The real estate company Zillow Group Inc. leaves the home-flipping business and says Tuesday that its algorithmic + model for buying and selling homes quickly is not working as planned.
The company’s termination of its tech-enabled home-flipping business, known as “iBuying,” follows Zillow’s announcement about two weeks ago that it stopped all new home purchases for the rest of the year. At the time, Zillow pointed to a shortage of labor and supplies for his inability to renovate and turn houses quickly enough.
In a statement Tuesday, CEO Rich Barton said Zillow had not accurately predicted the pace of house price rises, marking an end to a venture the company once said could generate $ 20 billion a year. Instead, the company said it now plans to cut 25% of its workforce.
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“We have found that the unpredictability of predicting house prices far exceeds what we expected, and continuing to scale Zillow deals would result in too much earnings and balance sheet volatility,” Barton said.
Zillow and other technology-driven house flippers, known as iBuyers, buy homes, renovate them and then try to sell them quickly, making money on transaction fees and house price increases. Zillow used an algorithm to make home price estimates, called “Zestimate,” and determine what it would pay home sellers.
Ultra-low mortgage rates and a need for more space to work from home have driven robust home purchase demand over the past year and a half. Prices have risen sharply in almost every corner of the United States
“It feels like it would be a tough time losing money on buying and selling homes,” said Benjamin Keys, a professor of real estate at Wharton School at the University of Pennsylvania. “This is a time frame where prices have risen sharply in many places.”
In recent months, soaring prices have forced some buyers out, and the market has shown signs of cooling, as many economists expected. The average selling price of existing homes rose 13.3% in September from a year earlier – still exceptionally robust, though falling from 23.6% year-on-year price growth in May, according to the National Association of Realtors.
Even this gradual slowdown in price growth upset Zillow’s algorithm, which led the company to pull the plug on the company.
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Zillow’s Class C share price fell 10% on Tuesday, and fell before the company announced after the market closed that it would end up returning home. The shares continued to fall in trading after opening hours.
The move represents a big hit to Zillow’s top line. Home flipping was the company’s largest source of revenue, but it has never made a profit.
Zillow, which announced earnings on Tuesday, said its returning company, Zillow Offers, lost $ 381 million in the last quarter, measured by adjusted earnings before interest, taxes, depreciation and amortization. This resulted in a combined adjusted Ebitda loss of $ 169 million across the entire Zillow.
Zillow has a portfolio of approximately 9,800 homes across the United States, which it currently trades to investors. In addition, there are a further 8,200 homes on contract, which it has agreed to buy. The company expects to lose somewhere between 5% and 7% on these homes, the company said.
From the beginning of the summer, competitors like OpenDoor and Offerpad began to withdraw from home buying in one of the largest home-flipping markets, Phoenix, as the red-hot pandemic market began to cool.
But Zillow accelerated, according to an analysis of sales records conducted by real estate technology researcher Mike DelPrete, a fellow at the University of Colorado, Boulder. Zillow also paid significantly more than competitors for each home it bought, buying homes at a price of $ 65,000 above average, according to DelPrete’s analysis.
By October, the company had built 250 Phoenix homes at a median price discount of 6.2% below what it had paid for them. DelPrete called Zillow’s price blunder a catastrophic failure.
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A broader look at Zillow’s national performance by analysts at KeyBanc Capital Markets showed that it had listed 66% of homes at prices below what it had paid them, with an average discount of 4.5%.
“The fact that Zillow can’t make it work should not be the last death knell for iBuying,” DelPrete said. “The other companies are making improvements, and Zillow is not. They are still losing a lot of money.”
Zillow said it expects the shutdown of its home-flipping outfit will take several quarters.