Where did Zillow go wrong? Permjit Singh Treasury Consultant finds out
WFTV Channel 9 aired a story "Inside the collapse of Zillow" that illustrates the importance of cash and the consequences of forgetting that markets go down not just up.
The company's strategy was to exploit the market demand for US homes. With multiple offers to buy a home coming within hours of it being put on the market, the company wrote an algorithm that offered the seller a sale price at the click of a button (i-buying). It made, for example, an offer (accepted) of around $430K (according to a local resident) for a house that had been marketed for $285K.
in 2019, Steve Eisman of Big Short' fame said Zillow had one of the most flawed business models he had seen in a very long time, adding that it did not think the business understood the property market risks it faced.
The company's strategy was to buy, refurbish and sell ("flip it" using US slang) homes in a rising housing market and so recoup the cash outlay to make a quick cash surplus (profit). All very well until the rising market started to dip but, crucially, the company continued to pay "top dollar" for houses in a cooling market.
Perhaps because the company has lost so much cash or it thinks the market will continue on a downward trajectory for longer than it can sustain negative cash flow, it has decided to pull out of the market. It is, however, left holding a stock of hundreds of houses for sale. It hopes to sell these and cut its losses when seasonal demand returns (or is expected to return) in 2022.
Zillow's "get rich quick" strategy backfired perhaps because of poor market research, greed, poor algo programming, or a combination of these. or perhaps its cash reserves might have been unable to sustain more cash going out than coming in (overtrading).
It is a truism, that a corporate treasurer will do well to remember, that companies fail not because they don't make a profit, but because they don't have cash. For Zillow, it made neither profit nor cash, so not surprisingly, it collapsed.
Basic Treasury Management 101 tells the Treasurer to manage company cash, because without it a company will suffer a liquidity crisis and then collapse.
Cash forecasts should be prepared and updated regularly, and checked for their reliability using variance analysis. Cash buffers should be held either as cash or committed lines of credit, to avoid insolvency or prolonged financial distress. Markets must be monitored and the probabilities of rises and falls estimated and their consequences for cash levels.
To discuss cash or Treasury management, contact me for a free, confidential chat without obligation.