Why Is Zillow Dumping Their Investment Properties?
Are They Really Losing Money?
Zillow homes for sale, or should I say Zillow’s mistakes, have recently flooded some real estate markets. No one knows why Zillow is selling 7000 of their real estate assets across the country. Almost 1500 Zillow houses for sale are in Phoenix, Houston, Florida, and Atlanta.
However, here are some facts that most people don’t know. Let’s start with the company history and dynamics, and then we’ll go to how it all fits together.
Zillow first began buying houses in 2018. They bought a lot of houses in 2020-2021 because of steep real estate appreciation rates. When you control the data of an entire market, you tend to see the trends first, and Zillow did. The main markets that Zillow invested in during 2020-2021 were Phoenix, Houston, Florida, and Atlanta, but they also bought nationwide.
According to data, these were the top 4 cities/areas with affordable housing where people transitioned after the pandemic. City dwellers were relocating to these areas and paying cash for their houses. Phoenix, Houston, Tampa/Orlando, and Atlanta are also where Zillow is now liquidating its assets.
Zillow Duped Zillow
After owning over $2 Billion in real estate to gamble on appreciation, the errors in their business model is obvious. Appreciation rates have not died. The incline is just not quite as steep these days.
Should we be afraid of a housing market crash?
Are you doing the right investment strategy or are you gambling with your investments?
How can inaccurate “Zestimates” be used to manipulate the real estate market?
How Zillow Built Their Kingdom
Zillow homes for sale are typically the first thing people see when they Google “homes for sale near me.” Searches for “homes for sale In X City, Zillow also comes up first across the United States. Zillow homes for sale are first because they control the listing information from most Realtor Boards across the country.
How did that happen? Good question. They seemed so innocent, grew into bullies, and now are selling over $2 billion in assets. Where did that money come from? What I find scary is the power and money Zillow has to manipulate the real estate market in the US and Canada.
How “Zillow Homes For Sale” Started
Years ago, Zillow convinced local real estate boards that Zillow could be a source for everyone to search for homes nationally. National exposure would help so many people!
Homebuyers looking for houses could look on their computer at night. Realtors could get national exposure for their listings free of charge. Sellers get all that valuable national exposure. Win-win.
The Realtor Boards in many cities cooperated with the large brokerages making it easy for everyone. Putting all of their homes for sale on Zillow would be advantageous for buyers, sellers, and real estate agents.
The Beginning of Zillow
Soon contracts were signed, and real estate rights were basically given to Zillow. Realtors were told how great of a marketing tool Zillow would be. We told our clients about how great this new tool was. We were wrong. Zillow was the big winner- they controlled the data. As the web grew, they grew.
What the search term “Zillow homes for sale” made possible was for Zillow to sell leads right back to the listing Realtor, or any other agent willing to pay their price. If the Realtor didn’t pay, they’d sell the lead to another Realtor.
Paying Zillow money each month for (not exclusive) rights to a zip code generated a lot of money. Soon Zillow was #1 in every city for the term “Homes For Sale In X city.”
This website did not benefit the Realtor or the seller. Someone who never saw their home was getting the seller’s inquiry? However, the deal with the devil had been signed. What else could possibly go wrong?
How Zillow Is Deceives People Every Day
Zillow is greedy and inaccurately represents information, wasting the consumer’s time. When a house has a buyer in contract, Zillow continues to show the house as available.
Showing homes as available that you cannot buy is deceptive. Not only that, it wastes a lot of people’s time reading listings and watching videos for houses not for sale anymore. But it keeps leads coming in.
This deception of inventory for homes for sale gives them 25-70% more inventory to get leads from. The search on our website removes houses with contracts.
Not only is Zillows listing of homes inaccurate, but isn’t it unethical? AKA “Bait and Switch” marketing? I guess it’s only called “selling leads.” The #1 online real estate company on Google operates that way.
Zillow became extremely wealthy. Big-name companies approached them for their data. Because they are “housing authorities,” they gave insider information to investors – for a fee.
However, the data they provided wasn’t entirely accurate. Look at “Zestimates” or house value estimates. They hit the news after years of inaccuracy.
After getting grief for their Zestimate inaccuracies, a disclaimer was added to the fine print regarding “Zestimate accuracy.” Zillow claims Zestimates have a 10% plus or minus accuracy. 10% plus or minus. Why? They have accurate data!
What Is Real Estate iBuying?
Can houses be bought and sold online? Can buying companies become the Amazon of home buying? At least 5 companies are trying to do that right now. When real estate appreciates at a high rate, investment companies/people find ways to take advantage and make a profit.
Let’s look at a couple of ways that companies can profit. When property values skyrocketed in the mid-2000s, one creative method was to tie up a property and resell the contract. Reselling a contract is similar to flipping a house without ever owning the property.
Another method that worked well was buying new homes. When buying a brand new house, you have approx. 6 months of high appreciation that only required a small deposit.
As the completion date approached, the buyer had choices. They could buy it or let an already waiting buyer finish the transaction with an “assignment of the contract.”
Lead Companies Buying Houses
Fast forward to 2017-2018. A newer popular method is called ibuying. iBuying stands for “instant buying”. It is simply buying a home without physically looking at the property. Since 2017, a lot of companies have gotten on this bandwagon.
Opendoor, Offerpad, Trulia, and Redfin are a few of the larger ones now playing Monopoly. Zillow got into the home buying game relatively late in comparison.
House flippers have been around forever, fixing up 1 or 2 houses at a time. The difference now is that these companies typically flip non-fixer-uppers. They go for quantity with a lower profit margin.
Their methods are, by design, short-term. As soon as the market starts to level off or decline, as all markets eventually do, it’s time to walk away. Buying houses for these ibuying companies is a desk job.
Zillow In 2020
Zillow saw the current upward appreciation trend before announcing it and started buying homes all across the country. They bought them specifically to flip. Often investment firms lined up waiting for houses, thus removing them immediately from the housing supply.
Once their purchase is finalized and closed, within 2-3 days, the house would be relisted for 10-20% higher than their “purchase price.” They even used the same pictures for their listings, but they also owned mortgage and escrow companies, so their fingers were in many pies.
Purchase prices were recorded on city tax records but were deceptive. Zillow actually paid less because they charged the seller “a service fee” payable at closing. The fee doesn’t show on public records, so profits are hidden from most potential buyers.
Zillow’s Service Fee
How “a service fee” works: the purchase contract is inflated by X dollars. Then the seller gives the X dollars back to the buyer in escrow. (Isn’t that called a kick-back?) This fee would be a seller’s closing cost.
There was no capital gain for the seller to pay on that money. No harm to the seller, right? However, having “fees” effectively inflated sales prices from the true sales price on the next appraisal, driving appreciation up.
Harm ONLY came to the eventual buyer and future buyers in that neighborhood. Zillow was doing well. By nature of the data, Zestimates went up more than was accurate. Sellers were doing well. Relocating buyers were paying cash for their homes, so appraisals didn’t matter much if they wanted a house!
What about the little guy? A first-time homebuyer was definitely losing out to cash buyers in bidding wars. Zillow statistics show that they flipped 20% of their purchases to investment institutions. Their flip forever removed those houses from individual home buyers. Rents increased. But Zillow was doing well.
Manipulating the Real Estate Market
Do you think inflated values enticed more people to sell their homes? Did home buyers feel motivated to buy NOW? Can you see how Zillow might have a vested interest in how much money a buyer thinks a house is worth? The real estate market started to get crazy.
When listing a house, the seller sees accurate real estate records by deducting fees from the value. Their Realtor would go over this data. When an offer came from Zillow or another company, a seller’s head wasn’t in the clouds. They were mostly reasonable. That 10% Zestimate inaccuracy difference was money hopefully going into Zillow’s pocket with a bidding war on the flip.
When Did The Real Estate Market Change?
Real estate patterns repeat themselves every year. When summer is over and school starts, fewer families move. The inventory of homes for sale increases, it takes longer to sell, and appreciation slows.
Zillow paid top dollar for a lot of houses in bidding wars that they helped to create. We think Zillow decided that the fast and easy ride was over for now.
The company issued a statement “Due to a backlog of renovations and operational capacity constraints…” This puts the blame on the supply chain and labor shortages. That is why they are selling $2 billion dollars in property across the country and in Canada? Do you believe that?
We think that since houses weren’t selling quickly anymore, it was time to leave the game – and to do it quickly. Longer days on the market stats add holding costs, and the cost of funds goes up, making profits go down.
They lost a lot of money due to tweaking their algorithm for Zestimates, according to Bloomberg. Despite a slowing economy, they were still over-paying.
The American People Got Duped
Two weeks ago, Zillow announced that they were not buying more houses right now. Their holdings were already for sale. This week they announced that they were lowering prices to sell their inventory on 64% of their holdings.
Reports are out that some houses are listed at 93% of their purchase price. Of course, that 93% is off the recorded price, not counting their “service fee.”
Houston has hundreds more, and Phoenix has around 100. These listings should help the housing supply in those cities.
This is not a “Fire Sale.” The Market is not crashing. Zillow has already made a killing from this strategy. Do The Math – after receiving a 5% service fee, their houses are now listed at 4.5% less than the purchase price. That’s not much of a loss for manipulating America and Canada.
So Zillow loses relatively little on a scheme that encouraged many people to overpay for homes or not get one at all. Now they get to claim Uncle Sam’s rewards for making a fundamental business mistake even though they are “housing authorities.” Heck, Zillow was gambling and manipulating the market.
The Truth About Investing In Real Estate
Is Investing In Real Estate Right Now A Bad Idea?
Will the Real Estate Market Crash?
Does Zillow Know Something We Don’t Know?
Real Estate does not usually appreciate 20%+ a year. Zillow was gambling on the high appreciation rates. Appreciation has slowed like it always does after school starts. They were not making long-term investments.
Zillow was also not investing in short-term profits. They were gambling on the flip, and people were willing to overpay to get a home. Savvy Investors don’t gamble on appreciation.
Smart investors buy properties that make sense.
Do the numbers work?
Will I have positive cash flow each month?
How much do I have to spend on repairs?
How much more rent can I get if I remodel?
Does it pencil out?
Return On Investment – ROI
Most people who invest will do well when asking these questions. The bottom line question? What Is Your ROI – Return On Investment?
Is it a good investment to put $30,000 down (10%) on a property, get a loan at 4% interest? It is with a $200 a month positive cash flow from renting the property out. Not only do you get the positive cash flow, but there are tax benefits.
Historically, there’s always appreciation. Worst case scenario – the house is paid off using other people’s money in 30 years, and you made money each month for 30 years.
I say that if a property pencils out, it’s a good investment.
The truth about investing in Las Vegas is that the Las Vegas real estate market has not seen any depreciation in a long time. In fact, this last month, the median-priced home appreciated $7,000.
Interest rates are below 4% and below 5% for investment money. There are homes for sale in Las Vegas right now that will produce positive cash flow each month.
Do you want us to find some properties for you that pencil out? Let’s open some doors!
The Truth About Zillow
Everyone is speculating about why Zillow homes for sale are getting all this attention. Why is Zillow selling all of these properties?
Did they make a mistake?
Does the company have a cash flow problem?
Do they have a quarterly earnings report coming out to stockholders?
Did they invest money using their own inaccurate data?
Are the carrying costs and costs of repairs too high?
Zillow claimed that they are unable to get the labor for repairing properties. A company that size can hire a full-time hiring manager, so is that the real reason? Does blaming the economy or the labor force give them the excuse to sell off everything immediately? We think that they are getting out before everyone realizes the extent of damage done to the American people.
Of course, scare tactics sell newspapers and make the news interesting. “Fire Sale” rumors and “Market Collapse” are attention-grabbing terms, but at this point, highly inaccurate. In Phoenix, there are thousands of homes for sale. Zillow has 75 left to sell. People are pleased as there is still a low supply of houses for sale in the area- compared to normal.
Rent vs. Owning Your Home
There are Las Vegas homes for sale where the house payment is considerably less than rent is. AND there are down-payment assistance programs wanting to give you money to buy a house. 3.5% of the home purchase money (the entire down payment) can also be a gift.
It makes sense to buy a house. Your payment is lower than rent, you get possible tax benefits, and you’re building wealth through appreciation and principal reduction.
If you buy your own house, your house payment will stay relatively stable (except taxes and insurance) for 30 years. Scenario: If you buy a $300,000 house that appreciates 20% over 30 years, that’s $60,000 plus your house is paid off.
A Las Vegas $100,000 house 25 years ago is worth over $350,000 today. The house payment today for $350,000 is similar to what the one was 25 years ago for $100,000.
It’s also a way to stop making other people wealthy off your rent money. Where do you want to live? Do you want a brand new or an existing house?
You can start building more wealth today with investment properties and homeownership. Let the American Dream be your reality! Call us today at 702-750-7599 for a housing consultation.
Buying a house makes sense if you are renting and have had a job in the same line of work for 2 years. If there is competition for buying a house in your price range, you need to be educated and prepared.
Read our blog about “Getting ready to buy a house in 2021.” Let’s open some doors and see if owning a house is in your future.
Selling your house right now might also be a good strategy. Do you know an accurate estimate of value for your home right now? The market has changed so much in the past year. Get caught up with just a phone call.
For Las Vegas Housing Information, please boycott Zillow. HomesForSale.Vegas is accurate, and we tell it like it is.
This blog was written by Kurt Grosse with Realty One Group. As a 25+ year top-producing Las Vegas Realtor and a former Nevada Building Engineer, I protect my clients. Houses are not built perfectly.
I use my building knowledge and real estate expertise to protect you and your investment. Contact me today at 702-750-7599. I am your Offensive and Defensive Coordinator combined.
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