The Science of Flipping - Zillow Failed...

Starting point is 00:00:00 Yo, yo, welcome back to the science of flipping podcast. I am your host, Justin Colby. And on this podcast, we're going to be talking about Zillow and what happened with their complete meltdown with their flipping business. For those that you don't know, this is all about the right tools, systems, processes, strategies to become an expert real estate investor. All those for getting your first deal all the way to scaling a business, um, to building wealth. Uh, that is what this podcast is about. So if you're about any and all that, getting your first wholesale deal,

Starting point is 00:00:51 scaling a wholesaling business, flipping homes, or building wealth through rentals, you want to be here and you want to be giving a five star review right there on iTunes. Um, and if you have not yet go subscribe to my YouTube channel, youtube.com forward slash Justin Colby. Make sure you subscribe because I drop six videos a week and turn on those notifications so you know when those videos drop. Now, let's talk about Zillow. I don't have all the stats on me regarding their primary business.

Starting point is 00:01:27 And that is because you see I am in the car. I'm in the car because I just bought and renovated a home. And I do not have anything such as curtains or carpet to mute the echo. So the echo is crazy bad in my house. So which is now my office and studio for the time being. So I am in my car. So I don't have a bunch of statistics to throw at you, but I do want to talk about their utter failure being a rehab flipping company.

Starting point is 00:01:58 For those that are in Phoenix, like myself, you know that they have been a massive competitor in Phoenix, like myself, you know that they have been a massive competitor in Phoenix. They've changed the game, how we've had to market properties, find properties, because of how big and powerful their marketing arm is. And so they've really relied heavily on realtors to bring top dollar offers where someone like myself needs to negotiate as low as I can get so I can make sure I have some profit in the middle. Now their business model very much was fee based. They did not necessarily care how much money they made on the flips. They, on their acquisition, they made a fee and then on the

Starting point is 00:02:37 sale of their property, they would make a fee. And so they weren't your traditional flipper where you need to make $40,000, $50,000, $60,000 on a flip. So they could pay a lot more for their properties. And so they were trying to run a financial model that is just different, drastically different from the financial model us small mom and pop flippers have to run. And obviously, after several years of trying, it just didn't work. The news has come out that there are selling roughly 7,000 of their homes at a massive, massive loss.

Starting point is 00:03:17 And so that loss is something that we, as small mom and pop investors, would freak would freak out about, but for them as an institution, um, they don't love it. Don't get me wrong, but they're nowhere near, um, taken back by, by that drastic, huge loss. They were running a model that was quite literally built off of speed and inexpensive budget, meaning they wouldn't take on a home that had a hundred thousand dollar remodel budget, right? They wanted to do lipstick and paint, run fast, run at a price point that could turn. Um, but they were trying to figure out their financial model in terms of our acquisition cost. And that was always drastically higher than someone like myself or maybe yourself was going to be able to pay. And so we lost out,

Starting point is 00:04:12 lost out. I'm using bunny ears. If you're not watching me on YouTube, we lost out on a bunch of deals because Zillow and Offerpad and Opendoor and all of these iBuy buyers were able to offer a much larger amount. Well, come to find out that model didn't work for them, right? I mean, that's really what we're talking about now. Could COVID have affected them? And if you look up all the articles, you'll see a bunch of different stuff, but could the material costs going up affected them because they were buying at volume? So they had to buy materials at volume. Could the labor force have affected them? Uh, I would tell you absolutely. Uh, the labor force could have affected them being that, you know, the labor costs have gone way, way, way up. Um, the lack of labor that you can find. Every contractor in every state is incredibly busy.

Starting point is 00:05:09 And then you find contractors who aren't busy and it's probably because they don't do very good work. And so all of these things fold into this idea of them becoming profitable. And no more important than this idea that Zillow is a data company. That is their main business. That is their flagship business. And then they've not necessarily taken their eye off the ball with that business, but now they're trying to bolt on a business that really isn't about their flagship, right? They're trying to say, okay, well, if we can get in this home flipping business, we can monetize another revenue stream. Well, they're not incorrect at that.

Starting point is 00:05:53 They don't have the right people. And so I think their numbers as a business have gone down and I'm not talking about the flipping business. I'm talking about Zillow, the data company because of their eye being off the ball. And there's a big lesson there, right? For us, mom and pop investors, and listen, a 20 deal a month business is still very mom and pop relative to Zillow. So I fit that category as well. The lesson there is when you take your eye off the ball, that your lead horse, if you will, you really can actually do damage to the entire company because while you're trying to

Starting point is 00:06:30 create more revenue doing something else, who's maintaining and making sure that lead horse is actually performing at top level. And that becomes the issue, everybody. And that's really what I believe to be Zillow's main issue is they actually realized their main core business was actually failing, not failing, but really taking a pretty big hit because they're focusing so much energy, time, effort, and resources into this other segment, this other bolt on that they had to come to realization that it just wasn't working. And now they're going to have to take massive losses. Now, what I will say about these losses, I mean, they are big, but it's not always what you see, right? It's not exactly that. And so remember, every time they bought a home, they made a fee. Every time they sold a home, they made a fee.

Starting point is 00:07:26 So always, always remember, it's not exactly as black and white as these massive loss numbers would say they are, right? And so keep that in mind. But what does this mean for investors? What does this mean for someone who's looking to fix and flip? How does this affect you? Well, let me tell you this. In markets where Zillow is selling heavily, such as Phoenix, could this affect the number of homes that are on the market, number of opportunities you would have on the market to buy for buyers? Yes. So does this become

Starting point is 00:08:02 a buyer's market? I don't believe so. Even if they sold every one of their homes, let's just say we're in Phoenix, it wouldn't actually make it a buyer's market still. So will it drastically affect, um, you know, the real estate market? I don't believe so. I don't think they have enough weight. 7,000 homes is a lot for you and me, but in the terms of real estate and markets like Phoenix and Las Vegas and Atlanta and all these other big cities, it doesn't really move anyone's needle. Would it be a challenging time to become a flipper and trying to sell for top dollar and push market when all of a sudden Zillow is dumping, you might want to pay attention to that, right? In markets, let's just use Phoenix because I know they're very heavy in Phoenix. When they're going and trying to sell a ton of home in Phoenix and you're a flipper

Starting point is 00:08:58 and you're trying to push top dollar, that could get a little challenging, right? Because now you're going to have a bunch of homes potentially comparables to yours that are going to be sold at a lesser price, right? That they're willing to take a loss at and you're trying to push for top value. Now, here's one thing as a flipper I would tell you should have been doing is make sure you're doing a really beautiful remodel. Zillow and most of the iBuyers, they come in, they try to do a lipstick and paint type of job. They would try to, for the most part, spend as little as possible while still creating a good product. They're trying to do as little as possible. So yes, I would say in general, as a flipper just be aware i would be aware if they

Starting point is 00:09:48 are selling a lot of homes in your market what's going to happen to your top dollar pushing of your rehab flip and then on the other side as a wholesaler what are your buyers doing right um are they a little bit gun shy you need to reach to them. See if this is going to affect their business. I always, anytime there's a big shake of anything. And by the way, again, Zillow selling 7,000 of the homes is not a big enough dent in any of our worlds to like shake us up. But I'm still going to be chatting with my good buyers, seeing their take on this. I would encourage you to do the same because listen, as a wholesaler, I'm only as good as my buyers, right? That's the key. So I need to make sure I understand what they're doing, how this is going to change their business, how they're going to navigate it. And lastly, I would tell you for someone who's actively

Starting point is 00:10:42 buying rentals, I'm going to be looking for these properties to be of good value that have already been remodeled to potentially pick them up as good rentals. So if Zillow was buying in your neighborhood and if Zillow is now going to be selling, this could create some great opportunity for you on the wholesale flipping and the buy and hold side, right? So it's a big announcement. I felt like it was bound to happen, to be honest. One of these guys had to go down because their business model is just a little silly, right? I mean, it's just not that profitable. Now Zillow knows exactly how not profitable it is. Hopefully you guys are liking this. If you like this, give me a five-star review. If you're on YouTube, subscribe to my channel, give me a thumbs up, give me questions, write some comments here in YouTube. Again, youtube.com forward slash Justin Colby, and I'll see you guys on the next episode. Peace. you

The Science of Flipping - Zillow Failed...

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