Is Zillow really in trouble?

Question

Hello everyone,

I'm sure most of you have heard Zillow is shutting down its home-flipping business and that Zillow is dumping its properties by selling their homes below what they paid for, hence, losing a lot of money. I don't know if this is entirely true so as a flipper and Realtor myself (Orlando, FL market), I did some research and this is what I came up with.

I got a Zillow offer for one of my homes last year and this was their offer. They said my home was worth $491k (which was a fair market value at the time) but the seller will get about $426k (before repair costs). If I wish to proceed with this offer, Zillow will schedule a visit to my home to do an in-home valuation and factor in repair costs in order to finalize their offer. If I were to sell my home to Zillow, it will show $491k as the purchase price.

Zillow is making 7.5% (Zillow Service Charge) from this sale and has all their selling and repair costs covered by the seller. If you are a home-flipper making 7.5% and have all your costs paid for, it's not a bad model even if you sell it at the purchase price. I just don't know what we are reading in the news is entirely true.

What are your thoughts?

Chris Mason · Answer

In addition to what @Russell Brazil said, it also matters when in that year you got that offer from zillow. Most of the "my realtor said list for $600k and it'll hopefully get bid up to $650k, but zillow offered me $675!" type anecdotes came from around May to September of this year. They obviously made some tweak to their algorithm, or something. And it's also possible that the z algorithm just didn't like your particular home.

Interesting and worth noting: The Realtors above, when confronted with "zillow said they'd buy it for $675k, why should I list with you?" by answering "GREAT! TAKE THAT DEAL!!! No way I can sell it for $675k, take that offer!" rather than chasing a single commission check, are the Realtors that I believe will be most successful. That client, in the future, is going to come back to that Realtor. And, once all the covid dust settles and there aren't companies trying to grow their biz by losing money, said Realtor will get that future business. The Realtor that tried to still convince that seller to list with them, by contrast, not only didn't get THAT listing, they also won't get the FUTURE business because they failed the integrity test. In my world doing mortgages, I can't tell you how much business I get from telling people NOT to refinance when it doesn't make sense. Everyone else is spamming them with "refi, refi, refi!!!" so when I'm the sole voice saying "I dunno, maybe, actually no, this does NOT make sense, you shouldn't refinance if you're going to sell the home in 9 months (or whatever it is)" I very quickly become the go-to mortgage fact checker for that person's entire sphere of influence. Far more valuable than one single stupid transaction!

Russell Brazil · Answer

In 2019 Zillow lost $400 Million flipping homes, in 2020 they lost $100 million, in 2021 they lost over $500 million. Zillow isnt making 7.5% on that house. That is what they are charging, but the whole transaction will amount to a loss.

Mike Chen · Answer

Thanks for everyone's feedback.  I guess my title is a bit confusing.  I'm not arguing with the fact that Zillow is losing money on paper but there's more to it than what we read in the news.  A lot of people are saying Zillow is dumping their homes for less than what they paid for and this is just not true.  What Zillow actually paid for a home is way less than what the public records show and we all need to recognize this fact.  When a home is sold to Zillow, Zillow makes 7.5% right off the bat.  In addition, the seller is also paying for Zillow's selling costs (both sides) and repair costs.  In essence, I believe Zillow has misled the public by not fully disclosing the true price they paid for a home.  If you see a $500k home listed by Zillow and the history shows Zillow just paid $500k a month ago, don't believe Zillow is selling it at a loss.

Bill F. · Answer

@Mike Chen

Excitedly interesting point you bring up. I think a complete answer to your question would take hours of digging into their SEC fillings and FASB updates to really get a definitive answer.

After reading their 10k for like 30 min I think I have a start.

Your are right in one sense that Zillow has mislead the public, but they have done it in the same way nearly every public company does, sometimes by choice, sometimes by convention.

What I mean by this is that the way public companies have to report about their operations isn't up to them, in the U.S they have to follow GAAP [Generally Accepted Accounting Principles]. GAAP only really makes sense to public accountants and financial analysts. Unless you deal with it everyday or study this stuff, you'll have no idea why some things happen. To really understand it you have to be incredibly familiar with how all lines of the balance sheet, profit and loss, and statement of cash flows interact, which most people simply don't, particularly at the level of specificity required for a huge firm like this.

Lets wave a magic wand for a second and say that Zillow bought your house. It would have been added to their inventory, which sits on their balance sheet, at the price that is recorded on the deed. If they sell it for $50k less than they paid for it, they will have to take a write down [this isn't technically true because of loss reserves, but lets ignore that] and write downs are bad. But they only take a write down of their inventory if their carrying cost is less than fair market value.  From their 2020 10k:

--"Inventory is comprised of homes acquired through our Zillow Offers program and is stated at the lower of cost or net realizable value. Each quarter we review the value of homes held in inventory for indicators that net realizable value is lower than cost. The calculation of net realizable value is based on several estimates which may ultimately vary materially from actual results, including our estimate of the price at which we expect sell each home in inventory and the associated expected costs to sell those homes."--Now you are thinking to yourself 'But what about the commission and Service fee dummy?' Valid question, however that money, under GAAP, as near as I can tell, hits their Profit and Loss, and not their balance sheet, so it doesn't impact their carrying costs.

But that gets to the core of your question, which is along the lines of: 'who cares what is technically right, they have gotten a haircut on every property, so this isn't that big of a deal.' If we ignore the commission, which I'm not sure if they keep [I think they do since they have their in house brokerage, but that will flow to the revenue of that business and that makes sense] and focus on that service fee.

I don't have a great answer for you. The 7.5% service fee, according to their website is for "The expenses we take on after closing (taxes, maintenance, utilities, etc.)" and "Any risks associated with reselling the house — like an offer falling through"

Dumb, I know. I mean if you or I bought a flip and put a 7% fee on the CD for that stuff we'd get laughed out the closing attorneys office, but we don't run the most well known name in all of Real Estate.

I can't find the Service Fee in their fillings, but I have only crtl F'ed it so far. I know they don't keep all 7% because they will have carrying costs, but I wonder if they use all of it every time? You could get close to how much they pay by looking at average hold time and figuring out taxes and insurance. The wildcard would be if it took longer to sell than expected. I bet if you put some work into this that you'd find out they have some account deep in the balance sheet that where all the unused funds from that 7% accumulate or that was a plan.

The point you raise does raise question why they got out of the game? If they started with all this revenue upfront, they could lose some cash on the sale and still have it as a lost leader in a sense...

Anyway, great observation!

Valentina Naumenko · Answer

Hi Mike. I heard the same thing. Sadly for Zillow but good for Real Estate professionals.

Is Zillow really in trouble?

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