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There’s A Difference Between A Gain On A Sale And Profit

A report from Geek Wire. “When Seattle-based online real estate giants Zillow Group and Redfin jumped into directly buying and selling homes to the consumer, the real estate market was blazing hot. Now things are starting to slow down — a trend foreshadowed by Redfin CEO Glenn Kelman — at a time when both companies have ramped up their commitment to these new programs. The move is a risky bet against the backdrop of a national housing market that is starting to shift as more houses hit the market and buyers frustrated by sky-high prices are sitting out.”

“GeekWire chronicled the first house Zillow ever purchased directly over the summer, a 15-year-old, four-bedroom, two-bath ranch-style home in the Phoenix suburb of Chandler, Ariz. Zillow purchased the house in May for $410,000 and put it on the market a few weeks later for $425,000.”

“Zillow aims to turn around and sell the houses it buys in roughly 90 days. The Chandler home sat on the market a little longer — about 4 months. Zillow reduced the price and it eventually sold in late September for $403,000.”

“Zillow spokesman Viet Shelton called the Chandler house an ‘outlier.’ He warned that looking at the sale price alone does not show whether Zillow made or lost money on a given home. Baked into the process is a fee — usually around 6 to 9 percent of the home’s price, but it’s different on each transaction — that Zillow charges for the convenience of doing the work of sprucing up, listing and selling the house.”

“Zillow Offers is designed to work well in both hot and cool housing markets. Zillow has as much insight into the market as anyone and can adjust if major changes appear on the horizon. Shelton says Zillow Offers can prosper in a down market because buyers will be more inclined to go with a quick sale rather than having to deal with the home sitting on the market for months.”

“Redfin spent $17 million buying homes in the second quarter, up from $6 million in the first quarter. Redfin sold all 17 of the purchases it made in the first quarter, with second quarter sales totaling $9 million, up from $3 million three months ago.”

“Redfin has said it made money on each home it bought and sold. However, the properties segment lost about $100,000 overall in the second quarter.”

“‘Every home we’ve sold has sold for a higher price than we paid for it,’ Redfin CEO Glenn Kelman said during a call with investors. ‘But there’s a difference between a gain on a sale and profit. Once you account for the cost of our labor, renovations and capital, Redfin Now has been about break even. The good news is that we expect as we get bigger within a market and build more software to manage the renovation process we’ll be able to spend less time and money bringing each Redfin Now home to market.'”

“Shares in both companies have been hit hard in recent months. Redfin and Zillow have both seen their stocks decline about 30 percent since early August on investor fears of a declining real estate market, while the Nasdaq Stock Market has dropped about 14 percent in that same time frame.”

“Redfin and Zillow are competing with a crowded field of companies in the so-called iBuyer movement — where sellers will take a discounted price in exchange for the certainty of a fast sale — such as Opendoor and OfferPad, as well as several new startups.”

“Programs like Zillow Offers and Redfin Now have gotten a lot of hype, but Mike Grady, COO of Seattle-area brokerage Coldwell-Banker Bain doesn’t see them as a transformative force in real estate.”

“‘I just don’t see very many sellers willing to take that much less no matter what the market is like,’ Grady said, ‘It’s just not human nature to say ‘I’m going to let you have 15 percent of my equity in order for me to save 60 days on the market.'”

This Post Has 30 Comments
    1. build more software

      The whole post is hilarious. It’s poetic justice though for Zillow to find out their own Z-Estimate is total BS. When the bubble was inflating, any idiot could win, when it starts deflating, not so much. Built in fee indeed, for thee.

      1. Z estimates / trulia estimates are TOTAL BS! I would like to see the HBB spin off a RE tracking site with HBB estimates 😉

        1. I would love to see that. I often look at a home on Zillow and play a mental game of “how much would I actually pay for that?” I ignore what the Zestimate is, or the asking price, but I often just think what I personally would be willing to shell out. The difference is my gut check on how large the bubble is.

    2. It’s gonna be another twitter…

      Best case. What a horrible time to go into that business. If any of them survive they could take over retail real estate from the current cartel. But it’s a long way from here to there and a very rough patch in the middle.

      1. Really, they had a nice business, but now they are going into speculation, and that is going to kill it.

        The only way I see this work is if desperate sellers are willing to sell for way below market to get out, and they can flip it fast before the market goes down more.

        But the transaction costs of buying and selling houses are large, even without the 6 percent broker fee. And it requires boots on the ground.

        1. A lot of what they talk about regarding capital improvements is extremely labor intensive. It’s an interesting idea, but I would have rather seen them innovate in different ways.

  1. Just noticed that Lowes Home Improvement is closing two locations in Orange County. Guess there’s not as much demand for those flips and remodels.

  2. “Zillow purchased the house in May for $410,000 and put it on the market a few weeks later for $425,000… Zillow reduced the price and it eventually sold in late September for $403,000.”

    Instant negative equity! Plus they had to carry it for four months.

  3. “Zillow spokesman Viet Shelton called the Chandler house an ‘outlier.’ He warned that looking at the sale price alone does not show whether Zillow made or lost money on a given home. Baked into the process is a fee — usually around 6 to 9 percent of the home’s price, but it’s different on each transaction — that Zillow charges for the convenience of doing the work of sprucing up, listing and selling the house.”

    Are these guys hedged against major, long-duration price declines?

    1. “Sprucing up” costs, what, $5-7K bare minimum if you’re lucky?

      With a margin of $15K gain on a $400K house, it’s not worth the bother of buying paint and hiring illegal labor. Why do you think the bankers would rather traffic in MBS and RBS instead? They could make that same $15K in a day just sitting at a computer.

  4. I am pretty sure that if you sold it for less than you paid for it… you lost money. On top of that you had to carry it for 4 months, on top of that you had to spruce it up.

  5. My start-up, SchlongedSeller.com, will use AI algorithms to match up grief-stricken FBs with appropriate mental health services and food banks, as well as our proprietary line of sturdy cardboard boxes that FBs can move into once they’ve been foreclosed on.

    1. …with ownership records for the cardboard boxes recorded on the ScholngedSeller blockchain, an ERC20 token run on the Ethereum network. The initial coin offering (ICO) will be next week.

  6. The moment the Zillow “flipping houses” scheme was announced, we knew it was a laughable failure. The scary thing is their management actually thought it was viable. I can’t believe that people like that are running large companies.

  7. “Shelton says Zillow Offers can prosper in a down market because buyers will be more inclined to go with a quick sale…”

    Could Zillow themselves become a market force driving prices down across the board? By super low-balling desperate sellers?

    1. Maybe. But it seems like they will have the same problems as anybody else. The sellers will be underwater…it’s already been sold to the bank.

  8. Every house I’ve looked at that opendoor has on the market in Nashville is priced either at or below what opendoor paid for them. Not to mention months and months days on market. Also factor in fix up costs, not to mention how expensive real estate is to liquadate. These things look like Ponzi schemes.

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