Phoenix, AZ

Real Estate Flipping Isn't All It's Cracked Up to Be - Just Ask Zillow Group

Mark Hake

Zillow Stock, Down 70%, and Opendoor Technologies, Down 40%, From Earlier Peaks, Show That Flipping Doesn't Work

Well, at least, flipping houses using an algorithm and on a massive scale, flipping homes doesn't seem to work.

Zillow Group (Z) has seen its stock fall 70% from its peak of close to $200 earlier this year, to now just above $60. Moreover, it has thrown in the towel. This month the company shut down all its home flipping operations, known as Zillow Offers, and laid off 25% of its workers.

The reason is simple. Zillow was losing money head over fist. The Wall Street Journal analyzed the situation and said that the company's "algorithm derailed its big bet."

The article goes through the history of how Zillow got involved in "iBuying" and how it began losing money by overpaying for homes - especially in the Phoenix market.

As a result, Zillow stock is now down over 56% year-to-date.
Zillow Group stock (Z)Google Finance

Last week Zillow announced in its Q3 financial results that it had a GAAP net income loss of $328 million. This included a pre-tax loss of $422 million in its Homes division, which includes its Zillow Offers iBuying division.

Obviously, this is the right move, as a company can't keep on digging the hole it was in even further.

Peers Sinking

However, Zillow's competitors are not yet done with home flipping, even though they are losing money.

For example, Opendoor Technologies (OPEN), whose stock is off 40% from its peak earlier this year, also reported massive losses. On Nov. 10, the company reported a GAAP net income loss of $57 million.
Opendoor Technologies stock (OPEN)Google Finance

So far, it is all engines full steam ahead. In Q3 alone it acquired 15,000 homes, with a gross market value of $20 billion. However, for Q4, the company said it is deliberately moderating its purchases " in order to manage systemwide capacity and ensure that we can continue to deliver a seamless customer experience."

That sounds like code for trying to improve its profitability.

Needless to say, no one is concluding the obvious. All these iBuying companies could have artificially pushed up prices for homes. Now that at least one major group is bowing out, others may join. That, in and of itself, could lower demand for homes, allowing prices to cool off.

No wonder, then, Opendoor Technologies is slowing down its purchases and Zillow is exiting the iBuying home flipping craze.

Where This Leaves Investors

Everyone knows that real estate goes in cycles. We may now have reached the peak, now that both Zillow is leaving and higher inflation numbers are pushing up interest rates.

Last month, for example, the government reported that CPI rose over 6.0% on an annualized basis - see my recent article in Newsbreak about this.

No wonder, as well, that analysts are not bullish on Zillow stock anymore. According to Seeking Alpha, the average Wall Street analyst price target is just $63.00 per share - only slightly over its price today of $60.

Moreover, analysts still project losses in Q4 for both Zillow and Opendoor Technologies. That is not going to inspire a lot of confidence in investors who are wondering if home flipping on a massive scale by both these companies is worth it.

The only real effect is that they seem to have pushed up prices for homes. Given that Zillow has just dropped out, and that we may have seen a peak, this is not a net positive for real estate owners in the long run.

So, if you think home flipping was a good thing, you now know it wasn't, at least if you use an algorithm and are willing to push up prices as Zillow did.

By the way, don't forget to follow me and make sure to download the Newsbreak app to become a registered follower, so you can see all my articles in the past. Click on the link underneath my profile name.


This is not financial advice and you should not rely on my analysis to buy or sell any stock or crypto, as I am not undertaking to induce you to buy or sell securities. 

I am relying on the “publisher’s exclusion” in the Investment Advisers Act of 1940 to provide this information without any personalized or individualized investment advice.

This represents my analysis of Zillow or Opendoor Technologies stock and it is not meant to provide you with specific advice in your own situation. I do not presently own these or related securities, but I may buy some of these in the coming weeks.

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Mark Hake is a financial analyst, investor, and Chartered Financial Analyst (CFA). He writes about US and foreign stocks as well as cryptos, hedge funds, and private equity. He previously ran his own hedge fund, investment research firm, and acted as CFO for a fintech startup. He focuses on finding value, arbitrage, and hidden asset opportunities.

Phoenix, AZ

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