Many people don’t realize that real estate listing site Zillow also purchases homes with an intent to fix and flip them. The platform’s Zillow Offers unit uses its sophisticated AI software algorithms to come up with an asking price and makes an offer to the house’s owner. If the owner accepts, Zillow buys the house, repairs and updates it, then puts it back on the market.
But KeyBanc analyst Edward Yruma on Monday pointed out a flaw in the strategy. Two-thirds of the homes Zillow owns and lists for sale are underwater, MarketWatch.com reports.
Upon release of Yruma’s note, Zillow stock dropped 6.2%. Tuesday morning, the stock is hovering just above the $90 mark, a drop from Monday’s close of $96.61. However, it still sits above its 13-month low of $86 in mid-October, when Zillow said it would stop buying homes as it cleared a backlog.
However, Yruma’s analysis of 650 homes in Zillow’s inventory — roughly one-fifth of those owned by the platform — showed that 66% were listed below the purchase price, with an average discount of 4.5%. Cities with the most homes underwater included San Diego with 94.3%, Phoenix with 93.4%, and Mesa, Arizona, with 92.6%. Of those cities, Phoenix had the most homes listed below purchase price, trailed by Charlotte, North Carolina with 70 and Las Vegas with 52.
“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 at 2Q21),” Yruma wrote in a note to clients, reported by MarketWatch.com.
Yruma has had a neutral rating on the stock since February 2020, MarketWatch.com reported.
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