“You make money when you buy,” said Alex Michaels, a real estate investor who flips one house a year. “You need a team, and you need a plan,” he added. “You need a good understanding of what needs to be done, and when, and a really good understanding of what can go wrong, because something always goes wrong. Best case,” he said, “hope for nine months, and plan for a year.”

This is project management 101: a plan, including critical path, risk analyses, and timeline.

Flipping a house is a “temporary endeavors undertaken to create unique product, service, or result,” a project, per PMI's definition. Flipping homes generally requires renovating kitchens, bathrooms, often requires new roofing and siding. Even relatively simple projects that only require painting and flooring benefit from budgets, risk analyses, and plans. There are critical paths to be considered – you want to sheetrock and paint the walls after running new wiring and installing installation, and before laying new flooring or new carpeting because you don't want to splatter paint on the floors or the carpets. Whole house renovations are major undertakings that can cost $100,000 or more and take nine months to a year, or longer.

Done right, it drives change, creating value.

Done wrong; Zillow lost $420  in three months.

Or, as Zillow CEO Richard Barton said, as reported in the NY Times , Our algorithm had “not produced predictable results.”

“Zillow announced it would temporarily stop buying new homes. At the time, it blamed a lack of workers to fix up and sell the [18,000} houses it had bought. But on Tuesday, [November 2, 2021,] Barton said using its algorithm to buy and sell houses had not produced predictable profits.”

“Zillow Offers lost more than $420 million in the three months ending in September [, 2021], roughly the same amount that the company had earned in total during the prior 12 months.”

Zillow's market capitalization collapsed to approximately 25% of its value, from roughly $60 Billion to roughly $15 Billion. Its stock price plummeted from $208.11 per share to $52.57. As noted in the Times, Barton blamed a lack of workers to fix up the homes and he blamed the algorithm. Zillow's Board appears to have agreed. Barton was paid $636,626 in salary and $7,798,200 in stock options.

In hindsight the reasons are obvious:

Zillow believed it could buy, renovate, and sell homes within three (3) months. As anyone who has ever purchased a house, condo, or co-op knows, while it could take three (3) months from the time a contract is signed to close the deal, the seller also needs time to clean up, renovate, stage, and market a home. An optimistic sales assumption is six (6) months, but as noted, a realistic assumption is nine months to a year.

If Zillow's algorithm was based on this fundamental assumption that a home sells the day it is put on the market, then it was not simply that “the algorithm did not produce predictable profits,” as Barton said, but rather that the algorithm which cost Zillow shareholders $420 million in cash and $45 Billion in market capitalization in three months as they wrote off the purchase of 18,000 homes was based on assumptions that were absolutely, unbelievably, and staggeringly incorrect.

Even assuming that the only renovation a home needs is a new paint job, new flooring and new carpeting, a realistic assessment would be that the home requires one week for these cosmetic renovations, one week to stage, to be listed, advertised, two weeks on the market, and then three months to close. That is a four-month scenario, and it's a best-case scenario. Add another month to close and another four weeks on the market to sell, and you're looking at six months, not four, for simple cosmetic renovations. The taxes and interest expenses are now twice as high as “Zillow's Algorithm.”  Factor in that Zillow was looking at foreclosed real estate – which likely will need more than a paint job – and they should have estimated nine months to one year, which is the time it takes my friend Alex to flip homes.

When the home needs extensive renovations, renovations that requires permits, then the flipper needs to add months into his or her calculations. If the project needs new windows, then it's one week to get permits, one week to get the windows installed, one or two weeks to get the property re-inspected. These impact the critical path. The flipper needs to wait for the inspections to be passed in order to move on to the next step. The plumbing and electrical has to be planned, completed, and inspected before the carpentry; and then the walls should be painted before the flooring is laid. These are detailed in Table 1, Zillow's Apparent Assumptions.

Table 1: Zillow's Assumptions v Reality

A key principle of Project Management is that we need to tell the sponsors and stakeholders what they need to know, not what they want to hear. However, the project sponsors need a realistic understanding of what they are doing. They need to understand likely costs, realistic time frames, and probable risk. Table 2 shows appliances and components like HVAC systems. Table 3 shows typical renovation costs.

Table 2: Large Systems

Table 3: Typical Costs

Zillow forecast a profit of 5% per project. Simply put, for every $1.0 Million they invested, they assumed that they would net $1.05 million. As noted, Zillow also assumed that they could flip each property in 3 months. Thus, they believed that could use the same $1.0 M four times each year and generate $50,000 in profit four times each year, a total of $200,000 on each $1.0 M invested. This would be an annual return of 20%. But $50,000 in profit on $1.0 M twice per year is $10,000. And once per year; it's $5,000.

Looking deeper, if the project takes six months, on average, rather than three months, then Zillow's mortgage interest and taxes double, cutting into their margin. If it takes a year, then the taxes and interest costs increase by 400% over the forecast.

The Project Manager is obligated to communicate realistic assumptions to the sponsors and stakeholders. And the sponsors, whether they are the CEOs and Boards of Directors of companies worth $60 Billion or CEOs and boards of companies worth $1 million, should demand to be told what they need to know, not what they want to hear. They must live in the real world, must understand real constraints. While they drive change, creating value, creating new realities, they are subject to the same laws of physics and economics as their customers and their competitors. If the best project managers are “Alpha Project Managers,” then Barton and his team at Zillow are “Alpha Project Mis-Managers.”

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Chapter member Larry Furman, MBA, PMP, continues his exploration of Project Management in the real world. He can be reached at “Larry@FurmanGroup.net”.

Stephen Gandel, New York Times, Nov. 2, 2021, “Zillow, facing big losses, quits flipping houses and will lay off a quarter of its staff,” https://www.nytimes.com/2021/11/02/business/zillow-q3-earnings-home-flipping-ibuying.html

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