Companies that specialize in flipping houses have long avoided Los Angeles, finding the sprawling metro too complicated to turn a quick profit. Now, that is changing.
Zillow Group Inc. said it is launching a business in the city this month. Two of its main homebuying rivals, Opendoor and Redfin Corp. , started operations in Los Angeles earlier this year.
The second-largest housing market in the U.S., after New York City, offers new opportunities for these fast-growing businesses to show off their recent technological advances. But it also poses new challenges for flippers, which have yet to prove they can operate profitably in such a varied and expensive metro area.
These real-estate companies, known as iBuyers, use technology to find homes they can quickly buy and sell online. Sellers usually choose to sell at a discount to an iBuyer because it is faster and easier than a formal sales process.
iBuyers have focused primarily on cities like Phoenix and Las Vegas, which have relatively new and uniform housing stock and median home prices under $300,000.
The relative homogeneity of housing there makes it easier to estimate a home’s market value. Likewise, the comparatively young age of these homes helps to flip them without significant renovations, whose cost isn’t always easily recouped in the sale.
iBuyers have mostly steered clear of large coastal cities, where the age of homes and price tags vary significantly within single neighborhoods. That can make flipping much less predictable.
These companies are now betting that their tech has become sophisticated enough to deal with these factors. Zillow says the data it has collected from other U.S. markets will help it tackle Los Angeles neighborhoods, where small, stuccoed bungalows can share a street with newer and larger custom-built homes.
Because residential real estate in Los Angeles is more likely to need significant repairs than in home-dotted Phoenix, Redfin’s iBuying unit RedfinNow has been hiring its own renovation staff and service vans to streamline the extra work, said the operation’s head, Quinn Hawkins.
Los Angeles comes with significant risks. For one, the high variability in home values means getting the price wrong is more likely. iBuyers will also spend substantially more for a home in Los Angeles than they do in other markets, and more expensive homes typically take longer to sell, said Mike DelPrete, a researcher at the University of Colorado at Boulder who studies iBuyers.
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Two-thirds of homes bought by iBuyers nationally in 2018 were priced between $150,000 and $300,000, according to Mr. DelPrete’s analysis of public records. But very few homes sell for that price in Los Angeles County, where the median is more than $600,000.
For the Los Angeles push, iBuyers have raised the maximum price they are willing to pay for homes to compete in this city. OpenDoor said it would pay up to $800,000 and Redfin is ready to spend $900,000. Zillow declined to disclose pricing information.
The companies expect their pricing algorithms to improve as they collect more data on the Los Angeles market. A home’s position on a hillside or its view of the mountains can mean huge swings in price, and the fact that Los Angeles homes are built during different eras with varying construction standards means added surprises.
“If you operate in markets like L.A., you’re doing [renovations] on older homes, so all of a sudden you figure out it’s got cast-iron pipes and those are broken, or it turns out there’s not a foundation under one corner of the house, they just put some rocks under there,” Mr. Hawkins, RedfinNow’s operation’s head, said.
For the companies that will buy condominiums in tall buildings, how high in a building a unit is will factor into price too, especially if views are in the equation.
“We don’t need to have 10 or 15 percent of the market to be valuable. As long as we can serve enough customers successfully, we can be profitable at a pretty low scale,” said Rob Reiling, general manager at OpenDoor.
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Write to Will Parker at will.parker@wsj.com
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