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House Flipper Zillow Lost $109K (37%) Per Flip

Scorpio

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#1
House Flipper Zillow Lost $109K (37%) Per Flip, Net Loss Triples, Shares Soar
by Wolf Richter • May 10, 2019 • 105 Comments • Email to a friend

But this new & horrendous house flipping operation inflated revenues “more than expected.”
Zillow, which has generated an unbroken series of annual losses as a public company since its IPO in 2011, has figured out how to lose even more money, a lot more money, and at the same time boost revenues and get its shares to jump: house flipping.
In its quarterly earnings report Thursday evening, Zillow disclosed the dollars and cents of its newest enterprise, “Zillow Offers,” which buys and sells homes. The company describes this as “a new, hassle-free way to buy and sell homes directly through Zillow.”
The report splits out the business segments, including the “Homes” segment, which is its house flipping operation.

In terms of timing: The revenues, costs, and expenses associated with buying and selling the house are booked on the income statement in the quarter in which the sale of the house closes.
So let’s see how Zillow’s new thingy did in the quarter ended March 31:
  • Sold 414 homes.
  • Sales proceeds added $128.5 million to revenues, for an average selling price of $310,400 per home.
  • The purchase cost of these homes added $122.4 million to cost of sales, for an average purchase price of $295,700 per home.
  • This amounts to an average gross profit (selling price minus purchase cost) of a meager $14,700, or 4.9% per flip.
But it costs money to buy homes, get them ready to flip, market them, finance them until they’re sold, and deal with the transactions, in a corporate manner. So Zillow booked the following expenses associated with its home flipping operations:
  • $20.8 million in sales and marketing expenses
  • $12.3 million in technology and development expenses
  • $14.4 million in general and administrative expenses
  • $3.8 million in “segment interest” expenses.
So, revenues of $128.5 million from selling the homes, minus $173.7 million in costs and expenses associated with these home sales, for a loss on its home flipping operations of $45.2 million.
This loss of $45.2 million on 414 home flips means:
  • Zillow lost $109,190 per flip on average.
  • Zillow lost 37% on each flip on average.
So this is a horrendous business.
But it performed miracles because the sales of those houses – a business activity Zillow didn’t engage in a year ago – added $128.5 million to revenues. This constituted three-quarters of the total revenue increase of $154 million (or 51%) to $454 million in total revenues in the quarter.
And due to the loss at its home flipping business, Zillow’s total loss soared by 263%. In other words, a 51% increase in revenues caused its quarterly loss to soar by 263% to $67.5 million. This loss amounts to a stunning 15% of revenues.
Zillow isn’t a startup. It has over 4,000 employees. It has been a publicly traded company since 2011. And it has been on an acquisition binge, buying all kinds of other companies. And now it has figured out a way to lose a lot more money.
But Zillow is apparently not yet losing enough money, and so it is going to expand this ruinous home-flipping operation from the eight metropolitan areas at the end of March to more markets to boost its revenues and its losses. In home flipping, there are very few economies of scale; so we’re looking forward to seeing a beautiful cascade of losses.
Because revenues jumped like this – no matter that this caused Zillow’s losses to more than triple – shares soared 19% in evening trading on these “better than expected” revenues and the prospect that Zillow will expand its ruinous home flipping operation to many more markets and boost its losses further. Friday at about noon, some of the excitement of after-hours trading has tapered off and shares are up 8% and heading down.
When a stock market rewards companies that have always lost money, such as Zillow, for coming up with a way of losing even more money, it takes the incentive away for management to build a functional profitable business model. And it shows to what extent this market and the entire hype machine around it are twisted.
It’s a tough job, but someone’s doing it. Read… The State of the American Debt Slaves, Q1 2019
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https://wolfstreet.com/2019/05/10/h...09k-35-per-flip-net-loss-triples-shares-soar/
 

SilverBuyer

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#2
I'm sure there is way too much bureaucracy for a big corp to operate efficiently in such an endevour. I know people make money doing it but they are tightly run operations that penny pinch and often are capable of doing at least some of the renovations themselves.

A lot of these companies are getting ridiculous valuations. (Uber, Facebook, Tesla come to mind immediately)
 

EO 11110

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#5
Employees of Zillow if I'm not mistaken. (buying on behalf of the corp)
confused -- are you saying that zillow bought and sold the houses to create churn? or that employees bought the houses from zillow for their own gains (buying below market price as zillow books losses)?

or perhaps, both?
 

SilverBuyer

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#6
confused -- are you saying that zillow bought and sold the houses to create churn? or that employees bought the houses from zillow for their own gains (buying below market price as zillow books losses)?

or perhaps, both?
The first option, Zillow bought and then sold the houses (presumably to make a profit like a mom and pop house flipper). But instead of making money they lost 37%.

I know mom and pop house flippers can make money but they aren't burdened by all the BS that comes with a big corp so no way they'll be profitable in this "branch" of their business. The mom and pop operations find an undervalued property that usually needs a lot of work, do some of the renovations themselves, maybe hire out some of the work to cheap labor (often mexicans). Once the house is fixed up they sell it for a profit if everything goes well.
 
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EO 11110

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#7
is that part of zillow's business model - flipping houses? i thought they were just another RE data site that angles for views and ad revenue
 

SilverBuyer

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#8
is that part of zillow's business model - flipping houses? i thought they were just another RE data site that angles for views and ad revenue
Yep that was all it was originally, this was a recent addition. All these companies seem to be striving to create high revenue numbers even if its at the cost of actual profits.
 

TAEZZAR

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#9
Yep that was all it was originally, this was a recent addition. All these companies seem to be striving to create high revenue numbers even if its at the cost of actual profits.
Sounds more like a government program than private enterprise ! :rotf::rotf::don't    know2:
 

Scorpio

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#10
SB has it nailed, that is the story as I know it anyway

Awhile back had heard about this, and thought of the 'we buy houses' types where the offer to purchase had to be back of market quite a bit to cover the costs to get it sold on open market.

The cost of transferring, owning, listing, selling and of course time. Time being a key factor as costs go up the longer you have it on the books.