selling price. While there is a lot of due diligence we can do online to make a bid, when we have an accepted offer it still takes a person to physically walk the property to make an accurate assessment of the scope of work and timeline. There are still surprises when you open up walls that add time and money to remedy. This report shows that Zillow and other Ibuyers have not figured it out either. Zellman and associates has done some research work on this as well, worth reading.
“There are still surprises when you open up walls that add time and money to remedy. ”
In similar work in our town we call these “hidden costs” experience shows they average at 30% of estimated cost over a number of projects..
Hence add 35% to estimate and end up within expected cost for project, then only relying on Mr Market to hit expected ROI.
So add 30% to the algo number and see if the project still adds up.
There is a fraud/scam in this zillow deal somewhere probably in the “Cost of sales” and where that money really goes. Havent put my mind to it.
Just as most of the profit in most reits goes into “associated maintenance costs and salaries”. Leaving the investors with annual losses.
I don’t flip houses, I flip things like oscilloscopes. There are so many factors – what’s the seller’s concept of what it’s worth? It is merely dirty, or is it actually worn and a simple clean-up won’t do much good? Are they throwing in probes? You always, always make your money when you buy.
I suspect houses are much the same. You have to have kind of a “bottom feeder mentality” as we say in electronics surplus, and know how to pass up deals because while they’re deals, they’re not good enough. You make your money when you buy, so you’ve got to find the ugly house, etc.
That two year rule only applies to your primary residence. If it is a rental or flip, it does not apply and CA will take their 3.3 pound of flesh. Additionally, the Feds will extract their share of your capital gain.
Maybe I missed some news coverage, but isn’t there an inherent conflict of interest here? Zillow’s primary service is offering a supposedly objective and accurate evaluation of property worth through the use of extensive data collection and proprietary algorithms. If they are now going to be trading in the very same market for which they provide assssments, there’s a huge motivation to tweak the valuations in their favor.
can’t be any worse than banking’s conflict of interest. let’s they provide “independent” investment advice, actively invest for their clients, and trade for themselves?
but it’s ok. there’s like a chinese wall or something.
LOL. I swear I have the worst market timing. I’m thinking of selling a service where I post what I buy and sell and my subscribers do the opposite. But I think the execs at Zillow have me beat. What bad timing to try to jump into real estate flipping now!
Wah, imagine what uBer’s market cap would be with these financials?
Thinking about the Uber IPO today, and other IPO’s like Lyft, and years ago, Facebook. It seems to me that we have to start looking at companies from a different perspective. Not that I agree with it, or think it is anything but an oncoming disaster, but the world is what it is, whether I like it or not.
I have been wondering why stocks go up even when companies consistently lose money. So, for Zillow I was thinking why people only look at Revenues, rather than the full financial picture (Balance Sheet, Cash Flow, and Income Statement). If you are losing money your Balance Sheet is obviously being “drawn down” to finance your loses. Even if you show a profit, you could be eating away at your core financial strength by eating away at your assets. So the question I keep wondering is how this new revenue focused model of companies constantly losing money but their stock value keeps rising can continue. I think I have a possible answer.
I think that you have to create companies in order to have stock. Like you need colleges in order to have college sports teams. The company is the “brand” and the stock is the “product”. So, the wealthy class creates companies and funds their losses pre-IPO with their wealth. Eventually the company does an IPO. The wealthy get the bulk of the position in the IPO, or like Uber today, they drive the initial price down to drive out the suckers, then buy in and pump up the stock price. So, they create the company to have a brand for the stock. The company continues to lose money; lots of money. We wonder how they can continue in business as normally if you lose money long term, you go out of business. So, either you have to show profits to fund the business, or you need additional capital provided by external investors. My theory is they don’t care if they lose money because they make far more money off of the stock price increases. For example, lets say a company loses a billion dollars. If the wealthy investor(s) make five billion in profits on the stock, they are fine funding the one billion dollar loss the company experiences. So the real business for Zillow isn’t real estate, it is the printing of money through stock price increases. Part of the stock price increases are used to fund the continued losses. This model can go on ad infinitum, or until the stock price either stops increasing, or isn’t enough to fund the company’s losses. The only way to continually fund losing companies with stock price increases is for their to be winners and losers in the stock market. Or, there have to be suckers on the other side of the transaction. As long as there are suckers (individuals, 401’k’s, Institutional investors such as pension funds) the game continues. If the suckers disappear – game over. What the wealthy aren’t taking into account is that even though the company’s are”fake” and the stock is just paper, there are real world implications to the activities behind the company’s. Uber/Lyft impact taxi cabs and drivers, Zillow impacts Realtors, etc. The impacts of the predatory losing company’ will be what ultimately causes the “crash”.
If anyone read this far I would be interested in whether you agree that the product is now the stock, and the stock needs a brand (company identity), and the game is printing money through stock market manipulation. This to me is why nobody cares anymore about whether a company makes money or not.
Boulder Mike,
You make some good points. Also keep in mind that Zillow can go to the market for an equity offering to continue to fund brand growth, revenue growth and market share growth. Tesla did this last week.
Zillow would make a good acquisitiion target. IBM would buy anything and pay any amount to cover up it’s gradual decline. That’s how this market works.
Basically, it’s the crypto, stamps, or beachfront property. You’re buying it today, not really because of “intrinsic value”, but because you think someone else will pay more for it tomorrow.
Boulder Mike… You absolutely hit all the points on how the processes work. This sadly has become the norm for companies that do not have a tangible product. I know having inside the industry for decades.
Totally agree that the demand they are creating is for the stock, not the real estate. Shares of stock have been commodities for decades, “investors” are only betting the prices go up, they don’t care about fundamentals. The homes are the medium for raising money and share prices on Wall Street.
This happened in retail too, which expanded due to money from Wall Street, not from actual store sales. We are now seeing the ramifications of the reversal of that trend. Guess how this will end.
Excellent points.
SHHHHHHHHHH!! Somebody might be actually reading your post and “thinking”!!!! LOL!! It really is no longer the “product” but the “music” that is being listened to!!
Here I am thinking my business running at 5% in the positive is horrible. I just need to make my numbers bigger and put them in the negative and I could run out for an IPO.
Boulder mike
Yes I agree , the product is the stock. I do remember back in 1999 to 2002 and many many stock(products)went poof. Can happen again Although the fed money printing environment is different this time
I have faith that one day the fear will over ride the greed. THe elephants just need to suck in as many muppets as they can to be the bag holders. Again …
All along the watchtower
Princes kept the view
While all the women came and went
Barefoot servants, too
Outside in the cold distance
A wildcat did growl
Two riders were approaching
And the wind began to howl.
Written by Bob Dillan
Love me some Bob Dillan.
Zillow’s online real estate valuations appear to be wildly inaccurate in many cases.
Burning cash is an American artform
Just don’t see it this in Europe.
All about volume. Scale economies (unit sales in the millions) with a 5% margin could be a really good business. I view this as equivalent to what Chuck Schwab did in the mid 1970s with stocks. Since the May Day deregulation in 1975, the cost of trading $1 million in stock has fallen from $5,500 to $10. Obviously there is more friction in houses (title issues, accrued RE taxes, inspections, etc), but no reason to pay 6% to sell your house. It can go a lot lower.
Wolf – Car dealers exist mainly to manage disposal of used vehicles and, most importantly, to provide the management layer of the service network. New car sales are a loss leader at even the largest dealers.
Even if they could, the major manufacturers wouldn’t abandon the dealer model because the incremental cost of developing and managing a viable service network would be outrageous. The real estate costs alone would be virtually unfinanceable, whether acquiring from the (hostile) dealers they just fatally stabbed in the back or building out new.
Tesla is an outlier, a bump in the skid mark of history. No real way to recycle cars via trade-in, a service mechanism only a half-wit geek from Silicon Valley would tolerate, and not enough capital to move beyond their generation one business model.
A Citizen,
Several items in this comment are wrong. So I’ll address just a couple of issues – financing and service.
Dealers are largely financed by the automakers’ financial branches. For example, our Ford dealership’s new and used vehicle inventories were financed via a floorplan arrangement with Ford Credit. Our 500 or so rental cars were financed with Ford Credit. The debt to finance our vehicle inventories exceeded at all times the debt to finance the property by a big margin. Just do the math: 1,000 new, used, and rental vehicles times the average cost…
The property, yes, it was financed by a bank, but Ford would have had an easier time funding real estate than an independent dealer. For example, it could roll all is retail real estate holdings into a subsidiary and finance it for a song at the institutional level via bonds that are rolled into CMBS. An independent dealer doesn’t have that option.
In terms of service: When you talk about the profits in parts and service, much of this is based on warranty work – and the automaker pays for all of it. Automakers routinely get ripped off by (unneeded) warranty work. Dealers make a ton of money on warranty work, and all this money – for parts, labor, and profits – is paid by automakers. Automakers have elaborate and expensive systems in place, including a lot of staff, to minimize getting ripped off by their dealers on warranty work. This includes warranty audits, computer systems, approval systems, and the like.
Automakers also have elaborate systems in place to train the techs. So automakers are heavily invested in the dealers’ parts and service operations.
On the new-vehicle side, a Ford dealer spends a lot of marketing money and does a lot of price-cutting to compete with other Ford dealers – because in most big urban markets, the biggest competition for a Ford dealer are the other Ford dealers in that market. This effort is totally wasted as far as the automaker is concerned.
These and many other reasons have been studied for years as benefits of setting up direct sales operations, if they were ever allowed, which they won’t be because the dealer lobby is very powerful at the state level.
Granted, there are some other issues that direct selling cannot solve or will create, so it’s not all roses, but dealers know that the franchise laws that protect them are there for a reason.
There is no magic here, Zillow Offers is a classic bait-and-switch product. 98% of all Zillow Offers are declined, leaving Zillow to sell these requests as leads for referral fees (estimated at 30%-40% kickbacks on gross value of broker commissions.)
https://homeopenly.com/Reviews/Zillow_Offers
Great overview, but the true real revenue here are kickbacks, Zillow doesn’t really want to flip homes, it simply looks for a cut of the transaction completed by an overpriced Realtor. Zillow Offers is just a cover story.