Yesterday morning, the news told us that Zillow is having a hard time making money on its new house flipping business. What a surprise. Actually, not surprising at all. It’s not easy to find properties at a price that will allow you to actually make money after you renovate and sell it.
With rising home prices all over the US, rising prices in materials (wood has gone WAY up), increased holding costs (paying someone high interest to finance your rehab, which seems to always take longer than budgeted), and fees and more fees, we are not shocked that others, even big corporations, find the residential redevelopment business challenging.
CNN described the model Zillow is using as follows, in the article linked above:
Zillow buys houses directly from homeowners, pays for minor repairs and resells them. It makes cash offers to buy from homeowners and charges them a slightly higher fee, at 7.5%, than a traditional real estate agent selling a house would. The perk for sellers? They don’t have to go through the home showing process and have a more flexible move out period.
I had to laugh about the “pays for minor repairs” part. If it’s anything like our recent experience, minor repairs won’t cut it. Buyers now expect every little flaw in a home found during ispection to be repaired, which adds to your costs and lowers your profits. If you don’t fix a house up to better-than-new standards, be prepared!
Here’s something else that sounds familiar:
CEO Richard Barton said on a call with analysts Wednesday that during the quarter, 69,000 homeowners submitted requests for cash offers on their homes from Zillow; the company actually only purchased 1,500 of those homes. And Zillow re-sold just 800 homes during the quarter.
That’s a much larger scale than our business, but it’s the same result: very few homes people want to sell actually fit into the model that allows them to feel good selling the house and the real estate redeveloper to be able to make repairs and profits. The sad thing is, they pass on all these potential homes to real estate professionals (for a fee), which means all these houses are lost to small-time folks like us. Not to whine, or anything.
The CEO claimed that all they have to do is get up to scale and they’ll make profits on this business. Well, I’ll just have to see how it works out. It appears to me that, with their brand-name recognition and ability to advertise on their other platform, they will reach lots and lots of people. That means we will just have to work harder and use our personal networking skills. And we will have to look at the houses that are too “sad” to be fixable with just a few minor repairs, like we are doing now!
What do you think?
Do you know of a house we might be able to buy and save the owner the hassle of making a lot of repairs? Call Carol at 512-807-8777!Hermann says please like and share!