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Crash? Bubble? The Real Reason Zillow Exited the Real Estate Investing Business

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Home » Real Estate Investing » Crash? Bubble? The Real Reason Zillow Exited the Real Estate Investing Business

In the 12 months leading up to August 2021, we saw a historic run in home price inflation, reaching a record 19.9%. But now the market is losing some steam, and the question is, “Will the market Crash or Boom?” The way Zillow is bailing out, you might think the market will bottom out.

Zillow recently scrapped its home investing business, also known as Zillow Offers iBuyers Program – but not because of a presumed market crash. Check out our insights, including a word from our CEO and Founder, Josh Miller, as to what really happened to Zillow’s house-flipping business.

Takeaway: Zillow Did a Poor Job Making Offers and Flipping Houses

“Zillow is getting out of this market because they’re losing money.” – Josh Miller, CEO and Founder of GoForClose

The following charts and margins suggest Zillow did not handle its real estate investing business well.

iBuyer Gross Profit Margins Chart Zillow

Zillow Profit Margins are a combination of the purchase price, sale price, renovation costs, and service fees. As can be inferred from the chart (above), Zillow continues to earn less than its peers.

Purchase Price-to-AVM 2021 Zillow

When Opendoor and Offerpad lowered their asking prices to flow with market trends, Zillow did not.

Zillow's iBuyer Purchase Activity

Zillow bought too many houses too fast and could not withstand its growing pains.

Reasons Zillow’s iBuyer & Flipping Business Failed

Zillow started its house-flipping business in 2018. Since its launch, a lot has happened. Real estate markets experienced major upheaval – the pandemic, followed by a temporary freeze of the housing market, and later, a record Seller’s Market which steered an unprecedented rise in home prices and homeowner equity.

In October 2021, Zillow paused its iBuyer program because they were not recouping expenses. Also, supply chain disruptions and a labor shortage post-pandemic created a backlog in renovated houses. The cost of holding the houses for a longer period added to the bottom line losses.

In November, Zillow announced they would scrap iBuyer altogether and let 2,000 workers go.

Massive Million-Dollar Loss Mainly Due to Poor Execution

In its third-quarter earnings report, Zillow showed a massive $339.2 million loss, largely due in part to its faltering iBuyer program. Also, they’ll see a staggering write-down of more than $540 million after exiting real estate investing.

Zillow quarterly net income shows massive loss

Bought Too Many Homes Too Fast, and for Too Much

Zillow justifies its third quarter loss to buying houses for more than they could sell them. Wholesalers and real estate investors know that you make the most money when you buy. It’s that difference that guarantees the profit, which means Zillow did a poor job at calculating Maximum Allowable Offer (MAO). 

Another issue was they bought too many properties in a short period of time. In the third quarter, Zillow purchased 9,680 homes, and its overwhelming portfolio pushed the business of closing and prepping houses for sale to its breaking point.

In Q3, Zillow only sold 3,032 homes, and the average gross profit per home sold had a loss of $80,771. Zillow ended Q3 with 9,790 houses in inventory, plus another 8,172 properties under contract. They still promise to purchase these houses and (hope to) sell them over the next six months.

Failed to Run the Numbers for Every Real Estate Investing Deal

Zillow’s iBuyer cracked because its model did not work well. They tried to be nationwide with a single template that was not flexible.

Their purchasing model was defective. It did not account for home price appreciation, nor did it consider how to respond in markets where prices decelerate. It also failed to plan for staffing shortages, prohibitive repair costs, or competition!

That’s right: Zillow competed with investors like you, and though they made higher offers, only 10% of their offers were accepted.

Not Enough Capital to Grow Large Scale, As Needed

Zillow was not prepared to expand to meet demand either, and even struggled to forecast prices and turn house flipping into a scaled business. Due to capital losses, they were forced to stop investing altogether to recover from the financial setback and improve their bottom line. 

As Rich Barton, Zillow’s co-founder and CEO, and Allen Parker, its chief financial officer, admitted, “We have determined this large scale would require too much equity capital, create too much volatility in our earnings and balance sheet, and ultimately result in far lower return on equity than we imagined.”

Barton also adds, “Most successful flipping is done by local flippers, using intimate knowledge of existing home conditions, renovation costs, and market idiosyncrasies, which is something that is very difficult to obtain purely through an automated home value estimate.”

In fact, this is, in part, why GoForClose was founded: to provide effective marketing and lead generation, so as to free wholesalers and real estate investors to dedicate themselves to crushing the numbers, understanding the markets, and making profitable deals. Many investors, like Zillow, underestimate the importance of running the numbers and having the sales skills to be able to close profitable deals and monetize every lead.

Crash? Bubble? What’s Going to Happen to the Real Estate Market?

Based on what we know, Zillow is not bailing because of an impending market crash. They are getting out of real estate investing because they made mistakes on the acquisition aspect of their real estate investing deals.

BUT the market is not going to crash OR boom – instead, it’s going to do BOTH! If you want to know our predictions for the new year, based on what our experts say, you can check out our 2022 Real Estate Investing Forecast!

How Can Investors / Wholesalers Stay Competitive, and Not End Up Like Zillow?

To sum it up, real estate investing and wholesaling depends on three aspects:

  1. The Market
  2. Marketing & Lead Generation
  3. Acquisition & Sales

The Market

Choosing the right market is an essential step, as well as the first. The wrong choice will mean a loss of resources, both in time and money. You need to have a clear idea, down to the county and postal areas, or zip codes, of where to target to get profitable deals.

GoForClose created an exclusive tool to Find the Hottest Real Estate Markets.

This free tool is easy to use, cleans data from multiple sources, and presents it in a way that makes it easier for you to find the best markets to invest your time and money, even narrowing its search down to the hottest zip codes, where sellers have a strong desire to sell and cash buyers are buying.

Marketing & Lead Generation

Now that you know where to target, the next step is finding motivated sellers within your chosen market area. There are many strategies that can be applied, from outbound, with data lists, skip tracing, and list stacking, to inbound, all of which require lead scoring, follow-up, and sometimes nurture campaigns, so when the seller is ready, you are their top choice.

At GoForClose, we know your time is valuable. That’s why we help investors / wholesalers, like yourself, with lead generation and your marketing needs.

Using NextData – our list management system, we pull and prioritize data and skip trace to find you off-market motivated seller leads. We only search and find leads that meet your margins and requirements.

After building you a market-exclusive list of motivated homeowners, we then market to leads, using inbound and outbound marketing tactics. Our trained Inside Sales Associate live answers, prequalifies, and schedules appointments on your calendar.

We do the long, tedious lead generation and marketing work, so that you can focus on sales and closing deals, giving you back your 20-, 10-, or 4-hour workweeks.

Acquisition & Sales

Your profit margin depends on your numbers, and understanding how much or how little to offer, plus your Maximum Allowable Offer (MAO), and when to pursue a cash offer or use creative financing to seal the deal or simply monetize the lead through agent referral. This is where Zillow failed.

However, you have a better chance of success. As Barton said, “(the) most successful flipping is done by local flippers, using intimate knowledge of existing home conditions, renovation costs, and market idiosyncrasies.” Whether you’re flipping, wholetailing, or wholesaling, knowing the market, property, and numbers is key to success.

Sales skills are also vital. The most successful wholesaler/investor is great at acquisitions, from being quick to answer and doing follow-ups, to knowing how to speak with sellers, and sometimes even getting contracts with lower offers, because they’re better at building rapport.

Focus on improving your sales skills and deal analyzing to prevent losing deals with motivated seller leads. It is time well-spent. And the best way to make sure you have the time to focus on your skills, or even get back your hours, is to outsource your marketing. GoForClose does 75% of the work for you, so you can fine tune your offers, speak with sellers, and improve your closing skills, so as to get more contracts and close more deals.

If you have questions or are curious to know more, request a free consultation below.

Wayne Hudson
Business Development Manager

Wayne Hudson has a background in sales and real estate - but with a passion for economics. He uses his knowledge of economics and real estate to help clients think strategically and make decisions to optimize their outcome.
As the company's business developer, Wayne works to help GoForClose grow.

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