Zillow Quits Home-Flipping Business

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Termination of ‘ibuying’ comes after the company said it was halting new home purchases for the rest of 2021.

Real-estate firm Zillow Group Inc. is exiting from the home-flipping business, saying Tuesday that its algorithmic+ model to buy and sell homes rapidly doesn’t work as planned. The firm’s termination of its tech-enabled home-flipping business, known as "iBuying," follows Zillow’s announcement about two weeks ago that it was halting all new home purchases for the rest of the year. At the time, Zillow pointed to labor and supply shortages for its inability to renovate and flip houses fast enough.

In a statement Tuesday, Chief Executive Rich Barton said Zillow had failed to predict the pace of home-price appreciation accurately, 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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Zillow and other tech-powered house flippers, known as iBuyers, purchase homes, renovate them and then try to sell them quickly, making money on transaction fees and home-price appreciation. Zillow used an algorithm to make home price estimates, called the "Zestimate," and determine what it would pay home sellers.

Ultralow mortgage-interest rates and a need for more space to work from home have driven robust home-buying demand in the past year and a half. Prices have climbed sharply in almost every corner of the U.S.

In recent months, sky-high prices have forced out some buyers, and the market has shown signs of cooling off, as many economists expected. The median existing-home sales price rose 13.3% in September from a year earlier—still unusually robust, though down from 23.6% year-over-year price growth in May, according to the National Association of Realtors.

Even this gradual tapering in price growth flummoxed Zillow’s algorithm, leading the company to pull the plug on the venture.

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Zillow’s class C share price was down 10% on Tuesday, falling before the company announced after the market closed that it would end home flipping. Shares continued to slide in after-hours trading.

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 turned a profit.

 

Zillow, which released earnings Tuesday, said its home-flipping business, Zillow Offers, lost $381 million last quarter, as measured by adjusted earnings before interest, taxes, depreciation, and amortization. That resulted in a combined adjusted Ebitda loss of $169 million across all of Zillow.

It has an inventory of about 9,800 homes across the United States that it is currently shopping for to investors. Additionally, there are another 8,200 homes in a contract it has agreed to buy. The company expects to lose somewhere between 5% and 7% on these homes, the company said. Zillow also paid significantly more than those competitors for each home it purchased, buying homes priced $65,000 above the median on average, according to DelPrete’s analysis. By October, the company had listed 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.

A wider look at Zillow’s national performance by analysts at KeyBanc Capital Markets found it had listed 66% of homes at prices below what it had paid for them, with an average discount of 4.5%.

Zillow said it expects that the wind-down of its home-flipping outfit will take several quarters.