from Hacker News

Zillow to stop flipping homes, loses more than $550M, lays off 25% of staff

by swatkat on 11/2/21, 9:16 PM with 458 comments

  • by dang on 11/2/21, 9:40 PM

    The previous thread on this, from earlier today:

    Zillow seeks to sell 7k homes for $2.8B after flipping halt - https://news.ycombinator.com/item?id=29081118 - Nov 2021 (521 comments)

    It seems the current article adds significant new information, so we won't treat it as a follow-up (or dupe).

  • by muttantt on 11/2/21, 9:58 PM

    Crazy. I recently sold a condo to Opendoor for significantly more than I would have even thought to list it for. When I negotiated with Opendoor after their initial offer, I pointed out a recently sold condo (days before, in similar condition, layout and finishes) in the same complex that sold for much higher than Opendoor offered. Within hours Opendoor came back matching that same selling price. The kicker? It was a unit that Zillow bought.

    The algorithms are fooling themselves... Opendoor matches Zillow who matches Opendoor and that's how you get ever increasing offers.

    Edit: oh, and now Zillow has that unit on the market, priced 14% lower than they paid for it, after 3 price cuts so far.

    Edit 2: Phoenix/Scottsdale AZ market

  • by pezzana on 11/2/21, 10:26 PM

    > ‘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,’ CEO tells investors.

    That's quite a statement. The head of a company with a privileged view of the US residential real estate sector says that the market is "unpredictable." Not the good kind of unpredictable where you can't figure out how heavy the money bags that get dropped at your door will be. No, it's the bad kind of unpredictability where you can... lose money.

    Reading between the lines, I conclude that Zillow sees a major shakeout in real estate on the horizon. They've already been hit with losses and see a lot more where that came from. In an effort to get ahead of whatever is approaching, the company is making an abrupt exit from the home flipping business.

    Zillow was founded in 2006, as the last US housing market bubble was furiously inflating. It has seen a complete cycle of boom/bust. If anybody knows the US residential real estate sector, it is Zillow.

  • by woeirua on 11/2/21, 9:52 PM

    This is kind of a big deal in the real estate sector. The only reason that Zillow would sell everything right now is if they believed that the carrying costs of the properties until they (eventually) sell would eat all of their profits. They must be seeing flashing red signs across the board that there's a slowdown in the market and that scenario is exactly what will play out if they don't exit quickly.

    There's no way that OpenDoor doesn't follow them out the door here in the next couple of months. The business model is exactly the same. Anecdotally I haven't seen any reason to think OpenDoor is doing much better around here.

    This coupled with the Fed tapering could cause the real estate market to cool pretty quickly.

    If you're buying a home right now, make sure you're moving somewhere you're willing to live for a while and that you're not going to be in financial duress if your home loses 20% of its value.

  • by filmgirlcw on 11/2/21, 11:14 PM

    A friend of mine had a really bizarre experience with Zillow’s ibuy. First, he sold right his condo through them right before the pandemic (Jan. 2020), but then, literally a week before his 90 day closing period was up, they pulled out, blaming public health orders [1] even though they would never be in his house and it was literally a matter of paperwork. They did this as a way to get out of their contracts and hedge their bets.

    Flash forward eight or nine months, the housing market explodes and they triple down on their iBuys. My friend sells his home again, again with Zillow (I couldn’t believe he chose them either), and they offer him more than they did in Jan. 2020 (he sold sometime in 2021). Even with the extra mortgage payments he had to make, he still ended up making some money on the deal. Clearly, these companies were in over their heads, making bad decisions on algorithms and not doing real due diligence. The fact that they had an out 18 months ago and stopped doing this, only to triple down and lose $550m in a quarter is just staggering.

    [1]: https://www.forbes.com/sites/brendarichardson/2020/03/28/zil...

  • by silisili on 11/2/21, 10:38 PM

    I don't get Zillow's play here.

    They were for a long time the de facto neutral party everyone used to look at houses. Great. Then they got into doing contracts apparently, still OK.

    Then they started competing against people and overbidding everyone, at the height of what appears to be the biggest housing boom of my lifetime. This was not only apparently financially dangerous, but an act that puts them in a bad light, publicity wise.

    I cannot think of how anyone thought this was an OK idea.

  • by busterarm on 11/2/21, 10:48 PM

    All of the 'Owned by Zillow' listings here in the Miami area are _really_ shabby flips. They'll basically redo the kitchen and leave the rest of the property looking like garbage and then ask for a 15% markup.

    Also they prioritize those listings now, with no way to filter them out, so when looking at houses I end up just scrolling past several pages to get to other listings that I actually want to see.

    It's amazing that this whole scheme has made their traditional user experience worse at the same time.

  • by vkat on 11/2/21, 11:29 PM

    We recently went through buying a Zillow owned house in Phoenix AZ and response and attitude from the selling agent and zillow was pathetic. They took 3 full days to send the signed contract after they told us we our offer was accepted.

    Couldn't get the inspection done within first 9 days(inspection contingency is 10 days) of signing the contract and only got a response when we said we were going to cancel escrow. Got the inspection complete on the 10th day and there were so many issues with the house and repairs done that we felt it was not worth the negotiation to sort it out with Zillow and decided to back out. Not sure if this is a general trend but my agent was fed up and he said he will never deal with Zillow again. This was 3 weeks ago.

  • by tppiotrowski on 11/2/21, 10:08 PM

    "The surprising exit, announced with pedestrian quarterly profits, thrashed shares in another rough trading session Tuesday, a day after an analyst said two-thirds of the homes it bought are underwater."

    https://fred.stlouisfed.org/series/MSPUS

    The fed chart shows almost hockey stick growth in housing prices this year. How can the Zillow properties be underwater, did they just massively overpay up-front?

  • by missedthecue on 11/2/21, 10:27 PM

    Big ups to hedge fund short seller Jim Chanos for calling this one way back in 2019.

    https://twitter.com/WallStCynic/status/1192663938720292864

    Steve Eisman, the short seller who was Mark Baum in 'The Big Short' also predicted this in 2019.

    https://www.cnbc.com/2019/08/08/big-short-investor-steve-eis...

  • by d136o on 11/2/21, 10:08 PM

    Sigh… It’s interesting that they blame the ML models, on the one hand it seems like a perfect example of ML gone wrong, on the other hand losses at this scale (hundreds of millions) don’t just signal that some data scientist’s model was not accurate enough… who’s running the ship over there? The ML model?

    Also I’m really curious about the geographic distribution of their inventory… let’s do some Data Science on this blow up!

  • by djanogo on 11/2/21, 11:12 PM

    Sold my house at the peek few months back to Zillow, they then sold it about 8% loss last month. The $/sqft price Zillow paid us is THE highest for our city EVER under <1mil price, and the record still stands after 5 months.

    Didn't make any sense to us at the time on why Zillow (and also Opendoor) was making such a high offer, the process was very smooth AND fast. Too bad they won't be around.

  • by seanmcdirmid on 11/2/21, 9:44 PM

    For some reason I can't reply to dang's comment, but this is Zillow basically saying they are giving up completely on flipping, whereas the article this morning said that they were pulling back and delaying buying more houses to flip (not giving up, but in trouble).

    So this is pretty big additional news from the context of this morning's article.

  • by lancemurdock on 11/2/21, 10:16 PM

    Everyone in big tech knows product direction comes top down with tons of product reviews along the way. There is no way you have this big of a screw up without major culture issues or more likely, leadership wanted to gamble and didn't think it would be this bad.

    The workforce gets the consequences for leaderships decisions

  • by iandanforth on 11/3/21, 12:09 AM

    In a similar vein it's common knowledge in the used car business that Carvana overpays for vehicles. I wonder if/when they will implode or stop buying direct.

  • by slownews45 on 11/2/21, 9:47 PM

    "pushing total losses on those houses to more than $550 billion."

    How can this even be possible? These numbers make zero sense.

  • by samfisher83 on 11/2/21, 11:07 PM

    You had bunch a smart ass physics phds pricing sub prime mortgages as aaa debt. It's just history repeating itself.

  • by qwertyuiop_ on 11/3/21, 2:28 AM

    And yet the Fed keeps printing the easy money.

    https://fred.stlouisfed.org/series/M1SL

  • by brightball on 11/3/21, 3:46 AM

    When I saw Zillow doing this, I honestly thought it was for a different reason than pure profit on houses. I thought they wanted to take over the MLS.

    The reason that local realtor groups will never get displaced by a Zillow is that in almost every area, those local realtors control access to the MLS. But...if a company like Zillow could come along and get a significant number of listings in an area that weren't represented on the MLS then Zillow could start to replace the MLS in that area without fear of being cutoff by the local realtor group.

    To see that all they were trying to do was make money flipping houses...I'm honestly a little shocked.

    But, this gets me back to my belief that Redfin is the only tech company in real estate with a real chance to be disruptive.

  • by holografix on 11/2/21, 10:51 PM

    When will governments step in to stop historic low interest rates from preventing anyone not bathing in cash from buying a home?

    It’s a grotesque situation in Australia with property appreciating by exorbitant amounts every month to keep up with the rate of cash printing.

  • by WisNorCan on 11/2/21, 11:02 PM

    It would be fascinating to hear the insider perspective. What exactly went wrong at Zillow with their approach? What were they not able to solve that OpenDoor could?

    This assumes that OD isn't a house of cards.

  • by dredmorbius on 11/2/21, 10:23 PM

  • by jklein11 on 11/2/21, 10:45 PM

    I'm a little bit confused about what their strategy was. As I understand it, house flippers usually buy houses, do some renovations to add value and then sell in under a year at a higher price. It sounds like Zillow tried to buy homes and hold them until they appreciated? Was there any data that supported that this would be successful?

  • by paxys on 11/2/21, 11:35 PM

    Their vast trove of data predicted (probably correctly) that flipping houses in this environment is a sound financial strategy. The trouble is they couldn't also predict the massive operational complexity that comes with it.

    Planning renovations, sourcing materials, finding and scheduling contractors all involve a lot more than writing clever code.

  • by remote-dev on 11/2/21, 11:50 PM

    Despite the ethics behind the business, I thought Zillow Offers was going to be hugely successful. My guess is a few factors go into why it might not have been successful:

    1. ZO overpaid for homes, offering over asking price for most homes 2. During the pandemic, housing inventory/supply (the number of houses for sale) tanked. This hurt Zillow's primary business, which thrives on the velocity of the market 3. ZO continued to purchase homes during the pandemic, overpaying, and adding huge liabilities 4. The inevitability of increasing interest rates could (probably will) cause housing market fluctuations that leave Zillow-owned homes in the red for awhile

    Zillow was leveraging their primary business to make Zillow Offers work. Unfortunately, a really bad year makes it difficult to justify the huge liability.

  • by speby on 11/3/21, 3:21 AM

    If you want to know what happened, who was involved, watch for various high-profile exists from Zillow over the next little while (and including, but not only, the higher-level layoffs that will be included in the short-term 25% workforce reduction).

  • by KingMachiavelli on 11/3/21, 5:23 AM

    What I really want to know is if the housing and real estate market's are so hot, why do REITs offer such terrible returns? How can hot housing areas have appreciation of >15% while REITs offer ~4% returns?

  • by emails4vg on 11/3/21, 1:50 AM

    Wondering if this is a tipping point? One thing is for sure, zillow’s competitors will get super careful. And this should bring some sanity go the market

  • by aurizon on 11/2/21, 11:38 PM

    Zillow walks on thin ice - a cracking sound is heard, they look down - an Oh Shit moment occurs. What now? tread with care, head for the shore, slide feet hope... All over the USA/Canada - ROW? people will hold their breath, then a few places raise interest rates - how many people are there on this(Larsen?) ice shelf. Will we get a crackling downwards cascade???? May you live in interesting time....

  • by whatever1 on 11/3/21, 2:41 AM

    Another machine learning success story. Why do you need on the ground agents with knowledge of the market when you can use the Big Data?

  • by bufferoverflow on 11/2/21, 10:08 PM

    And to think, Zillow has so much data that we don't have access to. And they still failed to buy the most profitable properties.

  • by qbasic_forever on 11/2/21, 10:49 PM

    That's about 2k employees in the Seattle area that will be looking for a job very soon. Who's hiring in the area? Amazon had a bad quarter too so I wonder if they're cooling off a bit on recruiting and hiring for a moment. Might be nice to have a Seattle area hiring/job opportunity thread of some sort to help folks.

  • by blondie9x on 11/2/21, 11:16 PM

    Does anyone know where most of these homes were purchased? This kind of practice where companies buy large quantities of houses should be banned. It isn't fair for first time or second time home buyers, non-corporate buyers essentially.

  • by oceanghost on 11/2/21, 10:36 PM

    Anecdotally:

    Zillow quoted a number for a house that I was selling right at the peak of all this, pending inspection. They couldn't come around and look at it though for about 6 weeks.

    By that time the market had turned and they said they weren't interested.

  • by sys_64738 on 11/2/21, 11:11 PM

    I don't get what Zillow's business model is or how they make any money. In the market where I live houses are going for crazy prices and under contract almost as soon as they hit the market.

  • by calltrak on 11/2/21, 11:39 PM

    Don't worry black rock ( look them up on yahoo finance) with 20 trillion dollars stolen from the american people via the privately owned federal reserve will buy up all the houses in America.

  • by chiefalchemist on 11/2/21, 11:43 PM

    What % of the market were Zillow purchases? And what effect has it had on prices overall? I mean one comp sale can effect 5, 10, 30+ homes, yes? All therefore also overpriced, and so on.

  • by rileymat2 on 11/2/21, 11:36 PM

    Does anyone have any insight into how you could lose so much money in a market that was quite hot? It says they paid too much, but how could you lose that much with any sane strategy?

  • by lightsurfer on 11/3/21, 1:14 AM

    This may be how it all starts. Zillow's CEO tweeted a few months ago that house prices were completely irrational in some areas. Who would have thought it was HAL 9000?

  • by WalterBright on 11/3/21, 3:35 AM

    Every few years, people learn once again that housing prices don't always go up and the owners cannot dictate prices.

    Supply + demand. It's the law!

  • by adamqureshi on 11/3/21, 1:24 AM

    algo vs algo with boom and BUST cycle and the net effect people get fired. AI is NOT the holy grail. AI will not have ALL the answers , humans still have value and will continue to adapt to the new world order. Innovation should not come at the cost of people. We still need to survive reproduce spend time with our family / friends and put food on the table. And have a lil fun on the way. -2cents

  • by MisterBastahrd on 11/2/21, 11:36 PM

    I was getting offers from multiple online realtors to buy my house, as-is, for 38% more than I paid for it in 2019.

  • by jliptzin on 11/3/21, 1:54 AM

    I wonder who's to blame more, the person who came up with this idea, or the one tasked with executing it.

  • by TheMagicHorsey on 11/4/21, 8:18 PM

    So what's the consensus? If you are in the market for a home, chill out and wait for a crash?

  • by emodendroket on 11/2/21, 11:49 PM

    Alluded to in the article, but Opendoor doesn’t appear to share Zillow’s problems.

  • by rel2thr on 11/2/21, 11:47 PM

    their statement a couple weeks ago made it sound like the business was fine and they were just pausing due to a labor shortage... what happened in the past 2 weeks to make this radical shift?

  • by sytelus on 11/3/21, 12:05 AM

    TLDR; According to CEO they tried to estimate current price vs price 6 months down after a flip and their estimates had been way off. When house doesn't sell at higher price, it creates inventory, monthly loss on rent value and volatility in balance sheet which is not good for a public company. So basically their algorithms had a lot of noise and scale wasn't still large enough to smooth it out for balance sheet.

    This is however surprising to me. During COVID, house prices have gone amok. A lot of buyers are now buying 10-20% over asking and waiving everything. Prices are going up 10% every 6 month in my area. If in this market if you can't make money buy flipping, I don't know how you can make money ever.

  • by spoonjim on 11/3/21, 2:36 AM

    How did Zillow lose money in this market?

  • by darepublic on 11/3/21, 4:32 AM

    Playing poker with your hand face up

  • by telotortium on 11/3/21, 1:13 AM

    Get around paywall: https://archive.ph/dy69K

  • by seaourfreed on 11/2/21, 11:45 PM

    Ooops

  • by enlyth on 11/2/21, 11:41 PM

    Good riddance, I hope this company burns to the ground

    The software developers working for this company knowingly tried to make algorithms to flip and profit off of something that should be a human right

    Replacing carpets and painting walls, trying to flip for a 20% profit, the people running Z must be geniuses

    As a millennial looking at 2 bedroom flats selling for £575k (780k usd, not far from a million dollars) in my area, I cannot help but have tears of joy when corporations who hope to profit off of our desperate housing situation get hit by reality straight in the face

    Ask yourself who benefits from housing prices rising. If you lie to yourself that it's people who are trying to move up the housing ladder, remember that your flat appreciating 50% in 2 years means the house you want to move into by selling your flat also appreciates 50%, so you win nothing

    It's the rent seeking leeches of society that think that by buying a "portfolio" of houses, they can live out their lives without contributing society in any way

    Anyone arguing against this has either a dog in the race, or loose screws in the head

  • by beckman466 on 11/2/21, 11:45 PM

    damn they got the algorithm wrong.

  • by m0zg on 11/2/21, 10:56 PM

    I think they might know something we don't. Such as, for example, that loan rates are about to go up a lot, which if inflation is not "transitory" (which it isn't) they will.

    They already did go up some. Most people can't count to save their lives, but $1M at 2.5% APR is about $4K monthly (borderline doable for quite a few folks on 2 incomes), whereas at 16% (historical peak) it's something like $13.5K (not really doable beyond the top 1%).

    In spite of their large loss, this could prove to be a wise divestment under that scenario. If loans get a lot more expensive (which happened during Carter and then Reagan years, see "stagflation"), the housing market will tank right away and people will be desperate to lock in at least some of the gains they thought they had, creating excess supply. Not a good environment for flipping, especially at the mid- to low end of the market. The game of musical chairs seems to be coming to an end, and Zillow has just grabbed a chair. Three legged and busted chair, but a chair nevertheless.

  • by zwkrt on 11/3/21, 4:49 AM

    Anyone whose main income is from other peoples rent has an incredible amount of explaining to do if they want to claim that they are anything but a useless leech.