Last week Zillow announced that it is going into the business of fixing and flipping homes. Its stock price fell 7 percent that day.

Last week Zillow announced that it is going into the business of fixing and flipping homes.

Its stock price fell 7 percent that day.

Why the dim view in the market? We’ve all heard of flip successes — sometimes too much. Every sports-talk radio show has ads like this: “Come to our two-day seminar, and for just $250 you’ll learn how to fix and flip and retire wealthy in just two years!”

Every business today faces the risk (or folly) of eager tech-types who plan to reinvent whatever we do and put us out of business. Something to do with electrons and connectivity.

And Zillow from its birth has had its own identity crisis. In sheer genius at the outset, Zillow pretended to know the value of every American home — and people believed them! Old-timers know that the average person responds to one type of real estate marketing above all others: the value of our homes. Nevermind that Zestimates are estimates, and the more unique the home, the wilder the Zestiguesses.

From that terrific opening, Zillow like so many others has wanted to get at the easy honey-pot of real estate money. Everybody knows that we non-techs don’t work hard for the money. Just drive people around, or drive signs into the ground, talk fast and cash checks.

The best these sites have done so far has been to aggregate listings in exchange for advertising dollars. Not bad, and amazing to get listing agents to volunteer their proprietary data, and even more amazing since there is nothing special about any of the sites.

But now several are trying to be in the actual business of real estate, not just parasites. Redfin is a full-fledged brokerage. Opendoor is reinventing the home buyout.

And Zillow will fix and flip for its own account. There is wisdom in that strategy: since Zillow will buy and sell as a principal, it will not be the overt competitor which Redfin has become. Way back in 2007 I spoke with Zillow’s Stan Humphries on behalf of real estate brokers deeply angry with a Zillow press release about market values in my area (Colorado). A thoroughly nice man, trying hard, Stan was surprised and hurt by the anger brokers felt toward Zillow for interfering with their client relationships, home value at the center.

So, why the negative stock market reaction to Zillow’s announcement?

Flippers at the outset can make good money, especially in extreme markets (either very hot or very cold), but sooner or later flippers, must be very good at two key skills: buying at the right price, and fixing the right way and at the right cost.

Today, most metro areas are HOT (not the countryside), so hot that even if a flipper pays too much, the market can appreciate away the error. But the left hand takes what the right has given: nobody can buy at a discount in a hot market. In a cold market, or arctic as during the Great Recession, flippers can prey on distressed households. Not a nice way to make a living, but so long as the flipper is honest, distressed buyers are useful. Unfortunately, the foreclosure era attracted fraudsters by the tens of thousands, so many that lenders to this day are suspicious of rapid re-transfers.

Buying right — inherently below the market — is a persistence gig. A successful flipper must scour the market and make many fruitless offers. Cash helps, but cash has a cost, either to borrow or to pay investors.

Fixing is tougher. An old merchant taught me when a kid: “You never make any money when you buy something. You make money when you sell.”

The best fixers I’ve seen have always had a high level of construction skill and experience, and the very best have been at least part-time contractors who have groups of sub-contractors available on fast call. Speed is crucial in the fix period: the money meter is running, and the flipper always gets the best price when buyers can see the completed work.

Successful fixers must be gifted at design versus cost: what’s the minimum fix necessary to turn a pig’s ear into a silk purse?

Best of luck to Zillow, but success is not likely. It will need to find construction and design-savvy people in each market area, and pay them for skill and speed. There’s a world of difference between the cost and skill of such people when acting as principal for their own deals, and having to hire them for good cash money. None of that design and construction management ability is in-house at Zillow.

Zillow will rapidly discover that a Zestiguess is one thing, and actually buying and selling is something else. Talking about value is different from writing a check.

From the flipping and fixing I’ve seen in the last 40 years, the 7 percent hit to Zillow’s stock was too kind.

Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at lbarnes@pmglending.com.

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