5 Things We Learned From Zillow's Failed iBuying
In November of this year, Zillow decided to terminate its house flipping business. Rich Barton, CEO of Zillow, said,
"We’ve determined the unpredictability in forecasting home prices far exceeds what we anticipated, and continuing to scale Zillow Offers would result in too much earnings and balance-sheet volatility," Barton said.
Which is a word-salad way to say, “We have no idea what we are doing”.
As a seasoned house flipper, I grabbed my popcorn and waited for this house-flipping model to implode the minute Zillow announced it was getting into house flipping. I sat back and watched as Zillow seriously overpaid for homes in our market. Many times, sellers I have talked to chuckled when they told me that Zillow paid much more than they expected for their properties. Add to that the labor shortage and material cost increase, it’s easy to see that Zillow ibuying was doomed to destruction. Here is the funny thing – everyone but Zillow seemed to recognize this.
There are several takeaways from Zillow’s failure, but we will just touch on a few of the most glaring ones:
You Can't Trust Algorithms
Algorithms cannot reliably predict home value without oodles of data and really knowing a market street by street and neighborhood by neighborhood. There are some neighborhoods in our market where home values can double when you cross a single street. The nuances of street-by-street valuation of homes is mostly lost on an algorithm. Extremely experienced real estate agents are the best bet for home valuation and market pulse- but even they get it wrong sometimes! And getting home pricing wrong in house flipping is a very expensive mistake.
A Home's Value Depend On A Variety Of Factors
Even a good comparative market analysis by a competent realtor does not always show the full picture of home value. There are so many things to consider that only an experienced person can get right almost every time. These items include home layout, curb appeal, neighbors, architecture, outdoor living spaces, age of systems, etc. These all work together synergistically to either add or detract from a home’s value to an end buyer. Just being in the right town, neighborhood, or school district is not enough. Most homes are purchased based on emotions, not logic. If the home does not strike the right emotional tone with most buyers, it will sit on the market, required discounting to sell, or end up in the investor’s rental inventory.
You Cannot Systematize Everything
One thing I learned quickly while simultaneously flipping dozens of houses at a time over a decade is that house flipping is almost impossible to systematize. You have to reinvent the wheel every time you renovate a house. There are so many factors to consider and so many intricate decisions to be made, that attempting to systematize this process is almost an exercise in futility. Can you make the process more efficient? Sure. Can you systematize parts of the process? Of course. But the business requires a trained eye examining each and every property and making decisions on how to remove objections for future homebuyers.
House Flipping Needs Really Good Contractors
And they are unfortunately quite rare. As the old saying goes: you can have cheap, or you can have fast, or you can have good, but you can’t have all three. Successful house flipping requires so much nuance in construction that you really have to throw trust out the window and micromanage every project. Scaling does not lend itself well to micromanagement.
Flipping Homes Is Hard
Although it can be profitable, home flipping is a difficult business because it requires a multitude of skills to execute successfully. Anyone who has ever completed a home renovation project learns this lesson quickly. Imagine doing home renovations for a living.
With Zillow’s house flipping failure, we can learn that this business requires much more than computer programs and capital to be successful, even in a hot real estate market. Imagine if Zillow had tried this model in 2010 when we were lucky to have one showing a week, much less one showing every 15 minutes. Back then, flipping houses was all about removing as many buyer objections as possible and providing a great product at a great value. A trained eye and tight budget controls were key.
It will be interesting to watch as other ibuyers continue to try the institutional house flipping model using algorithms and software to evaluate homes while overpaying for property, doing little to remove buyer objections, and then asking a premium on the market.
In this business, you have to make your money when you buy a property. Paying too much and expecting the market to make up for your buying mistakes is a recipe for eventual disaster. It’s not if, it’s when.
So, if you are thinking of selling your home and want to get fair cash offer- call us at (704) 802-1097 for a hassle-free process!