Recently US based property giant Zillow exited Zillow Offers business where it used to buy house from owners and sell the same to buyers on its platform after repair/renovation with a premium.
Couple of takeaways from the US property space –
-Predicting future home prices is a very risky bet. As home prices are governed by a complex combination of factors like interest rates, employment, income, local infrastructure, supply/demand, black swan events such as COVID & more. In a country like India where apartments are becoming mainstream in metros, it is even more complex with heavy depreciation at work beyond a certain age.
-House flipping (selling your existing house to a broker at X price who will then sell the same to a new owner at X + Y price) might appear as a cool proposition by a business to a home owner. But it is highly capital intensive for the business and entails a huge risk if hoarded inventory’s price is off the mark. Leads to significant loss of return on capital for the business if deals are not priced well.
-Big Data in real estate plays an important role in giving an estimate basis past market performance but like financial markets where past returns are not indicative of future performance, this can’t be more true for a capital intensive sector like real estate.
-Considering this, only a calculated leverage & risk makes sense to survive unseen future. This is applicable for even Home Buyers buying out of range properties assuming continuation/growth in their salaries & stretched EMIs.
-This is perhaps why Zillow riding on popularity of its ‘Zestimate’ algorithm to value a property, thought house flipping could be a great business and wrote algorithms deciding right price to buy a property with estimated future home price as potential return on capital. But failed to rightly assess downside of not been able to sell these properties including loss of return on capital on unsold inventory.
It will be interesting to see Zillow’s competitor – Open Door’s upcoming quarterly figures in the same business.