Zillow axes home-flipping business after losing $381 million

Nov 4 2021, 12:25 am

After more than three years of launching a house-flipping division, a decision has been made by Zillow to shut down Zillow Offers, following massive losses.

The Seattle-based digital real estate company told investors in its financial results on Tuesday that a plan is now in the works to gradually close Offers and lay off 25% of its staff.

Over the third quarter of 2021, it lost about USD$381 million from Offers alone, with the company writing down inventory of about USD$304 million as a direct result of purchasing homes at higher prices than the current estimates of future selling prices.

“This decision was not taken lightly, especially considering the hard work and commitment from the Zillow Offers team. Ultimately, we determined that further scaling up Zillow Offers is too risky, too volatile to our earnings and operations, provides too little opportunity for return on equity, and serves too narrow a portion of our customers,” said Zillow co-founder and CEO Rich Barton and CFO Allen Parker in a joint open letter to shareholders.

“In our short tenure operating Zillow Offers, we have experienced a series of extraordinary events: a global pandemic, a temporary freezing of the housing market, and then a supply-demand imbalance that led to a rise in home prices at an unprecedented rate. We have been unable to accurately forecast future home prices at different times in both directions by much more than we modelled as possible.”

Offers uses Zillow’s iBuying pricing algorithms to buy homes from property owners. Before putting them back on the market for an increased resale value, it conducts light renovations on the home. When it launched in 2018, it was marketed as a way for property owners to sell their home through a non-traditional platform.

But as it turns out, their algorithm has been overpaying for the properties. As well, to date, it has been able to convert only about 10% of the serious sellers who ask for an offer.

During the third quarter, Offers bought 9,680 homes, but only sold 3,032, partially due to its constrained logistical capacity to renovate and resell the properties. It entered the quarter with 9,790 homes in inventory and 8,172 homes under contract.

The company’s statements show the average Offers gross profit per home sold was a loss of USD$80,771, while the average Offers revenue per home was USD$386,722.

The average acquisition cost per home was USD$354,482, average renovation cost per home was USD$7,369, average holding costs per home was USD$2,412, and average selling costs was USD$13,326 per home. Offers only operates in about two dozen cities within the United States.

Additional losses of USD$240 million to USD$265 million are anticipated in the fourth quarter on homes it expects to purchase, before the business can be fully shut down. This fourth quarter Offers activity was shifted from the third quarter due to the logistical constraints.

Offers generated USD$1.2 billion in revenue over the third quarter, below their forecast of USD$1.45 billion.

Overall, Zillow recorded consolidated revenue of USD$1.7 billion over the third quarter, with a net loss of USD$328 million.

Zillow states it will now focus on strengthening its core business, which “has thrived while we poured its profits into the Zillow Offers iBuying operation.”

The 2006-founded company began solely as a website that provides real estate listings and estimates home prices, and it has expanded into other services such as providing prospective homebuyers with a mortgage loan estimate. In 2018, Zillow expanded its property listings business to Canada.

Kenneth ChanKenneth Chan

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