Zillow has announced that it’s existing the iBuying business for good – just a couple of weeks after saying it was temporarily pausing its operations until the end of the year.
The company revealed Tuesday it’s shutting up the Zillow Offers business for good, citing “unpredictability” in forecasting home prices as the main reason for its closure.
The bombshell announcement came during Zillow’s third-quarter earnings report, with the company also missing analysts’ revenue and earnings targets. Zillow added that because it’s closing Zillow Offers, it also has to layoff around 2,000 staff, approximately a quarter of its workforce.
Zillow’s stock nosedived, losing 7.5% of its value.
Zillow launched Zillow Offers back in 2017 in an effort to take on the likes of Opendoor in the so-called iBuying market. Zillow Offers, like other iBuyers, allows homeowners to obtain an instant cash offer on their home and then sell it fast, usually in less than 24 hours, instead of going through the process of listing their home and waiting for it to be sold.
To determine the size of its offers, Zillow Offers relied on artificial intelligence models that try to estimate the value of the home based on various factors including its size, median property values in the area and so on. If a homeowner accepted the offer, Zillow would upon completion of the transaction renovate the home and then stick it back on the market to try and sell it the old-fashioned way, for a profit.
Zillow’s decision last month to put Zillow Offers on pause came as a surprise – the company said at the time it was a temporary halt and that it wanted to work through a backlog of around 9,800 homes already under contract. The company cited labor and supply shortages that prevented it from renovating the homes fast enough.
However, Zillow Chief Executive Rich Barton admitted in the earnings call that Zillow was also struggling to make a profit from iBuying.
“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,” he said.
Edward Yruma, an analyst with KeyBanc, told MarketWatch in an interview that Zillow had miscalculated badly with Zillow Offers and that most of the homes it purchased recently are now worth less than what it paid for them. Yruma analyzed 650 homes snapped up through Zillow Offers.
The Wall Street Journal drew similar conclusions, saying that Zillow Offers will complete the purchase of 8,200 homes it is currently under contract to buy, though it will likely lose around 7% of its investment on those properties, amounting to $265 million.
The Journal said Zillow Offers failed to generate a profit in more than three years of operation, most recently losing $381 million in the previous quarter.
A separate analysis by real estate technology strategist Mike DelPrete found that Zillow had consistently paid more than comptitors such as Opendoor and OfferPad, with its offers averaging $65,000 more than the median.
According to Barton, Zillow is now focused on creating “an integrated and digital real estate transaction that solves the pain points of buyers and sellers while serving a wider audience.”
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