Zillow Group Inc. is calling it quits on the home-flipping business, while disclosing losses of more than $550 million on homes purchased in the second half of this year for which the company admits it paid too much.
The real-estate giant on Tuesday blamed a faulty algorithmic model for ditching its iBuying business of buying and selling homes quickly, and said it will lay off about a quarter of its staff. The surprising exit, announced with pedestrian quarterly profits, thrashed shares in another rough trading session Tuesday, a day after an analyst said two-thirds of the homes it bought are underwater.
“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 Group
In an interview on CNBC, Barton called the decision “tough but necessary” after determining the business was “too risky, too volatile” and addressed too few customers. “Sure, there are those wagging their fingers at me,” he acknowledged. “Predicting the price of homes six months ahead is really hard” in the COVID age, he added.
The dissolving of the flipping business will take several quarters and include a reduction of Zillow’s workforce by approximately 25%, Barton said. Zillow disclosed that it wrote down $304 million in losses due to houses purchased for too high a price in the third quarter, and expects losses of $240 million to $265 million in the fourth quarter for the same reason, pushing total losses on those houses to more than $550 billion.
During the third quarter, Zillow said it bought 9,680 homes and sold 3,032 of them. It marked a significant jump from the record 3,805 homes it purchased in the second quarter, of which 2,086 were sold.
Shares fell 10% in extended trading following Zillow’s announcement of a net loss of $328.2 million, or $1.29 a share, compared with net income of $39.6 million in the year-ago quarter. Revenue rose 164% to $1.74 billion from a year ago. Analysts surveyed by FactSet had expected net income of 16 cents a share on revenue of $2 billion.
Zillow Group’s stock is down 34% in 2021; it declined 10.3% in regular session trading Tuesday, to close at $87.20. The broader S&P 500 index
has gained 23% this year.
Speculation about the future and viability of Zillow’s home-flipping business grew grim this week as Bloomberg reported the company is selling about 7,000 homes to recoup $2.8 billion, and an analyst warned that two-thirds of the homes Zillow bought were underwater. That prompted RBC Capital Markets analyst Brad Erickson on Monday to predict the demise of the business.