Zillow Quits iBuying Business, Unloads Inventory

Real Estate News: Real Estate Investing Podcast

Zillow has officially announced the end of it’s iBuying program, Zillow Offers. The announcement comes just a few weeks after the company said it wouldn’t be buying any more homes this year. And then there were reports that Zillow would be offloading thousands of homes at a discount.

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The iBuying frenzy has been growing among several competitors including Zillow, Redfin, Opendoor, Offerpad and others. There was a pause in those programs during the pandemic, but the iBuyers were back in full swing this year. And Zillow was one of the more exuberant ones.

Home Price Forecasting

But Zillow apparently miscalculated the value of the homes it was buying. The company’s financial results show a $304 million write-down for the homes that were purchased for more than it can sell them for. It expects to lose another $240 to $265 million for homes that it is contracted to purchase in the next quarter.

CEO Rich Barton told investors: “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.” (1)

Zillow now expects to wind the home-flipping arm of its business down over several months. That includes a 25% reduction in its workforce, which will impact about 2,000 employees.

Zillow’s iBuying Binge

The company has been on a buying binge. According to the Wall Street Journal, Zillow bought 3,800 homes in the second quarter, and ended the third quarter with an inventory of almost 10,000 homes and another 8,000 homes under contract to buy. It only sold about 3,000 homes, and many were sold at a loss. The Journal says that Zillow also expects to lose between 5% and 7% on the remaining homes. (2)

An analyst for KeyBanc looked at the financials for 650 homes in Zillow’s inventory. That’s about one-fifth of the homes the company owns. As reported by MarketWatch, he found that Zillow was selling two-thirds of them at a discount of 4.5%. Most of the discounted homes that he found are in San Diego; Charlotte, North Carolina; and Las Vegas. (3)

Offloading Homes to Investors

According to Bloomberg, Zillow is hoping to sell about 7,000 homes to institutional investors for close to $2.8 billion. The report says they will likely be sold to various buyers, and not as a single sale. (4)

Barton founded the company 16 years ago. The iBuying arm of the business is relatively new. Barton wanted to hit 5,000 home flips a month and had predicted, last year, that Zillow Offers could generate $20 billion a year.

What Went Wrong?

Zillow has been an aggressive player in the iBuying market, offering more than competitors. That won Zillow some homes, but in markets that may have cooled off slightly, the anticipated price growth didn’t materialize. It sounds a little like the scenario in 2005 when people thought home prices only go up. Right now, they are still going up, but Zillow apparently miscalculated by how much.

The New York Times also reports that the company underestimated the risk of holding homes for too long between a purchase and a sale. (5) Zillow had previously said that labor and material shortages were impacting the business. The company couldn’t turn them around fast enough. And that’s a huge departure from a relatively risk free business model that Zillow was founded on.

Barton and Zillow’s CFO, Allen Parker, said in a shareholder letter: “Our aim was to become a market maker, not a market risk taker.” On a more positive note, there will be thousands of homes hitting the market at a discount from the previous sale price, and possibly of interest to investors both big and small.

You’ll find links to our sources in the show notes at newsforinvestors.com.

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Thanks for listening. I'm Kathy Fettke.

Links:

1 -https://www.prnewswire.com/news-releases/zillow-group-reports-third-quarter-2021-financial-results--shares-plan-to-wind-down-zillow-offers-operations-301414460.html

2 -https://www.wsj.com/articles/zillow-quits-home-flipping-business-cites-inability-to-forecast-prices-11635883500

3 -https://www.marketwatch.com/story/zillow-stock-dives-after-analyst-highlights-two-thirds-of-homes-bought-are-underwater-11635785293

4 -https://www.ocregister.com/2021/11/01/zillow-to-sell-7000-homes-for-2-8-billion-after-flipping-flop/

5 -https://www.nytimes.com/2021/11/02/business/zillow-q3-earnings-home-flipping-ibuying.html