Zillow Group’s ambitious tech-fueled bid to shake up how people buy and sell homes is coming to a surprising end.
The Seattle online real estate giant said today it will shut down Zillow Offers, its iBuying program that aims to digitize and accelerate the homebuying experience.
Approximately 25%, or about 2,000 people, will be laid off as a result of Zillow Offers closing. The company will take a write-down of more than $500 million related to the shutdown.
The decision is a remarkable reversal from the company’s home sales operation that represented a fundamental shift away from Zillow’s core business when it began rolling out in 2018. Zillow was pinning its future on Zillow Offers and originally projected annual revenue of $20 billion by 2024 from the program.
“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.
Barton provided more explanation in a shareholders letter, which you can read in full below. He cited price forecasting volatility, caused in part by the pandemic — which initially froze the housing market, followed by rising home prices and a supply-demand imbalance. Zillow as a result was unable to accurately forecast the price of homes three to six months in the future, and was forced to think about making Zillow Offers an even larger business.
The CEO said “the business would only become consistently profitable at scale. We have determined this large scale would require too much equity capital, create too much volatility in our earnings and balance sheet, and ultimately result in far lower return on equity than we imagined.”
Barton, who co-founded the company and returned as CEO in 2019, also noted labor shortage and supply chain issues that led to Zillow’s decision earlier this month to temporarily pause purchasing new contracts to buy homes via Zillow Offers for the rest of this year.
Also: Zillow was only able to convert 10% of serious sellers who asked for an offer via Zillow Offers. “We believe there are better, broader, less risky, more brand-aligned ways of enabling all of our customers who want to move,” Barton wrote in the letter.
The CEO tweeted: “Today is a tough day at Zillow.”
Zillow’s stock had been falling this week after reports emerged noting that most of the homes the company had purchased were now worth less than what Zillow paid for them. KeyBanc analyst Edward Yruma said an analysis of 650 homes in Zillow’s inventory found that 66% are currently listed below the purchase price at an average discount of 4.5%.
Bloomberg reported Monday that Zillow is looking to sell about 7,000 homes, and is seeking roughly $2.8 billion for the houses.
Brad Erickson, an analyst with RBC Insight, this week laid out three possibilities for Zillow Offers: that it would continue to pause temporarily, that it would put a more indefinite pause and partner with another iBuyer, or completely ditch it, like the company announced Tuesday. He said closing Zillow Offers offers a near-term solution to “remove asset intensity overhang” but limits the longer-term bull case “given Zillow would once again lack better access to the sell-side of the TAM which limited growth historically.”
Erickson added that “Zillow’s buying got ahead of itself as prices started to soften at the end of the summer” and continuing to purchase homes “would have simply furthered incremental losses.”
Zillow competes with other iBuyer services from Opendoor, OfferPad, and Redfin, among others.
Zillow’s home-buying segment brought in $1.1 billion in Q3 revenue, up 534% year-over-year, and up from $772 million in Q2. It accounted for more than 60% of Zillow’s total revenue in Q3. The homes segment posted an adjusted loss of $380 million.
The company purchased 9,680 homes in the third quarter of this year, more than double what it purchased in the second quarter, which was more than double from the first quarter. It sold 3,032 homes, below expectations. It ended Q3 with 9,790 homes in inventory, up from 3,142 homes in Q2.
Zillow posted an adjusted loss of $0.95 per share, missing expectations of $0.16 per share. It also missed on estimates for total revenue, reporting $1.74 billion versus expectations of $2 billion.
The company’s shares have fallen more than 40% this year. The housing market has shown signs of cooling in recent months.
Read Barton’s full letter to shareholders below:
from GeekWire https://www.geekwire.com/2021/zillow-shutter-home-buying-business-lay-off-2k-employees-big-real-estate-bet-falters/