Online real estate marketplace Zillow, best known for its home value estimates, has fallen victim to its own algorithm. During its third-quarter earnings release on Tuesday, Zillow said it will permanently shutter its house-flipping operation, Zillow Offers, as failure to accurately predict home prices resulted in heavy losses.
Zillow Offers was a program launched in April 2018 where Zillow bought (often in all-cash offers) and renovated existing homes and later put them up for sale on the open market. It’s a lucrative business model for many real estate investors but hasn’t fared well for Zillow. “The unpredictability in forecasting home prices far exceeds what we anticipated,” Zillow CEO Rich Barton said in a statement on Tuesday, adding that continuing the program “would result in too much earnings and balance-sheet volatility.”
In the third quarter, Zillow recorded $330 million in losses, including a $304 million write-down of real estate in the Zillow Offers portfolio that are now worth less than the company’s estimates.
The bad news came weeks after Zillow Offers halted its home-buying operations, citing difficulty in finding contractors to renovate the homes the company had already bought.
As a result of the Zillow Offers closure, Zillow plans to lay off a quarter of its 6,400 employees and will put about 7,000 homes on the market.
“Home flipping is a hyper-local business that works very differently in each market because demand and supply factors vary by geography,” said Josh Stech, cofounder and CEO of Sundae, a real estate marketplace linking sellers and buyers of dated or damaged properties.
“Some markets are rental markets, and other higher-priced, supply constrained
markets that attract affluent first-time home buyers that value remodeled properties are homeowner markets,” Stech went on to explain. “Home flipping is a relationship business, you need to figure out how to scale operations that benefit local players, not alienate them,” he added. “As a result, a purely tech or algorithmically-driven buying system may struggle to factor in these highly subjective and evolving market-to-market, and street-to-street variables.”
In a call with investors on Tuesday, Barton said the decision to discontinue Zillow Offers and let employees go had “weighed heavily” on him. “We could blame the current losses on exogenous market events. But it would be naïve to predict that unpredictable events won’t happen in the future,” he said.
Zillow shares have plummeted more than 60 percent from its record high of $200 in February, when the housing market was booming as people looked for larger spaces to accommodate remote working.