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5 min read

Executive Letter #13: Man Vs. Machine

Nov 22, 2021 9:00:00 AM

If this drama with Zillow has taught us anything, it’s that an algorithm is never going to make the same kind of decisions as a person.

In case you’ve missed it, Zillow’s bustling little “side hustle”—that is, investing in millions of dollars’ worth of houses, sight unseen—is the American economy’s newest cautionary tale in letting online shopping get the best of you.

Hey, I get it. If I were a big company like Zillow, I would’ve also been thinking creatively about how to monetize the endless window shoppers that regularly come through its app. But, on the other hand, I know better than to buy in bulk when prices are record high and I don't have personal knowledge of the product.

How do I know? I’m not a machine.

I’ve got decades of experience in real estate, and even more in business. When we look toward investing in a house, we have boots on the ground in each market plus a host of historical comps we’re reviewing before our teams decide to buy a property. 

This situation with Zillow is everything we at our company warn investors about. Don’t get ahead of yourself. Don’t get lulled into thinking the market is on your side. Don’t buy long-distance without a trusted team on the ground. Above all, don’t expect flipping to be easy.

Don't Count Your Quarters Before They're Rolled 

You know by now that I’m not against a good side hustle. In fact, my first foray into real estate was actually buying a few carwashes in Texas when I was in my mid-20s.

It seemed like a simple enough investment. Because they were self-serve, I didn’t have to worry about employing anyone to take care of the day-to-day. I could take the sacks of quarter payments from the carwashes, cash in the quarters in ten dollar rolls, and repeat. The only other thing I needed to do was keep the sign lit, lights on, and the water running. Right?

Wrong.

For every dollar I made, I was spending a dollar on maintenance and repairs. Soap would leak. Drains would get clogged. Some idiot would drive off with my hose wrapped around their car antenna.

I learned early on that no investment is a one-time payment. All the little details add up to big dollars, and if you’re not prepared you will lose out.

That’s how I knew, when I got started investing in residential real estate, that when you’re considering an investment, the listing price is only the beginning. Sure, you might buy a house for $200,000, but if you sell it for $250,000, that doesn’t mean you made $50,000! From beginning to end there are fees, interest, renovations, replaced appliances, inspections, and more. Your profit margin is small, and shrinks with every set back.

Zillow's gamble to buy high, sell high relies on an impossible world where renovations won't also be high. 

Inspect What You Expect 

You have to be careful not to get ahead of yourself when it comes to expanding your business. Sometimes the market isn't right, sometimes the returns aren't there, and sometimes consumers aren't ready for your product or service.

Does anyone remember when online grocery delivery orders first became popular as an idea? No, it wasn't with Instacart during the pandemic. Actually, most might not remember that in the late 90's, Webvan attempted the same thing. 

Its plan was to fulfill online grocery orders within 30 minutes, with a bold claim to begin operating in nearly thirty cities across the country. Over a billion dollars later, they barely reached ten, and never made it past the West Coast. Before they'd learned their lesson, they tried expanding, buying HomeGrocer. Clearly, the market wasn't ready. It all ended in a big, fat, expensive failure.

Like renovations in real estate, operations in any business is a major investment. When your vision also involves scaling across several markets, you can't make a blanket plan. 

That's why, when our company breaks into a new market, we have to have real confidence. It's not just about affordability. It's about long-term operational costs, too. How many staff will it take to renovate and manage each property? Do we have the kind of reliable vendors we need? Are there older, established neighborhoods, or is there more of a build-to-rent trend in the works? 

Every answer comes with costs. Often, doing our due diligence means that the answers aren't in our favor, and we have to press pause on a particular market. 

Zillow's algorithm wasn't looking at crunching those numbers. What it was designed to do was swim into a competitive market, and it had the dollars to do it. With houses empty, and no way to operationalize in the midst of this second act to the post-pandemic market, they're learning the hard way that the market was competitive for a reason. 

Now, they are dumping 7000+ houses, and because Zillow seems determined to sell in bulk rather than to individual investors or home buyers, we may not see the full effect for years to come. What we do see is that Zillow is estimated to lose over half a billion dollars in value on the houses it bought and will lay off a quarter of its employees.

All due to a bad expansion decision and relying too much on machines instead of people. Due diligence is a must!

Commit to The Grind

I won't pretend there aren't downsides to having people behind the wheel. People make mistakes too. But with people, it’s often easier to clean up those mistakes. We say, “Accidents happen,” and with any luck they learn their lesson, never to make that same mistake again.

What do you do when a machine makes a mistake?

It’s a lose-lose.

Until next time,

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Kent Clothier
Chief Grind Officer

About Kent Clothier

CG5A0010-1Entrepreneur, Real Estate Investor, Husband, Dad, and Granddad. Through decades of personal experience, and a few other titles, Kent built a strong community around him at REI Nation. But it didn’t start there. It took 22 years of entrepreneurship – of losing money and making money, building small businesses and multimillion dollar companies alike – before he founded a family business-turned-empire. His sons Kent Jr, Chris, and Brett have worked alongside him, as well as leading successful ventures of their own. Real estate trends, managing towards efficiency, excellent customer service and leading the industry are what fuel him. Over the years, the skills he’s come to value are financial acumen, honesty, and forging new paths in business, investing, and winning.