Zillow Exits "Fix & Flip" Space
Zillow’s big headline in early November caused investors to reflect on the current conditions of the “Fix & Flip” market. When a company with the bandwidth and brand recognition of Zillow reports large quarterly losses in Q3 and projected Q4 losses of over $500 Million, it makes investors pause. We see five key topics as indicators which were overlooked and likely contributed to Zillow’s missteps in a popular segment of real estate investing.
- “Automated Flipping”: The Q3 earnings reports and investor letters mention that the iBuying business of “automated flipping” was too difficult to execute. We are huge advocates of having a system to rehab properties, but thinking that flips can be automated with so many variables multiplied by 100’s of different markets across the country wasn’t a smart bet.
- Technology vs. real estate investment company: We use technology like Monday.com, Podio, and the MLS to run our business but these are tools to efficiently run an investment company, not the other way around. Having data at your fingertips and complex algorithms should help inform investors, but the nuts and bolts of running a business, even with Zillow’s focus on cosmetic flips, wasn’t a scalable model for success.
- Rising costs & labor shortages: We’ve developed great relationships with contractors and sub-contractors that gave us insight over three years ago that labor costs were rising even before the huge spike in new Fix & Flip investors entering the Denver market. Homeowners with increasing equity, stable jobs, and growing families were also needing contractor services long before Zillow ran into labor and supply chain issues. These challenges were further exacerbated with COVID’s increasing shift for homeowners to have a need for more and improved space in their properties.
- Local partnerships with market experts: The iBuyers, Hedge Funds, and Private Equity companies who have been successful in real estate investing are those who team up with established and knowledgeable local market experts. While real estate has fundamentally similar economic drivers, every market is unique. Location, location, location is important to understand on a number of levels. One cosmetic remodel in Phoenix is drastically different from Denver and the small details of putting out a great finished product is an area Zillow overlooked when listing their flips.
- Profit + Appreciation= ROI: Zillow was including appreciation into their yield calculations which also got them into hot water. We never factor in additional appreciation as the turnaround time should be under 3 months for most rehab projects. While appreciation is likely in the current market, it shouldn’t be factored into the ROI calculations to make the numbers work.
Zillow is a great data and marketing company that continues to move the real estate industry forward which is a huge net positive. Other iBuyers are increasing their business so it’s all a matter of perspective. While some are concerned, we at ELEVATION see this as a major opportunity on a local level. We’re still using strict investment guidelines and are making cash offers.