Did you hear the news about Zillow? It finally admitted what I’ve been saying for years – its home flip business is a flop.
Zillow’s stock price plummeted over 25% in 24 hours after announcing that its home-flipping division (known as “Zillow Offers”) is taking such massive losses that it is being discontinued. The company said it plans to lay off 25% of its workforce.
As stated on CNBC: “The homes segment, which is mostly Zillow Offers, lost $422 million in the quarter, producing an overall net loss at the company.”
Zillow shareholders must wonder if their stock will ever stop tumbling. The firm’s valuation has dropped over 60% (down $33 billion) from its 52-week high.
I predict Zillow is only the first of the flippers to fold. Other well known brands will soon follow. Why?
The home flip business presumes Americans are so naive (or uninformed) that they will sell their homes thousands below market so these institutional investors (known as “iBuyers”) can flip them for a quick profit.
“Being smart spoils a lot of things, doesn’t it?” – Thomas Harris
To further enhance their profits, iBuyers typically charge sellers a commission (5%-9%), in some cases more than a Realtor would charge (iBuyers call it a service fee). I find it incredulous that Zillow (and the other iBuyers) expected that many people would knowingly sell their home below market AND also pay a hefty commission, particularly in one of the best housing markets in U.S. history.
I’ve been in real estate for over 50 years. There have always been “niche buyers” who look for homes in need of a remodel. After investing time, money and talent, they sell those homes at a profit to buyers (like me) who want it move-in ready. They provide value for those of us who don’t have the time or specialized knowledge to remodel a home.
But today’s iBuyer flippers (like Zillow) typically don’t add value. They simply try to buy low and sell high, and charge a commission on top of it. They frequently try to keep people from knowing what their home is really worth. Homeowners are commonly warned: “Market your home in MLS (to find retail buyers) and our offer is off the table.” In my opinion, it’s one of the most ill conceived business models ever devised.
“Evil people rely on the acquiescence of naïve good people to allow them to continue with their evil.” – Stuart Aken
It gets even worse. iBuyers typically use purchase contracts allowing them to cancel the sale up to the day before closing at a minimal loss (typically only $1000 earnest money). This has left many who thought their home was sold with a last minute disappointment.
“The big print giveth, and the fine print taketh away.” – Fulton J. Sheen
“Taketh away” is exactly what happened when the pandemic hit in March of 2021. iBuyers cancelled purchase contracts en masse. Those home sellers had often bought other homes, and were left out in the cold.
My real estate firm (and many others) stepped in to help these abandoned sellers sell, many of whom having already purchased another home. Fortunately, these sellers were often able to sell for thousands more than their cancelled iBuyer contract.
“Zillow Offers is a classic bait-and-switch sales model.” – Dmitry Shkipin
Everybody knows the traditional process for selling a home is stressful, inconvenient, and uncertain. Nobody likes strangers traipsing through their home day after day. Nobody likes constantly wondering, “When will my home sell and for how much?”
Have you heard the phrase “friction in the transaction”? Friction is inconvenience. Friction is uncertainty. Friction is stress. People will pay a price to remove friction from their lives. iBuyers know this.
Eliminating this friction from selling a home is what iBuyers try to profit on… but in the wrong way. Homeowners who sell to iBuyers often have no clue how much they are giving up. It’s a business model that feeds on lack of knowledge.
It’s relevant to state that my inspiration for launching the 72SOLD program was to eliminate the friction from selling a home (make it convenient, certain, and stress-free), but never make money flipping homes for profit. We give sellers the difference when a retail buyer is willing to pay more than our price. My business is built on making lives better, not taking advantage.
I see business in two categories:
- Do you make money by making lives better? Amazon does. Uber does. I do.
- Or do you make money by taking advantage? In my opinion, that’s what the big corporate iBuyers do.
In the words of visionary real estate developer, James Rouse:
“Profit is not the purpose of business. The purpose of business is to provide a product or service that people need, and do it so well it’s profitable.”
With that in mind, if I was a shareholder in an iBuyer company, I’d be selling my stock today.
Greg Hague is the CEO and founder of 72SOLD.