Zillow Will Start Flipping Houses, and Investors Want No Part of It

Real estate website Zillow announced on Thursday plans to expand its Instant Offers service — which currently allows investors to bid on homes sight unseen in Las Vegas and Orlando, Fla. — into Phoenix. But the bigger revelation was that Zillow itself will be one of the investors buying homes in two test markets, Phoenix and Las Vegas, with plans to make necessary repairs and flip the homes as quickly as possible.

Like someone talking down their drunk friend from a “can’t-miss” business scheme, investors largely rejected the idea, sending shares of Zillow plunging downward on Friday and deflating a bit more Monday.

They’ve got a point. While shows on HGTV often glamorize and oversimplify the process, the truth is that flipping houses is pretty dicey business. It leaves one heavily debt-leveraged and vulnerable to shifting market conditions. Plus, while most traditional sellers can dodge paying capital gains if they’ve lived in a property long enough, profits from a flip are taxed like ordinary income.

Now, Zillow obviously has some advantages over most home flippers. They’ve got the money to invest, could presumably leverage their mammoth size to offer big contracting firms steady work in exchange for discounted rates, and they have access to millions of buyers and sellers. Maybe they even have sophisticated algorithms that can determine which properties in their database offer the best potential payoff.

And other companies, such as Opendoor, are already doing the same thing. But for Zillow, it’s still a dramatic departure from their longtime business model. “We’re entering that market and think we have huge advantages because we have access to the huge audience of sellers and buyers,” Zillow CEO Spencer Rascoff told CNBC.

Rascoff told CNBC the company aims to buy between 300 and 1,000 homes by year’s end, financed with collateralized debt (a housing crisis-era buzzword, as if this didn’t sound risky enough).

To oversee the Instant Offers and home flipping operations, Zillow hired Arik Prawer, a former executive at Invitation Homes — itself a corporate landlord known for buying up vacant single family homes, remodeling them, and renting them out with a sometimes cold-hearted focus on profitability.

It looks like Zillow can expect the same amount of patience from its investors.