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The only time I've seen house flipping work at scale is 2010-2012 when those with huge piles of cash could buy foreclosures in a few heavily affected metros, do

The only time I've seen house flipping work at scale is 2010-2012 when those with huge piles of cash could buy foreclosures in a few heavily affected metros, do nothing for 3-6 months then put them back on the market for a tidy profit. After that brief window closed, you either had to become a landlord for a couple years or employ a crew of handymen on staff to fix all the surprises that come with being a homeowner. You're either a landlord or a builder if you want to actually make money outside of a recession.

mertd 5y ago
The idea was not house flipping at scale. They wanted to "market make" for housing. Housing market is illiquid. People would leave decent money on the table if they could just sell their houses within hours without having to deal with realtors, open houses, listing and closing process. Of course Zillow would have made some repairs and improvements but I don't believe that they thought this was their upside.
- sokoloff 5y ago
  Exactly. People sell cars to CarMax for less than they could otherwise get because it's easy, fast, and certain. People buy cars from Carvana over the lowest price they could pay elsewhere because it's easy, fast, and certain. I think there's a lot of money to be earned by turning a slow, tense process into a fast, lower stress process.
  - toomuchtodo 5y ago
    What market making opportunities do you see that aren’t currently aggressively competed for?
    - sokoloff 5y ago
      I'm no expert, but as a homeowner and someone who as a result has to employ contractors to fix things, I'd love to see someone make home repairs easier, more certain, and lower aggravation. I think there are probably thousands of other industries/segments where an aggregate hundreds of millions or billions of dollars are spent annually and where people would spend 1 to 2.5% extra if friction were noticeably reduced. That used to be flights, hotels, and cabs that have been made easier in the last 2 decades.
      - gruez 5y ago
        > I'm no expert, but as a homeowner and someone who as a result has to employ contractors to fix things, I'd love to see someone make home repairs easier, more certain, and lower aggravation. While it's definitely possible to improve the experience around that, I don't think it really qualifies as market making. Specifially, look at wikipedia's definition: >A market maker or liquidity provider is a company or an individual that quotes both a buy and a sell price in a tradable asset held in inventory, hoping to make a profit on the bid–ask spread, or turn. You can't really hold "renovations to be done" as an "asset in inventory". It'll be something like uber, ie. a marketplace, not a market maker.
        sokoloff 5y ago
        That's fair and I agree that it's friction-reducing but not market-making.
      - nradov 5y ago
        Except for really basic stuff like snaking a toilet, home repairs and remodeling are all different. It's not a standardized commodity service like flights, hotels, and cabs where the majority of customers all want pretty much the same thing.
    - JAlexoid 5y ago
      All home repairs - it's a damn nightmare. Home building - complex, slow and expensive RE agencies, seem to compete... but it's an oligopoly market. (just to stay in the RE segment) And all three have severe government monopoly powers and competition killing regulations.
    - gnopgnip 5y ago
      Some would say the real estate brokerage market isn't that competitve. The national realtors association keeps prices artificially high, there is room for ibuyers or market makers to offer a better service, and charge less than 6%
  - anonAndOn 5y ago
    Except, it never works that way for houses. Banks are reluctant to give mortgages when the roof is EOL, or the siding has dry rot or there is some black mold basically anywhere, etc. Giant Corp may be able to buy quickly and efficiently but Joe Homeowner can't get his loan approved until A, B, and C are fixed. Good luck getting 3 different contractors lined up quickly and under budget while in escrow.
    - gruez 5y ago
      > Banks are reluctant to give mortgages when the roof is EOL, or the siding has dry rot or there is some black mold basically anywhere, etc. but used cars seem to do fine, even though they can be similarly damaged?
      - amerkhalid 5y ago
        Used cars loans tend to have higher interest rates though.
      - pille 5y ago
        Maybe because used cars cost/risk about 1% as much as houses?
        bena 5y ago
        Also, every car has scrap value. Houses don't have that.
        gruez 5y ago
        The equivalent for houses is the land they sit on. In metros that could easily be worth more than the house, and in most cases it's worth more (in % terms) than the scrap value of a car.
        gruez 5y ago
        Why? because the unit price is lower? Can't zillow just... buy less houses? I don't see anything different between zillow buying a $500k house and one hundred used cars worth $5000 each.
  - cwilkes 5y ago
    Also the downsides are vastly different between buying a lemon of a car (although I’m those two cases I bet the companies offer a money back guarantee) that you might lose $1-2k on in repairs vs tens or hundreds of thousands of dollars in buying a bad house.
- vannevar 5y ago
  I think you're probably right. And in order to bootstrap the necessary volume (and starve their competitors), they were willing to actually pay more than market (similar to Uber's investor-subsidized rides in their early years). So the problem isn't so much that they lost money (which they probably expected for the first phase of the program), but that they lost more money than expected (and could tolerate). The additional cost and carrying time associated with labor and supply shortages in the construction industry may have contributed in that case, though I agree with the article that the adversarial market aspect was probably the biggest factor: in a competitive market, particularly bad offers were particularly likely to be accepted.
  - lotsofpulp 5y ago
    >The additional cost and carrying time associated with labor and supply shortages in the construction industry may have contributed in that case And property taxes. And security. I do not know who ran the numbers on this program, but anyone with even a little bit of real estate experience was wondering what the hell they were doing. Blackstone has been around and killing it in real estate for 20+ years, and you would figure something obvious like what Zillow was planning to do would be on their radar if it made sense.
- kmonsen 5y ago
  In the bay area there seems to be some companies that do this. Every time I turn on the radio there is an ad for "John buys bay area houses". I think they do exactly what you say, give a quick cheap offer, then do some fixing and sell the normal way for a profit. Basically, if you can convince someone to sell for x% less than the real price today, you can make x% - some costs. Of course this has huge variability, but the company I noticed do it in one market they probably know extremely well so they can make good bets.
  - thedougd 5y ago
    I inquired about selling to a few in a different region. They all expected you to pay for repairs they identify. That's far too open ended of an agreement for me. Perhaps it was limited to structural issues, but that wasn't clearly outlined. I also assume they complete their own repairs using their own staff. I expect that gives them the opportunity to quote me at $1000 for a repair while their cost is lower. In a red hot market, I opted to let the market decide the price and terms.
    - kmonsen 5y ago
      I think if you can it is almost always better to do it on the open market. The exception being that there is a lot of middleman involved, loan agents and purchase agents. So cutting out these should save at least 5%.
- brendoelfrendo 5y ago
  Market makers also typically make money on their spread, paying slightly under market rate for an asset and selling for slightly over. They can do this in, say, stock trading because people want to make trades right now to capitalize on moment-to-moment conditions, so that's the price of convenience and liquidity. Zillow SAID they wanted to be a market-maker, but they ACTED more like a flipper or investor, expecting to make a profit on the houses themselves, not just on the spread. When they started making above-market offers on homes they pretty much left any pretense of market-making behind: at that point, you need to either sell at a loss or hold inventory and go (a little) long on your investment. Zillow realized they didn't want to hold inventory. It doesn't help that houses aren't nearly as liquid or fungible as stocks: buying a house, prepping it for sale, accepting and offer, and closing takes months, and all that time can eat into your spread. Zillow would probably always have ended up in a situation where they were more concerned with the sale price 2-4 months down the line rather than their spread.
SV_BubbleTime 5y ago
Agree, but there is a tiny bit little more in depth to it. * If you got a lucky market you could’ve made a lot of money. But I had far less to do with the renovation part and just the I happen to buy low and sell high part. * A LOT of flippers lied about it being their primary residence. That helps with loans, although there are more serious paperwork and requirements since 2012 or so. FBI paperwork iirc. * The math changed if you were your own crew. If you have the time, and the skills, it definitely change the equation. However, you basically had to make this your full time job, and there aren’t a lot of competent non-professional “full stack” contractors flipping for fun. It’s a lot less stress to just be hired for jobs.

mertd 5y ago

The idea was not house flipping at scale. They wanted to "market make" for housing. Housing market is illiquid. People would leave decent money on the table if they could just sell their houses within hours without having to deal with realtors, open houses, listing and closing process. Of course Zillow would have made some repairs and improvements but I don't believe that they thought this was their upside.

sokoloff 5y ago
Exactly. People sell cars to CarMax for less than they could otherwise get because it's easy, fast, and certain. People buy cars from Carvana over the lowest price they could pay elsewhere because it's easy, fast, and certain. I think there's a lot of money to be earned by turning a slow, tense process into a fast, lower stress process.
- toomuchtodo 5y ago
  What market making opportunities do you see that aren’t currently aggressively competed for?
  - sokoloff 5y ago
    I'm no expert, but as a homeowner and someone who as a result has to employ contractors to fix things, I'd love to see someone make home repairs easier, more certain, and lower aggravation. I think there are probably thousands of other industries/segments where an aggregate hundreds of millions or billions of dollars are spent annually and where people would spend 1 to 2.5% extra if friction were noticeably reduced. That used to be flights, hotels, and cabs that have been made easier in the last 2 decades.
    - gruez 5y ago
      > I'm no expert, but as a homeowner and someone who as a result has to employ contractors to fix things, I'd love to see someone make home repairs easier, more certain, and lower aggravation. While it's definitely possible to improve the experience around that, I don't think it really qualifies as market making. Specifially, look at wikipedia's definition: >A market maker or liquidity provider is a company or an individual that quotes both a buy and a sell price in a tradable asset held in inventory, hoping to make a profit on the bid–ask spread, or turn. You can't really hold "renovations to be done" as an "asset in inventory". It'll be something like uber, ie. a marketplace, not a market maker.
      - sokoloff 5y ago
        That's fair and I agree that it's friction-reducing but not market-making.
    - nradov 5y ago
      Except for really basic stuff like snaking a toilet, home repairs and remodeling are all different. It's not a standardized commodity service like flights, hotels, and cabs where the majority of customers all want pretty much the same thing.
  - JAlexoid 5y ago
    All home repairs - it's a damn nightmare. Home building - complex, slow and expensive RE agencies, seem to compete... but it's an oligopoly market. (just to stay in the RE segment) And all three have severe government monopoly powers and competition killing regulations.
  - gnopgnip 5y ago
    Some would say the real estate brokerage market isn't that competitve. The national realtors association keeps prices artificially high, there is room for ibuyers or market makers to offer a better service, and charge less than 6%
- anonAndOn 5y ago
  Except, it never works that way for houses. Banks are reluctant to give mortgages when the roof is EOL, or the siding has dry rot or there is some black mold basically anywhere, etc. Giant Corp may be able to buy quickly and efficiently but Joe Homeowner can't get his loan approved until A, B, and C are fixed. Good luck getting 3 different contractors lined up quickly and under budget while in escrow.
  - gruez 5y ago
    > Banks are reluctant to give mortgages when the roof is EOL, or the siding has dry rot or there is some black mold basically anywhere, etc. but used cars seem to do fine, even though they can be similarly damaged?
    - amerkhalid 5y ago
      Used cars loans tend to have higher interest rates though.
    - pille 5y ago
      Maybe because used cars cost/risk about 1% as much as houses?
      - bena 5y ago
        Also, every car has scrap value. Houses don't have that.
        gruez 5y ago
        The equivalent for houses is the land they sit on. In metros that could easily be worth more than the house, and in most cases it's worth more (in % terms) than the scrap value of a car.
      - gruez 5y ago
        Why? because the unit price is lower? Can't zillow just... buy less houses? I don't see anything different between zillow buying a $500k house and one hundred used cars worth $5000 each.
- cwilkes 5y ago
  Also the downsides are vastly different between buying a lemon of a car (although I’m those two cases I bet the companies offer a money back guarantee) that you might lose $1-2k on in repairs vs tens or hundreds of thousands of dollars in buying a bad house.
vannevar 5y ago
I think you're probably right. And in order to bootstrap the necessary volume (and starve their competitors), they were willing to actually pay more than market (similar to Uber's investor-subsidized rides in their early years). So the problem isn't so much that they lost money (which they probably expected for the first phase of the program), but that they lost more money than expected (and could tolerate). The additional cost and carrying time associated with labor and supply shortages in the construction industry may have contributed in that case, though I agree with the article that the adversarial market aspect was probably the biggest factor: in a competitive market, particularly bad offers were particularly likely to be accepted.
- lotsofpulp 5y ago
  >The additional cost and carrying time associated with labor and supply shortages in the construction industry may have contributed in that case And property taxes. And security. I do not know who ran the numbers on this program, but anyone with even a little bit of real estate experience was wondering what the hell they were doing. Blackstone has been around and killing it in real estate for 20+ years, and you would figure something obvious like what Zillow was planning to do would be on their radar if it made sense.
kmonsen 5y ago
In the bay area there seems to be some companies that do this. Every time I turn on the radio there is an ad for "John buys bay area houses". I think they do exactly what you say, give a quick cheap offer, then do some fixing and sell the normal way for a profit. Basically, if you can convince someone to sell for x% less than the real price today, you can make x% - some costs. Of course this has huge variability, but the company I noticed do it in one market they probably know extremely well so they can make good bets.
- thedougd 5y ago
  I inquired about selling to a few in a different region. They all expected you to pay for repairs they identify. That's far too open ended of an agreement for me. Perhaps it was limited to structural issues, but that wasn't clearly outlined. I also assume they complete their own repairs using their own staff. I expect that gives them the opportunity to quote me at $1000 for a repair while their cost is lower. In a red hot market, I opted to let the market decide the price and terms.
  - kmonsen 5y ago
    I think if you can it is almost always better to do it on the open market. The exception being that there is a lot of middleman involved, loan agents and purchase agents. So cutting out these should save at least 5%.
brendoelfrendo 5y ago
Market makers also typically make money on their spread, paying slightly under market rate for an asset and selling for slightly over. They can do this in, say, stock trading because people want to make trades right now to capitalize on moment-to-moment conditions, so that's the price of convenience and liquidity. Zillow SAID they wanted to be a market-maker, but they ACTED more like a flipper or investor, expecting to make a profit on the houses themselves, not just on the spread. When they started making above-market offers on homes they pretty much left any pretense of market-making behind: at that point, you need to either sell at a loss or hold inventory and go (a little) long on your investment. Zillow realized they didn't want to hold inventory. It doesn't help that houses aren't nearly as liquid or fungible as stocks: buying a house, prepping it for sale, accepting and offer, and closing takes months, and all that time can eat into your spread. Zillow would probably always have ended up in a situation where they were more concerned with the sale price 2-4 months down the line rather than their spread.

SV_BubbleTime 5y ago

Agree, but there is a tiny bit little more in depth to it. * If you got a lucky market you could’ve made a lot of money. But I had far less to do with the renovation part and just the I happen to buy low and sell high part. * A LOT of flippers lied about it being their primary residence. That helps with loans, although there are more serious paperwork and requirements since 2012 or so. FBI paperwork iirc. * The math changed if you were your own crew. If you have the time, and the skills, it definitely change the equation. However, you basically had to make this your full time job, and there aren’t a lot of competent non-professional “full stack” contractors flipping for fun. It’s a lot less stress to just be hired for jobs.