Zillow Pauses Buying U.S. Homes As It Works Through Backlog

According to Bloomberg, Zillow Group, the online real estate marketplace, has announced it will stop buying U.S. houses for the remainder of the year as it works to get through a backlog of properties it already owns.

Zillow purchased 3,805 houses in the second quarter of 2021, while selling just 2,086 of them. Despite the number of houses sold being the highest total Zillow has hit since the first quarter of 2020 (2,394 houses sold), the achievement loses its luster when considering just how much inventory the listing giant still possesses.

In response to Bloomberg’s report, Zillow chief executive officer Jeremy Wacksman released a statement on Monday, explaining that the supply and labor constraints that’s plaguing the real estate industry are the culprits behind Zillow’s stoppage.

“We’re operating within a labor- and supply-constrained economy inside a competitive real estate market, especially in the construction, renovation and closing spaces. We have not been exempt from these market and capacity issues and we now have an operational backlog for renovations and closings.”

Wacksman also stated that pausing home buying will allow Zillow to finish working with sellers that are already under contract, as well as help them to focus on their current home inventory.

Bloomberg noted that Zillow shares dropped by 11.4% to $83.54, and are down by 60% from their 52-week high. Meanwhile, competitors are seeing benefits from Zillow’s drop, as their shares rose by almost 7.9% to $25.27.

Zillow jumped into the online house-flipping business — the practice of buying a property, making renovations or improvements, and then flipping it for a greater return on investment — by launching “Zillow Offers” back in 2018, transforming themselves into what are known as “iBuyers.”

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Zillow Offers allows users to get an estimated market value (or “Zestimate” as they call it) for their home, followed by an in-person evaluation before a purchase. Zillow would then make light and needed repairs before reselling the house.

The quick and no-hassle model that Zillow promotes is certainly appealing over the usual, stressful process of listing a house (especially during a pandemic). This, along with the sudden activity the real estate industry experienced following lockdowns, likely contributed to the overwhelming amount of properties the company purchased.

As seen by Zillow’s overloaded business, house-flipping is becoming an active real estate market. The U.S. saw house-flipping rates increase in the second quarter of 2021 to 4.9%. However, return on investments were at 33%, which was down from previous quarters.

In addition to the labor shortages that have affected virtually every industry, house-flippers like Zillow are also dealing with inflation and supply shortages due to the ongoing supply-chain problems that could worsen even further within the coming months.

Bloomberg mentioned that Zillow, as well as its competitors, also stopped buying houses when the pandemic began. Additionally, it took nearly seven months before Zillow was able to buy houses at a pre-pandemic rate.

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Despite the company’s sudden halt, they still experienced strong numbers across the board in the second quarter. TheRealDeal reported that Zillow saw $9.2 million net income in Q2. While that was down from $52 million in the first quarter, Zillow also achieved a record $1.3 billion revenue – which is up 8% from Q1.

Additionally, according to Barron’s, Zillow Homes recorded a second quarter revenue of $777 million — up 71% from the previous year — while mortgage revenue was up 68% to a total of $57 million. Zillow also expects third quarter revenue to be around $1.91 to $2.05 billion.

With their stoppage, Zillow will now be in a race to successfully finish their current contracts and start accepting new ones by the start of 2022 – while also crossing their fingers that their opponents don’t gain the upper hand in the house-flipping industry in the meantime.

House Flipping Is Heading Upwards, But Profit Margins Are Down

According to a report published by Attom, the house flipping rate in the U.S. is trending upward. 79,733 single family homes and condominiums were flipped in the second quarter of 2021, coming out to a rate of 4.9% in all second quarter home sales (one in 20)— which Attom notes is the first increase in over a year.

The second quarter (which consists of April, May, and June) flipping percentage is up from 3.5% in the first quarter (January, February, March). However, both percentages are far from the 6.8% the house flipping market saw back in the second quarter of 2020.

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House flipping is typically defined as buying and selling a house within a 12-month time period. As you may have seen on popular TV shows such as HGTV’s “Flip or Flop” or “Fixer Upper,” home flippers renovate or improve their properties in order to create a bigger return on investment (ROI) when they eventually sell.

Like many tactics in real estate, the process and end result of house flipping can greatly fluctuate and depends on a variety of factors, from the types of improvements and costs needed to the location and market that the property has.

The gross profit on an average house flipping rose to $67,000, up by 2.5% from $65,400 in the first quarter. These profit numbers are up from 2020 and are some of the highest totals since 2005. However, while the gross profits may be promising, CNBC explains that the ROI (which is calculated after adding in flip costs) have taken some sizable hits in the past quarters.

“The return was just 33.5% in the second quarter, down from 37% in the quarter before and down from 40% in the second quarter of 2020. Investors are now seeing the lowest returns since 2011, when the housing market had yet to begin its recovery from the subprime mortgage crash.”

CNBC notes that there are a number of influences that contribute to these returns, which includes the tough reality that renovating a house is much more costly now due to inflation and the supply-chain being heavily impacted by the pandemic. Home-flippers also tend to be just one person or a small group, which impacts just how much (or little) discounted resources they have at their disposal.

While ROI was down nationwide, some populated areas saw terrific boons of returns. Among the metropolitan areas that have experienced the highest ROI rates in the second quarter of 2021 are Oklahoma City (196.4%), Fargo, N.D. (185.7%), Pittsburgh (154.2%), Omaha, Neb. (135%), and York, Penn. (115.%).

If you’re a lover of renovating while munching on cheesesteaks or crab cakes, you’re in luck. Along with Oklahoma City and Pittsburgh, Philadelphia (100%), Buffalo (93.3%), and Baltimore (90.5%) were among metro areas with at least a population of one million that saw the largest returns in the second quarter.

Meanwhile, midwestern and southern areas such as Gulfport, Miss., College Station, Texas, and Corpus Christi, Texas had the smallest investment returns, seeing losses of up to 7.8%. These towns also dealt with considerably small raw profits.

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If you have an interest in real estate and think you could manage despite the tough profit margins, house flipping could be a viable market to jump on while it’s growing. USA Today touched down on a number of tips for flipping beginners. Studying and knowing your market is the first and most important duty, as your location will heavily impact your potential profits and returns (as evident above).

Setting a budget and timeline is also an important goal. USA Today specifically emphasized the 70% rule— which is how much you should spend on the property when keeping in mind how much you want to sell it for and how much it will cost to renovate.

Lastly, you should stay away from making too many improvements. If not, you run the risk of either becoming too attached to the property, or ruining your potential ROI when the profit doesn’t cover the vast amount of changes you made.

There is another positive, which is that as Attom notes, the average time it takes to flip a house— 147 days in the second quarter— is the lowest it’s been since 2010. That’s great for potential investors who don’t want to be wrapped up in a long-term project.

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How To Sell Your Home Fast

The housing market is forever changing. It’s always hard to tell when the best time to sell or buy is and vice versa. However, when you find yourself in a situation where, regardless of the market status, you’re looking to sell your home and sell it fast, there’s a few key tips you should keep in mind. 

First and foremost, unless you’re an expert on all things real estate yourself, make sure you get a reputable and hard working agent to assist you on your housing journey. There are many things that you should specifically be looking for in a trustworthy agent, however, that’s a different article for a different time, now we’re trying to sell!

Assuming you and your agent are already teamed up and ready to get your house into the hands of its next occupant, here are some things to consider. According to Zillow, home properties spend, on average, 68 days on the market before it sells, so how can you cut that number way down?

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Understand that the mantra “location, location, location” is so commonly known for a reason. If your home is already in a desirable neighborhood near the water, you obviously will have no trouble selling. However, if you find yourself not in the most desirable location, figure out what adjustments you then need to make to your home either aesthetically or price wise to get more buyers interested. 

No one wants to change the price of their property once it’s on the market, however, you can’t change the location of your home, and if that’s what’s holding it back from selling, there’s not many options to get individuals interested. Again, this is where having a trustworthy and professional agent by your side will benefit you. They can tell you if your specific market is more hot or cold in the moment you’re selling and how to adjust either your pricing or listing itself to grab the attention of more buyers.

After a while, consider removing any online listings of your property from the internet and re posting them through the Multiple Listing Service. However, your best bet will always likely be a dramatic price drop. Think about the neighborhood you are in and what the surrounding properties would sell for. If your property is the lowest, price wise, for the specific area it’s in, it’s likely to get more offers and interest.  

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While there’s been a major emphasis on finding a solid agent to assist you, maybe consider using a wholesaler instead. 40% of all real estate transactions that occur in America are done in all cash transactions. All cash means no banks and less complicated paperwork and real estate  jargon to work through, this is especially important for the desperate seller. 

Wholesalers act more as a middleman for property improvement when compared to a traditional real estate agent. They may not offer you top-dollar, however, if you aren’t looking to dramatically drop your price, this would be the next best choice. A wholesaler will then put your house under contract, flip it for cheap, and then offer it back up to a slew of cash-buyers that they themselves have already scouted based on what the property itself has to offer each client. 

Finding a wholesaler can be quite tricky, as they often find clients themselves who are desperate to sell. However, there are a few online services that can connect you to the right people for the job; such as We Buy Ugly Houses.  

Finding the right people in the business to assist you in selling your home fast is the best way to ensure you’ll get the best bang for your buck, no matter how much you have to drop the price.