Zillow Decides to Drop its Zillow Offers Division

It looks like not all homes can be flipped the same way.

For instance, the Zillow Group, Inc. recently announced its consolidated financial results for the three months ended Sept. 30, 2021, and its plan to wind down its Zillow Offers, the company's iBuying division which began in 2018.

With Zillow Offers it was acting as the primary purchaser and seller of homes under this division but has since decided to stop buying homes for the remainder of 2021.

"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," said Zillow Group co-founder and CEO Rich Barton in a news release. "While we built and learned a tremendous amount operating Zillow Offers, it served only a small portion of our customers. Our core business and brand are strong, and we remain committed to creating an integrated and digital real estate transaction that solves the pain points of buyers and sellers while serving a wider audience."

Early On

Although to date turn a profit through home flipping, Zillow Offers brought in $1.47 billion in revenue in the first half of 2021.

Zillow's announcement of its homebuying pause caused the stock to fall fast, but it recovered and then stumbled again after analysts reassessed the Zillow Offers division's bottom line.

On Nov. 2, after the market closed, Zillow reported it would close Zillow Offers and pink-slipped 25 percent of its staff.

The decision underscored the many challenges Zillow encountered with iBuying.

As reported by one report, its analysis of Zillow Offers listings in the company's five biggest markets showed Zillow could be headed toward millions of dollars in losses from its iBuying operations:

• In Phoenix, 93% of Zillow-owned listings were priced below what the company paid.
• In the Minneapolis-St. Paul metropolitan area, Zillow was listing two-thirds of homes for less than it paid.
• Zillow also appears poised to take losses on the majority of its listings in Houston and Dallas.

The same article stated, “Wall Street analysts and property-technology experts predicted more pain would be evident in Zillow's third-quarter earnings, released on Nov. 2.”

However, the losses were even worse than many thought as its CEO announced and as Zillow's stock took a beating in the days following the announcement.

What’s the big deal?

For sellers, Zillow Offers has offered a convenient — and sometimes lucrative — opportunity to sell a home fast via Zillow Offers. Real-estate agents have reported cases of Zillow paying much above the expected market value of a home, which means good news for some sellers.

But shuttering the division isn’t easy: "The most difficult part of this decision is that it will impact many of our colleagues," Barton further explained in the news release. "This is not something we take lightly. We are grateful for their efforts, and we are committed to providing a smooth transition."

Another article on Barron’s reported the real estate technology company indeed closes its Zillow Offers platform after paying lots of money for homes it planned to sell.

Barron’s added when Zillow Offers began to push these said homes it followed a model like other iBuyers: Homeowners solicit an offer by giving information about their house online.

It continued to work like this: The property was then assessed by a proprietary algorithm, and a preliminary offer was entered. Zillow evaluated the home in person and made a cash offer.

Should the seller accept, they set a closing date. Zillow then performed repairs and updates, then listed it with an agent. If the seller rejected the offer, Zillow referred the homeowner to a partner agent for a traditional sale.

For sellers, the process saved time and provided lots of flexibility.

“Zillow’s goal was to make a small profit on selling the home and charging sellers a fee, and funnel homeowners to other services such as mortgages and closings,” Barron’s article added.

Though things went sour as Zillow’s timing was certainly off.

The company purchased 9,680 homes between July and the end of September, more than double what it purchased in the previous quarter. The company sold 3,032 homes and has an additional 8,172 homes in contract to purchase.

Who Is Zillow

According to its website “Zillow is the leading real estate and rental marketplace dedicated to empowering consumers with data, inspiration, and knowledge around the place they call home, and connecting them with great real estate professionals. Zillow serves the full lifecycle of owning and living in a home: buying, selling, renting, financing, remodeling, and more.”

Who It Serves

In addition to Zillow.com, Zillow operates a suite of mobile real estate apps, with more than two dozen across all major platforms. It was founded in 2006, and Zillow is owned and operated by Zillow Group headquartered in Seattle.

The company reported the following Q3 financial results recently:

• Consolidated Q3 revenue of $1.7 billion.
• IMT segment revenue growth of 16% year over year to $480 million, and Premier Agent revenue growth of 20% year over year to $359 million, both within the company's Q3 outlook ranges.
• Homes segment revenue of $1.2 billion, below the company's Q3 outlook of $1.45 billion at the midpoint of the range, due primarily to renovation and resale capacity constraints.
• Mortgages segment revenue growth of 30% year over year to $70 million, exceeding the high end of the company's outlook range.
• Consolidated GAAP net loss of $328 million in Q3. Segment income (loss) before income taxes of $130 million, $(422) million, and $(6) million for the IMT, Homes, and Mortgages segments, respectively.
• Consolidated Adjusted EBITDA loss of $169 million with Adjusted EBITDA for the IMT and Mortgages segments exceeding the high end of the company's Q3 outlook. Adjusted EBITDA by a segment of $207 million, $(381) million, and $5 million for the IMT, Homes, and Mortgages segments, respectively.
• The company ended the third quarter with cash and investments of $3.2 billion.

Included in the company's third-quarter financial results is a write-down of inventory of $304 million within the homes segment because of purchasing homes in Q3 at higher prices than the company's current estimates of future selling prices. The company further expects an additional $240 million to $265 million of losses to be recognized in Q4 primarily on homes it expects to purchase in Q4. Additionally, Homes segment Q3 revenue is below the company's previously provided outlook range due to resale capacity constraints that pushed several closings into Q4 that were previously expected to close in Q3.

Stay tuned for what the future might hold for Zillow’s iBuying division as well as if or when it will continue to flip homes.

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