Zillow Catastrophe – Avoid this Thinking

 

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This is the 61st episode of the Effective Executive podcast. In this episode, Tripp Babbitt looks at Zillow and its stopping its home buying. There are 5 lessons from Zillow’s actions. Download our Effective Executive Starter Kit.
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Show Notes

[00:00:00]
The Effective Executive – Zillow Catastrophe

[00:01:40]
5 Takeaways

[00:01:58]
Background of Zillow Story

[00:05:28]
Lesson 1: Hubris

[00:06:47]
Lesson 2: Listen on Social Media

[00:08:58]
Lesson 3: Big Bets

[00:11:28]
Lesson 4: Risk Management

[00:13:10]
Lesson 5: Take the Blame with Action

 

 

Transcript

[00:00:00] This is the 61st episode of the Effective Executive podcast and YouTube channel. I’m Tripp Babbitt. I just got back from vacation from Disney. I posted an episode, I’m going to say me round 55, Episode 55 on Disney, and I’ll be doing a follow up on that one was relatively popular episode that people really commented a lot on. I was a little surprised actually by the amount of comments on the YouTube channel that I got. Interesting conversations associated with the whole Disney thing. But why was on vacation last week? Zillow announced they were exiting the home buying business, and it got me thinking, OK, what? Every time I see something like this, I think, OK, what? What’s going on? And so when I returned home over the weekend, I started doing a little bit of research about it, and there were a number of things that I think are takeaways that executives can learn from from any of these situations. But again, my broader thinking is that you need to learn about your own organization and you know, whether it’s copying another organization or, you know, trying to get lessons from other organizations, sometimes this is a stretch. Sometimes they don’t apply.

 

[00:01:40] But I’m hoping that these five things will give you pause and be able to think, What am I doing in my organization? And maybe I need to think more broadly on some of these subjects. So let me just kind of go through it.

 

[00:01:58] If you’re not familiar with the whole Zillow thing, you know, Zillow is one of those sites I use often just to kind of go around when I’m thinking about moving to warmer climate or more business friendly climates. Then I go to Zillow just to see what the housing industry is like. And it’s really a good website to go to. But it took a haircut last week of about from one hundred and three dollars to sixty six dollars. A little more than thirty three percent of their stock price went down because they had been buying up homes. And with the thought that they would be able to resell them because the the real estate market has been so hot, especially the resale market, very few homes were up for sale and drove the prices higher. And in fact, some of the things that Zillow did that drove the prices up, and we’ll talk about that a little bit. But. You know, I I personally don’t care much for stocks that have business models that are unsustainable. They’ve Zillow has never shown a profit. Which makes me wonder, is this the reason they got into the home buying business or was it a number of other things? And those are the things that I’ll walk through and actually there, I’ve written down five things that I took away from the whole Zillow atmosphere or event.

 

[00:03:28] And you know, they they don’t have a business model that has its create a profit, but they’ve always had a negative net income. So after the profit and some other things have taken out, they’ve they’ve lost money and now they’re even losing more money associated with it. And that’s something about all of these kind of everybody trying to copy Amazon. And, you know, because it didn’t make money for for for a long period of time as it grew. And so, you know, we have a lot of these not only meme stocks, but we also have just unsustainable models. I feel the same way about a number of other stocks to. But regardless, you know, we live in a world of market cap, and as long as we have revenue and there’s money in the bank because people are willing to invest in speculative types of of things, we’re living in a bubble at this time and I believe every organization should be in the process of asking some serious questions about what their business model is. And, you know, if it’s if it’s not going to be profitable now and a very speculative environment where people are, you know, getting meals shipped to their home, you know, and some of the things that are going on, you may never be profitable. And I think some of these. Well, I think a lot of these stocks are going to go down, and I feel the same way about things like bitcoin. We’re investing in air while we need manufacturing in this country that I’ve watched go away in my lifetime and hoping that that, you know, we’ll wake up and realize that we need to manufacture some of the stuff in the country.

 

[00:05:28] But anyway, so the five executive lessons I got from this whole Zillow thing as I got into it is the first one is hubris, which is basically, you know, executive teams getting overconfident just because it got a lot of money in the bank, you know, so I’ll go and get into the the home buying business, which wasn’t a huge leap for Zillow since they have they maintain a website. But what was happening was they had something called Zillow Offers and a Zillow Zillow estimate type of thing. And so they were they they started to buy up these homes. And I just, you know, when the hubris is involved or maybe even the fear of missing out, your emotions take over and you wind up making poor business decisions. And so hubris always kind of plays a role in a lot of things, especially at the executive level. I wouldn’t have got this level if I wasn’t brilliant is sometimes the thought process, and I think that that leads to problem, especially I see it a lot in tech companies past, present and I’m sure future.

 

[00:06:47] And so so that’s one thing that you need to guard against is this whole emotion when making these types of decisions. The second thing is kind of a little bit different, but it’s all along. The theme of what I do when I work with clients is listening to social media, and I know there’s a lot of, you know, go on Twitter. I mean, you’re going to get a lot of crap out there. But one of the things that I found interesting is I went back and started listening to some TikTok episodes that people had posted on there. And they were excoriating months ago, years ago, Zillow for driving the price up in the market over pain because they are overpaying for homes, and some of the homes that they were buying were not in good shape and poor staging that was being done when they were finally got to it. And some of the issues that you’ve heard, you know, with regards to labor, you know, in that market. So there was if an executive would have taken the time to go out and listen to what people were saying, they might have picked up on some of the things that were happening in the marketplace. And and and you know, one things that. They’re going to lose, too, as people are going to go, OK, well, if they were that dumb to do that, then, you know, overpay for these markets, which was kind of these tic talks that were going on that people were posting, like I said, months and even over a year ago, then, you know, how much confidence do we have to manage me? Oh, well, they got a lot of money, and I’ve heard that a lot on Twitter.

 

[00:08:31] Well, they’ve got money. So they cut down a division, which is kind of a speculative type of attitude that seems to go on in them, especially on places like Twitter. But I think they could have picked up on some of the things that people were seeing long ago and how long it was before they realized that something was happening. I don’t know.

 

[00:08:58] The third thing is big bets. You know, I’ve talked about this over and over. In a matter of fact, episode 43, which I’ll put a link to was about small scale saving you. You know, keeping things small until you understand, because there’s a lot different than posting Zillow properties, you know, real estate properties on a website versus actually getting involved in renovating homes and buying them and those types of things. And you know, this may go into the hubris a little bit, but you know, they had something called iBuying, which is kind of an eye type of atmosphere, and we used to use the words with regards to technology of garbage in, garbage out. And these big bets were garbage in, garbage out in this iBuying because nobody really had the expertize and speculating here, but of the information that went in to iBuying.

 

[00:10:00] And there’s some things that technology does very well. I love technology, but you know, if it’s not the right information or it can’t do everything and people are trying to get, at least today, let’s put it that way, and I’d say we’re probably still a few decades away from it being as smart as a human. But anyway, these I buy this I buying by robots and I type of thing bought up properties. And this is what I think led to a lot of the overpaying from what I’ve read for particular properties. You know, it’s not like they went out and saw the properties and, you know, people that flip houses and do things like that can see the property because, you know, they’ve got their capital tied up in that property. And so they want to make sure they’re making good decision. How much is it going to cost me to renovate this, you know, all those types of things. But you know, you can see and tock people say, OK, there they bought it for five hundred and ninety, this home for five hundred and ninety six thousand dollars. And then they said, you know, on one tick tock, it said, you know, it’s up for sale for five hundred and eighty four.

 

[00:11:13] The commission is twenty five percent and who knows how much that they had to put into the home to get it ready to sale for to sell to a consumer of real estate? I don’t know. So those are all things that that become factors.

 

[00:11:28] The fourth is risk management and this comes from and one of the things if you’ve listened to my episodes before, you know, it comes from synthetic thinking that you can see the whole and there’s a whole expertize involved and just doing risk management, you know, it’s labor and a pandemic and post-pandemic pandemic type of thing should have been considered when they started to look at their entire system that was out there in the buying and selling of homes. You know, you got to have people that are willing to fix it up. And some of a lot of the homes that I saw that they overpaid for require weren’t even finished homes. They’d been on the market for quite a while, and some are really interesting. But you can go look at tick tock yourself for for that, but to be able to manage risk and you know, a lot of people are pointing to the labor shortage as the reason that Zillow had to get away from the from the home buying business as they weren’t able to fix them up. Uh, you know why? In a timely fashion? Get them out on the market.

 

[00:12:46] And you could see why some of the thick docks, they were really in complete homes. And so there was a lot of work left to make them syllable. But the iBuying robots did not consider or see that. And so they wound up buying a property and overpaying for it.

 

[00:13:10] The fifth thing is, and this is this is this is caveat they Zillow’s wound up cutting 25 percent of its workforce. Now I’m guessing this is somehow tied to this whole iBuying homebuying business type of thing. And obviously, they wouldn’t have spent this much money on buying homes had they not thought it was a good decision. As executives and one of the things that I always tell executives to do and CEOs is if you’re going to do layoffs, you’re going to have to cut your executive compensation. And I know that sounds awful and those types of things, but you made the decision to, in this case, get into the home buying business. And the people who are really paying are the people that are on the front line and do the actual work. And in an atmosphere where you know, the prospective employee has a lot of the power now this this will go as a kind of a black mark against. Zillow, if they start to grow again or maybe they get back into this, and I’m not lamenting the fact that they tried this, I just think that they went too big and it looks like they went too fast.

 

[00:14:34] They didn’t consider risk management. Some of the things that I talked about here. And when you’re in a new venture, you really need to be doing those types of things. But cutting executive compensation before you do the layoffs, you keep as many people as you can, and I know you’re not going to be able to sell to save everybody. But it’s a gesture of, Hey, we we we made a mistake and the decision that we made and you know, we’re in this with it. We thought it was a good idea. We’ve learned from it and we’re we’re going to be moving forward and we need to take some of the responsibility here. And just saying the words I’m responsible isn’t enough. You’ve got to take action on it. And I hear too many executives nowadays saying, Oh, I’m responsible for that, but I’m going to lay off, you know, 50 of my employees because I’m responsible. It didn’t hurt, didn’t do any, you know, it’s no skin off your back. These people now have to go out and find a new position and those types of things. And I just think that’s it’s not just a gesture. It is something that that should be required by organizations that when mistakes are made, you know compensation will be cut. Now some people will say, well, the compensation is going to be cut because the salary or excuse me, the stock price has gone down.

 

[00:16:00] And that’s true to a certain extent. But I think it needs to go well beyond that, you know, to show to employees that you’re in this with them and, you know, they didn’t have any. Usually they don’t have a say in what’s going on in those types of decision making processes. I’m not saying they shouldn’t. I’m just saying typically they aren’t. So those are the five things you know, watch, watch your hubris. You know, emotion can take over. Boy, we got lots of money in the bank because we’re a technology company on the West Coast. And boy, are we awesome? And that definitely plays a role. The second thing listening to social media about what the Heck’s going on with it, how are people perceiving? They’ll have a long time. It’ll be a long time for them to recover from this reputationally. The third thing is the big bets. You know, just having iBuying robots go out and buy properties on a large scale has led to to some of the issues that they have here. Consider your risk management always, constantly. It’s going to change. And then the fifth thing is, you know, if you have to lay off people, cut your executive compensation and not just just your, you know, because your options are going to go down.

 

[00:17:24] It has to be something more, you know, you have you need to feel the pain because the people you just laid off and the people that are left will, you know, in many cases, be upset about the fact, OK, well, was this the way we’re going to treat? They’re going to make bad decisions and lay me off. So we kind of see it’s it’s one of those things that is more it’s more than just a gesture of goodwill. It is needs to be culturally embedded that, hey, we’re going to do these things and we’re going to get smarter. And that’s the aim. And again, I don’t want to lament the fact that they went into a different market. I I think people organizations need to and constantly do that, but they need to do it on an incremental scale, a very small scale at the beginning and build from there, just just the way you should buy stocks. You know, and a company start small and then expand it as it proves its worth. So that’s it for this week and look for the new Disney follow up. If you haven’t seen that episode, go see it. It has some 2500 views so far, which for me on a YouTube on my YouTube account is is relatively big. It’s but it gets into some of the things that I see as Disney’s decline and what executives can learn from that also. Talk to you next week.

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