
Zillow Launches Home-Flipping Program in Phoenix and Las Vegas - twohanded
https://www.bloomberg.com/news/articles/2018-04-12/zillow-launches-home-flipping-program-in-phoenix-and-las-vegas
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calcsam
This is copying the Opendoor business model. Keith Rabois, an Opendoor founder
/ investor, claims this is vaporware and implies this is trying to block an
ongoing funding round:
[https://twitter.com/rabois/status/984544209188237314](https://twitter.com/rabois/status/984544209188237314)

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tristanj
It's not fully clear what Zillow is offering here, but my reading is that
Zillow is buying homes, quickly fixing them up, and selling them. If this is
what they are doing, I can see a lot of value in these "Zillow Approved"
flipped houses.

I've read a lot of online horror stories where people buy flipped homes only
to realize they bought a lemon. Houses with shoddy construction work, code
violations, and the new owners are stuck with tens of thousands of $ in
repairs.

Home inspections help, but they don't catch everything. Anything inside the
walls, such as poor plumbing/electric work, are unlikely to be flagged.

I'd be happy to pay a 0.5% to 1% premium on the sales price to be assured the
people who renovated this house followed local housing code, used proper
construction procedures, and used decent materials.

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dagw
_the new owners are stuck with tens of thousands of $ in repairs._

Don't sellers have any responsibilities for what they are selling in the US?
Certainly in Sweden it is the sellers responsibility to disclose any known
problems to the buyer and they're financially responsible for any problems
they fail to disclose.

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yardie
No. A seller is only responsible for what you can negotiate after inspection.
Which is why it is critically important to have a good inspector.

The only homes to have any sort of clawback are new constructions. Which are
warrantied for about a year.

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jiveturkey
10 years (by law) for structural issues.

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baud147258
It's the same in France, 10 years for structural issues and 1 year for the
basic stuff.

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kosei
Doesn't this create a big conflict of interest in their Zestimate algorithm
that's core to their business?

If they provide lowball Zestimates, that allows them to buy homes for cheap.
Or if they own the home, they can increase the value prior to sale.

Hard to trust when they could easily use this estimation system to their other
business model's advantage.

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jjeaff
I doubt zestimates are really a core of their business.

Try to use a zestimate to negotiate the price on your next home. Watch how
quick the experts laugh you out if the room.

The zestimate is just a nice quick way to get a ballpark value of a home. But
I don't think they are playing any significant role in affecting market
prices.

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hshehehjdjdjd
I find zestimates are most accurate on the day a real estate transaction is
recorded. It would be interesting to see an error histogram of zestimate-day-
before-transaction.

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JshWright
Anecdotally, the zestimate on my home purchase (in 2016) was off by ~30% (the
zestimate was too high).

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matt_wulfeck
It is chronically low in the Bay Area.

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josefwasinski
What Zillow are doing is charging for certainty, buying a house is a huge
financial decision - with potential risks.

As a seller, how much do I value a certain payout today? It's at least a few %
points.

As a buyer, how much do I value a property which has been "Approved" and been
fixed up? Again at least a few % points.

They can easily get a 5% margin, if not closer to 10% (especially if they do
value-add improvements)

Then it is just about managing inventory, and not being overly exposed during
a downturn - however depending on how their capital is structured are there is
the opportunity to rent until it can be sold.

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SomewhatLikely
I question how much value Zillow would be adding. Inspectors should be playing
the role of approvers. And most sellers value getting the biggest offer. If
Zillow develops a reputation of offering you less than market value then
people will stop taking that offer. Also, if the house is actually changing
ownership to Zillow then in some states they would owe at least an excise tax
on each sale.

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rco8786
What they’re doing is an extremely common thing and proven business model.

There are lots of interesting things you can do to consistently buy “below”
market value. Don’t use a realtor, that’s 3-6% savings. Buying in cash and
guaranteeing a smooth closing is incentivizing to a lot of sellers, another
couple % points. Etc.

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kkwteh
I was the first data scientist hired at Opendoor. We have a strong team of
data scientists, engineers, designers and operators. We're ready and excited
to take on this challenge.

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starchild_3001
It's interesting that they're following the lead by Opendoor---the startup
that pioneered the same.

What I don't like about this business is it's very capital intense with low
ROI. Sort of like high frequency trading for homes.

Plus, transaction prices are all public. Sellers get pissed off when they see
how much profit you made off of them. They assume they could've made that
10-20% themselves (in those rare cases), leaving the flipper with bad reviews
on Yelp.

Does it make more sense to turn this into a fund, a long(ish) term investor in
homes... say longer than 6 months or 1 yr? Essentially creating a medium-term
hedge fund. Basically, capital needed to flip shouldn't be mixed up with
firm's equity (else you constantly need to raise huge sums)?

Wonder what others think about that.

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nikanj
In markets like Vancouver and SF, the ROI is well over 10% per year. And banks
are quite willing to offer extra leverage, so the capital costs remain
reasonable.

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pfarnsworth
Generally, things like this mark a top in the market. Zillow will get caught
with a ton of inventory that they can't sell, and then take a huge loss trying
to unload them for cash. It probably won't happen right away, but I can
totally see it happening in the next year or so.

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tehlike
They are market makers, they will profit off of this.

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toasterlovin
If you’re selling, you need buyers. If there is an economic downturn, there
won’t be buyers. There is no way around this.

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tehlike
But if you are constantly buying, a down market is actually good as it is
followed by a bull run. If you have funds (and zillow would) each doen market
is am opportunity to buy some houses for cheap. Put some make up, and
eventually it will have buyers, in good markets.

Similar to accumulating stocks. Downturns are an opportunity to buy some
stocks for cheap.

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JumpCrisscross
How will they hedge risks related to a national housing downturn?

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nradov
Perhaps by trading Case-Shiller index futures on the CME?

[http://www.cmegroup.com/trading/real-
estate/residential/Sand...](http://www.cmegroup.com/trading/real-
estate/residential/SandP-case-shiller-home-price-index.html)

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kafquaesque
Like taking out puts and allowing them to expire?

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nailer
Homes are for living in, not investment vehicles. Housing is not a free
market: supply will not rise to meet demand, and entry into the market is
limited not by the ability to pay a mortgage, but the ability to pay a
deposit, which limits participants to those with access to large amounts of
cash.

Individuals doing so are increasingly punished for this behaviour as a way for
governments to control anti-social investing (eg, in the UK) or increasingly
prevented explicitly from doing so (in China).

I hope the same happens in the US: the alternate is house prices spiralling
further out of reach of those without family wealth or very large incomes and
those with family wealth or very large incomes growing increasingly wealthy.

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purplezooey
Home flipping in Phoenix and Las Vegas could be the sole unifying American
obsession of the past 15 years.

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subpixel
The article states the model is not to profit through appreciation. So where
is the profit?

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mwnivek
From the article:

> Unlike traditional home-flippers who bet they can make money on home
> appreciation, Zillow plans to profit by charging sellers a fee in addition
> to agent commissions.

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subpixel
So they plan to make offers on houses near market rate, invent a "fee" to
account for the fact that they won't actually be paying market rate, and then
turn around and sell the same house at market rate, pocketing the fee.

For this to work at scale a lot of people must be in a situation where they
can't afford the holding costs associated with waiting for their house to sell
for what it's worth. Or a lot of people's houses have appreciated sufficiently
that Zillow's fee is a non-issue. If anyone knows if this is true, I guess
Zillow would.

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hshehehjdjdjd
In almost every US housing market except the Bay Area, houses can sit on the
market for quite some time waiting for the right buyer. I’m looking at
apartments right now in nyc and we saw a very nice place that has been on the
market for half a year. It’s not exactly right for us at this time, and
perhaps it is a little over priced, but it’s not hard to picture this making
the owner antsy.

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subpixel
Every situation is unique: maybe the sellers need a certain price for
financial calculations that are wholly separate from the apartment they are
selling.

My argument is that Zillow is always going to come in under-market. That's
their whole model, and in order for it to work a lot of sellers need to be in
a financial situation that allows them to say 'fuck it, I'll take the Zillow
price and be done with this'.

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m3kw9
Is gonna be like stocks, you don’t even need to see the product. Is just a
number on screen now

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tristanj
REITs have existed for a while.

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kafquaesque
I’m surprised no one has mentioned this.

