I’m shorting Zillow stock. Here’s why.

This message was edited 1 time. Last update was at 10/30/2019 12:24 AM EDT

Why I’ll be shorting the shit out of Zillow

Remember this guy? (See picture below). If your favorite character from The Great Outdoors wasn’t “Roman” as tragically hilarious as he was, it was the guy that kept getting hit by lightning.

“6...6...6...66 times”

Guy knows his lightning. You see him running for cover, you better get inside.

Well consider me your personal lightning to the head 66 times expert on why Zillow is going to make me some money in the options the stock market makes available to investors like myself to short the shit out of companies with unsustainably bad ways of running their business.

First, let’s start with the latest news:

https://www.geekwire.com/2019/zillow-2-0-real-estate-giant-embarks-fundamental-shift-projecting-home-sales-operation-will-become-20b-business/

Go ahead. Read it. Enjoy.

Now really think about this: In order for Zillow, a company that currently does $1.3 Billion in revenue (which is respectable) to hit its lofty goal of $20 Billion (yes, 17 times their total current business in the next 3-5 years LOL)...their plan is the following:

- Take their current rate of purchasing under 700 homes in a year and a half to purchasing 5000 homes a MONTH.

Oh, and out of those 686 homes they bought as an “ibuyer” (yeah, one of those disruptive words that really drives people without a calculator or common sense nuts...this model is going nowhere folks so hold on for the ride), they’ve sold a total of 177. So, failure. This exercise has cost them a net LOSS of $27.2 million.

The claim that these losses turn into profits at scale is totally bogus. There’s a possibility scale might help to reduce the losses - they could get good at being a landlord as an example when the overwhelming cost of carrying the overhead on these hundreds and the future thousands of inventory homes starts to affect their credit rating and have investors fleeing - but what magic exactly turns a tiny buyer of 0.000076222222222% (yes that’s the actual number currently) of homes for sale in this country losing tens of millions on inventory holding massive investments in something no one actually wants to invest in (think REO and how quick a bank is to get that bad investment off their books) into some profitable entity in the unlikely event they ramp up such purchasing to a still puny 1% of the market?

What’s worse - those homes in inventory won’t likely increase in value at a rate that would save them. The carry cost will almost certainly outweigh appreciation indefinitely and that’s if we don’t see any downturn in the market or rise in interest rates or shift to a buyer’s market. Which happens quite frequently by the way, especially as luck would have it in the markets they’re buying in. So I’m sensing the lightning coming to play on that analogy. Except instead of being hit with lightning in the head 66 times, I’ve been involved in millions and millions of real estate transactions. Over a period of decades and experiencing the markets at their ups and downs.

I see the irrational freak outs from within my relatively small real estate industry and get questions all the time...”are you concerned about Zillow disrupting the market?” Sometimes some will ask about other “iBuyers” too and they’ll cite some article online claiming these deals could be 10% of transactions at some point.

My answer: Nope.

I’m not running for the hills on that one. There’s no shortage of people low balling sellers of homes offering “cash now”. There have been signs on street corners long before Zillow was even a word offering these deals and most of the market ignores them and people just don’t want to sell their biggest asset for a discount. Add all the “iBuyers” and even those guys with checkbooks and signs that say “cash for your house today” all up together and it’s a tiny little piece of the market. Always will be.

Which brings us to why I’ll make a decent return shorting their stock, but not an enormous return:

Zillow will only fail a little.

When you short a stock, you’re buying the option to sell at a certain price. Your take is when that option price goes way up because the stock goes down. Nothing would make me more money than the nightmare of Zillow actually buying 5000 homes in a month and falling flat on their face. Cherry on top if they start overpaying trying to impress investors with big numbers and the timing goes well on a slight market downturn. But I don’t think that’s likely to happen for three reasons:

1. I don’t think they’ll actually find 5000 opportunities a month.
2. I don’t think their leaders will actually go so far down a path of loss once the red numbers start adding up.
3. Financing will start becoming an issue and at some point the much smarter, much larger banks doing hundreds of billions in business pull the rug out.

Also my big pay day will be thwarted by the underlying value of Zillow. Outside of the nonsensical fiction of just buying all the houses, they have huge traffic. They have great opportunities in what they do. They have amazing market positioning.

So short the shit out of it now. Let this $20 billion fiction fizzle. Then buy the shit out of it later.

Nathan Out.

The homes segment is not yet profitable, reporting a loss before income tax of $27.2 million on $41.3 million in revenue. Barton said profitability will come as Zillow Offers and the Homes segment scale up, but he didn’t give specific timing.

Preston wrote:The homes segment is not yet profitable, reporting a loss before income tax of $27.2 million on $41.3 million in revenue. Barton said profitability will come as Zillow Offers and the Homes segment scale up, but he didn’t give specific timing.

It's mathematically impossible. The value of my short will be determined by how fast the market notices.

https://homeinspectionforum.net/posts/list/3811/Zillowcouldbecrushed.Here'show.

https://www.theverge.com/2021/11/1/22758176/zillow-offers-ibuyer-housing-market-inventory-investors-real-estate

Zillow dumping their portfolio.

This post aged soooooo well!! And may I say, Thankfully!