Zillow To Shut Down Tech-Enabled Home-Flipping Operation, Slash Workforce By 25%
Zillow Group has decided to shut down its home-flipping business, Zillow Offers, saying that the algorithmic model the company created to anticipate the movement of home prices simply isn't up to the task.
"We've determined the unpredictability in forecasting home prices far exceeds what we anticipated and continuing to scale Zillow Offers would result in too much earnings and balance-sheet volatility,” Zillow CEO Rich Barton said in a statement.
The shutdown of Zillow Offers will take several quarters and result in Seattle-based Zillow cutting its workforce of roughly 6,400 by about 25%.
Zillow has an inventory of more than 9,800 homes nationwide that it has yet to sell to investors, and another 8,200 that it has already agreed to buy. Zillow Offers has been the company’s largest source of revenue, but it never operated at a profit.
Competitors in the home-flipping game, such as OpenDoor and Offerpad, began to pull back from purchases during the summer, wary of the challenges of predicting market fluctuations, The Wall Street Journal reports.
A little more than a month ago, Zillow said it was going to hit pause on buying houses through Zillow Offers until 2022, citing a lack of labor necessary to do the quick renovations that home-flipping entails.
Zillow's foray into home flipping proved to be costly. In the company's third-quarter report, it noted a write-down of about $304M as a result of purchasing homes in Q3 at higher prices than the company's current estimates of future selling prices. Altogether, the company reported a loss of $328M for the third quarter of 2021.
The company also expects an additional $240M to $265M of losses during Q4 primarily on homes it has agreed to purchase in Q4.
Investors sold Zillow stock on Tuesday, driving its price down about 11.5% by the end of the day to $85.48 per share. Shares traded for more than $200 each in February.
Single-family houses have been of special interest to real estate investors recently, though many of them are pursuing a buy- (or build-)and-hold model that assumes a growing need for rental properties, and doesn't necessarily need to predict which way valuations will go.
For instance, in June, Blackstone Real Estate Income acquired Home Partners of America, which owns and manages more than 17,000 single-family rental houses, for about $6B.
About 6% of new single-family homes are developed specifically to be rented. If that rate of development doesn't change, about 700,000 new single-family housing units for rent will be developed by the end of the 2020s.