What is the Better Investment Strategy: Quick & Risky or Considerate & Successful?
Zillow Seeks to Sell 7,000 Homes
I can’t even tell anymore how many years we have all been hearing about the never-ending increase in housing costs.
For anybody interested in selling a house that is now too big after the kids left the nest, it was is a constant evaluation to see if it is really time to sell and find a smaller place.
Just to avoid suspense, most people didn’t sell, decided to keep enjoying the additional space and the familiar payments. In most cases, the potential smaller properties would cost as much as the place they currently own or only slightly less.
For those people who are reaching the point in life where they want to start a family or get their first own house, the last few years were a constant fight against time.
When you first contemplated the idea of owning a house or condo, etc., you focused on the low-interest-rate environment and calculated how much money you would have to gather to afford the down payment and all the other costs associated with a purchase.
Most people don’t have these sums sitting on their savings account, so they start saving.
When you are ready and reach the amount you had calculated you might ask a real state agent or maybe search online in your preferred neighborhood.
What most people found in the last few years was the constant increase in prices and bidding wars for properties.
You had to decide if you wanted to participate in this game.
This brings us to Zillow and the recent news that they plan to sell 7000 houses they recently purchased.
First of all, for anybody thinking that such a sale might moderate the market as a whole, I can tell you it won’t. The reason is that we are short at least 1 million available properties, so 7000 isn’t going to make a big dent in that shortage.
Still, it begs the question of why they want to suddenly sell in what we are told is a red hot real estate market?
Well, in a nutshell, they must have felt that they can play a game that generates quick profits.
I call it a game because they did not use a detailed evaluation of each property, as we suggest and advise our clients, regardless if you want to buy the property to move in or as an investment.
Zillow thought they could develop an algorithm to determine the value of a property, bid that value, and make the purchase.
If you look at the history of the application of algorithms in our daily life in the last few years we find more and more examples where it initially sounded like a good idea, appeared to level the playing field, simplify a complex process, and increase efficiencies.
When the algorithms had a chance to run for a while, i.e. YouTube channels, special media platforms, bank loan application approval processes, it is often discovered that a lot of the variables a human being takes into account are not covered by an algorithm, leading to undesirable results.
That’s what happened to Zillow. The system bid and bought so many houses that the portfolio started to overflow. I can’t tell for sure but to me it looks like the algorithm looked at each purchase individually, not taking into account that each purchase of a property at a higher price increases the valuation of all other properties for sale in the same area. It’s called the “comparative valuation model”.
The end result is that Zillow ended up paying more than they should have and now suffer from an effect where changing seasons, changing interest rates for mortgages, changing consumer sentiment, and a million other things lead to many of these properties no longer being as valuable as a few months ago and Zillow just has too many of them on the books.
Does that mean that real estate prices will come down? No, I don’t think so.
If you ask me, I predict that prices will keep increasing at a rate of about 5–7% next year.
It’s just the tale of an algorithm leading to undesirable results.
So what can we learn for our own real estate plans?
- If you own a house, do your research to determine the best time each year in your area to sell at the best price — in case you plan to sell.
- If you are looking for a house to occupy yourself, check if you can get a house from Zillow’s inventory below market or generally during times when the market in your area is unfavorable for sales
- If you are an investor (hopefully working with me and my team) and wonder what you should take from the Zillow news, remember that we always recommend long term planning:
- First, determine what your Time Freedom Point number is — the amount of money you want to collect monthly as passive income/cash flow from your investment properties.
- Determine in which geographical location you want to invest and if it’s not close to where you live, consider using the out-of-state turnkey approach we are suggesting.
- Determine if you are more interested in the long term and therefore prefer to own newer investment properties or properties that perform best right now. If you plan for the very long term, consider built to rent properties, otherwise purchase newly renovated properties
- For built-to-rent, only consider properties that perform at .65% of the purchase price or better for rent ($300K property, rent $1950.00/month or more). For renovated properties aim for performance as close as possible to 1% in A-class and B-class neighborhoods (no worse than c+)
- Get financing for a 20% down payment and 80% loan
If you do these things and consider those calculations, you will keep investing long-term and be successful.
Zillow saw the news about the increasing house prices, bidding wars, etc., and claimed they could make a quick killing. That greed resulted in bad buys, oversized inventory, and now losses as they try to get rid of this huge obligation they have on their hands.
If you ask yourself why they try to sell now the answer will remind you of a TV series: “Winter is Coming”
That’s the crux for publicly traded companies. They know they have to pretend that they can increase success in their business every 3 months or the stock analysts will kill their valuation.
Luckily, you and I and anybody with a long-term view does not have to care about that and can keep enjoying the great increases in value of our properties and the soon-to-come increases in rents.
So when you ask:
Quick & Risky or Considerate & Successful?
The answer should be obvious and Zillow just gave us one more example why the 5 P’s apply again: proper planning avoids pxxss poor performance in real estate investing.