Last Wednesday, Zillow announced it was abandoning their ibuyer program after losing hundreds of millions of dollars. Zillow themselves are trying to blame the volatility in the home market. However with very little recent volatility in the market, their explanations do not make much sense. Our feeling is Zillow purchased homes without a home inspection and couldn’t sell them because they did not understand the condition of the homes they purchased. Zillow’s failures highlight the importance of a home inspection.
A Home Price and Value are different
When Zillow purchased a home, they purchased it sight unseen. They used historical sales prices in the area to make assumptions about the value of the home. And as the market got hotter and hotter, their offers went up to secure a sale.
However, what is often NOT taken into account in a final sales price are adjustments made for the condition of the home. Many times these adjustments are made in the form of covering closing costs, credits, or simply, the home buyer understands they will pay for said repairs after closing.
For example, let’s say a 3 bedroom home is sold for $500,000.
The inspection revealed the home needs a new roof, a new HVAC system, and several miscellaneous repairs. The value of the new roof is determined to be $20,000, the value of a new HVAC system is $10,000 and the value of the miscellaneous repairs is $1,000.
The seller agrees to cover $10,000 in closing costs and credits but isn’t willing to do any repairs. The buyers decided they really want this house, and agree to take on the repairs after closing.
The sales price is recorded as $500,000. The value to the home seller is $490,000 since they gave up $10,000 in closing costs and credits.
The value to the buyer is (500,000+20,000+10,000+1,000-10,000) = $520,100 for the home, assuming they pay for the repairs immediately.
But to an outsider, like Zillow, who is only looking at the recorded price, all they see is $500,000.
By not having a home inspection, Zillow missed out on the opportunity to discover the real value of the homes there were buying.
Flipping Can Be A Flop
Homebuyers who are looking to flip a home are counting on buying under market value and that the repairs can be done in a manner that will still make a profit upon sale. However, savvy home flippers will visit the property and get a home inspection so as to fully understand the depth of repairs needed.
Zillow, however, did none of this.
As we have written before, popular TV shows such as “Fip or Flop”, “Flip this House” “My First Flip” and more show the glamorous side of flipping.
Yet most flippers, including Zillow, missed important items, such as a roof, electrical, HVAC, and other items, as discussed here. Occasionally, we find a house that has significant foundation problems, which can cost many tens of thousands to repair.
When a flipper, such as Zillow, does not take these important details into account, they can find it’s going to cost more to repair and sell the property than it’s worth on the open market.
Don’t Be Zillow, Get a Home Inspection
To make sure you understand the property you are buying, a buyer needs to do their due diligence. That includes visiting the property, doing your own investigations, and getting a professional home inspection. Zillow’s failures highlight the importance of a home inspection, don’t be a Zillow!
Book your home inspection now by calling 818-298-3405 or book online here.