Zillow to shutter home buying business and lay off 2,000 employees as its big real estate bet falters – GeekWire
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, beyond its core business as a home price estimate platform and lead generator for agents. It originally projected annual revenue of $20 billion by 2024 off 5,000 home sales per month from the home-flipping program, which was billed as a way for consumers to avoid the hassle, time commitment and uncertainty of a traditional sale.
“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 tweeted: “Today is a tough day at Zillow.”
On a call with analysts, Barton apologized to the laid off employees. “I’m sorry for how difficult and disruptive this will be,” said Barton, who co-founded Zillow 16 years ago and is the largest individual shareholder.
Zillow took a $380.1 million adjusted loss from its Homes segment in the third quarter. The news Tuesday follows reports this week that most of the homes Zillow had purchased were now worth less than what it paid for them amid a cooling housing market. It ended Q3 with 9,790 homes in inventory, up from 3,142 homes in Q2.
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. That resulted in Zillow Offers unit economics fluctuating in both directions by margins wider than Zillow predicted.
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.
Barton 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.”
In an interview with CNBC, Barton said that the move was about “not being naive, and thinking that this kind of price movement could never happen again in the future.”
“This is us acting like the long-term shareholders we are, and the long-term investors we are in this company, and saying it just doesn’t work for us. We have a great core business to fall back on,” he said.
Barton also noted labor shortage and supply chain issues that Zillow blamed when it said earlier this month that it would 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 shareholders letter.
The message on Tuesday was a far cry from just a quarter ago. “Of particular note, our iBuying business, Zillow Offers, continues to accelerate as we offer more customers a fast, fair, flexible and convenient way to move,” Barton said following Zillow’s second quarter results in August. “Zillow Offers is proving attractive to sellers even in this sizzling-hot seller’s market.”
Barton returned to Zillow in 2019, taking the CEO reins from Spencer Rascoff, who recently led a SPAC deal to acquire Offerpad, another iBuyer. Barton is a board member at Netflix, Qurate, and Artsy. He previously co-founded Expedia and Glassdoor.
Speaking at the GeekWire Summit last month, Rascoff said he was bullish about iBuying.
“I’m still a big Zillow shareholder, partly because of Zillow’s move and success in iBuying,” Rascoff said at the time. “Consumer expectations around the ease of a transaction have changed,” he said, adding: “They expect a vertically integrated, seamless, magical experience when selling their home.”
Zillow’s stock had been falling this week after a report from KeyBanc, which 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 take an indefinite pause and partner with another iBuyer, or completely shut down, 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. They haven’t announced any similar slowdown or pause.
Redfin CEO Glenn Kelman told GeekWire he was surprised that Zillow decided to ditch Zillow Offers. He said Redfin remains committed to iBuying and “will keep methodically and carefully expanding that service.” Kelman said the choice most homeowners will prefer is a brokered sale, “especially when we charge a fee as low as 1%.”
“The iBuying business is what we’ve always thought it is, an attractive option for homeowners who are willing to pay more for convenience and peace of mind,” Kelman said.
An Opendoor spokesperson said the company “is open for business. We have demonstrated strong growth and unit economics, and we are energized to help homeowners nationwide move with simplicity, certainty and speed.”
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. But it also took the $380.1 million loss, up from a $59 million loss in the year-ago quarter.
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 said it expects to buy nearly 9,000 homes in the fourth quarter, taking a loss between $240 million to $265 million on those homes. It expects to sell about 5,000 homes.
For the third quarter, Zillow posted an adjusted loss of $0.95 per share, missing expectations of $0.15 per share. It also missed on estimates for total revenue, reporting $1.74 billion versus expectations of $2 billion.
The company’s shares continued sinking in after-hours trading Tuesday; the stock price has been cut by more than half this year.
The housing market has shown signs of cooling in recent months. Barton told CNBC that shutting down Zillow Offers was not about “making a call on the housing market.”
“The fundamentals of the housing market are actually quite strong,” he noted.
Zillow ended the third quarter with cash and investments of $3.2 billion.
And as for what’s next?
“Before today, our seller offering was overly focused on Zillow Offers and was able to serve only a small number of the available customer set. Going forward, rather than having to buy a customer’s home to help her sell, we are now simply going to help her move,” Barton wrote in the letter. “We will expand our view and explore a marketplace of scalable selling solutions that give certainty, convenience, choice, simplicity and speed, all while addressing the broader opportunity for Zillow. Importantly, we now plan to focus our offerings on asset- and capital-light solutions with an open mind as we explore providing these solutions ourselves and/or through partners.”
Read Barton’s full letter to shareholders below:
This content was originally published here.