How Much Has Zillow Lost In Home-Flip Sales?

Any company that expands its asset pool is taking a risk. Zillow (NASDAQ:ZG) learned this firsthand when it temporarily paused its quasi-automated home buying process through 2021. Now, the company is selling its remaining homes below their purchase price, effectively pushing ZG's home-flipping investments underwater.

Zillow has lost money in home-flip sales, and that loss is expected to increase as the company sells off its remaining flipped homes.

Zillow's home-buying process, called iBuying, is partially automated but still requires human inspectors and construction workers to renovate the home and prepare it for sale.

Zillow has been hit by the labor shortage and can no longer support its home-flipping aspirations, which is why the company paused home sales through the end of 2021. In the meantime, Zillow is selling its remaining 7,000 homes for a fresh start.

There's just one problem. Zillow is now selling most of those homes below purchase price, according to KeyBanc analyst Edward Yruma. This makes the company indebted to its iBuying investment.

In San Diego, Calif., and Phoenix, Ariz. Zillow is feeling the heat the most. In San Diego, 94.3 percent of homes were selling below their purchase price. In Phoenix and Mesa, Ariz., the rates were 93.4 percent and 92.6 percent, respectively.

Over the past few weeks, ZG stock has struggled to thrive thanks to Zillow halting a portion of its business. This week alone, its stock fell 14.6 percent. Year-to-date, Zillow stock is even deeper in the red, having fallen 33.86 percent. After thriving during the pandemic, Zillow's market cap is shrinking.

Market cap aside, Zillow is losing cold, hard cash on its investments. KeyBanc's Yruma wrote, "Zillow may have leaned into home acquisition at the wrong time, and we believe earnings may be at risk due to its current home inventory ($1.17 billion in 2021's second quarter)."

Yruma analyzed 650 Zillow homes, about 20 percent of its remaining inventory of flipped homes (down from an initial 7,000 homes).

Zillow is selling those 7,000 homes for a collective $2.8 billion, which equates to $400,000 per home. Of those 7,000 homes, 66 percent are selling or have sold below the purchase price. That means about $1.85 billion in flipped homes lost money (and that doesn't even include extra costs for high-tech AI, inspection, and renovation).

Zillow plans to restart its iBuying program next year, but investors hope the company has learned its lesson on overextending its liquidity. Basically, Zillow bought too many homes for most people's liking, and only loyal shareholders are sticking around to witness what happens next.

The company could decide to sell a larger chunk of its remaining inventory to an institutional investor at a premium, but no deal has been inked as of yet.