Zillow, the popular online property sales platform had apparently bitten more than it can chew. The company is left holding more than 7,000 properties after it decided to get into the business of flipping properties for a profit in its Zillow Offers program.
The business model was to buy homes from owners for cash, renovate them by doing necessary repairs, and then sell them. Zillow is not alone in this practice, and there had been a race with competitors Redfin, and OpenDoor, which is focused on buying up homes through the internet. As housing prices rose nationwide, these companies kept acquiring properties, increasing their exposure to liability.
However, after turning the program into a billion-dollar business, Zillow is cutting its losses by exiting the house buying business altogether and closing the program. The CEO, Rich Barton, admitted his company misjudged the demand for properties, which is strange coming from a company that deals in properties and has access to extensive data.
“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.”
This news is in contrast to the outlook portrayed by Zillow in its second-quarter financial report. It said then that Offers was a significant part of its business, and it was even securing a $450 million loan to support the program, intending to buy up thousands of more properties throughout the rest of 2021. Zillow also justified operating the business by pointing to the rate at which homeowners were selling to Zillow.
The optimism, however, was not reflected in its finances. Zillow’s Homes business, which oversaw Zillow Offers, reportedly lost more than $380 million. In the third-quarter report, Zillow seemed to have started coming to the realization its home-buying business model was problematic. It reported it was risky to continue investing in Offers at the rate it wanted and did not offer much promise of a profit.
More signs not all was well came when Zillow allegedly started looking for investors to offload its property inventories onto, instead of looking for buyers. In October, the company itself announced it would stop buying up houses. Zillow blamed the lack of ability to move the houses on labor shortages, renovation, and construction challenges.
With the property flipping business over, Zillow has said it would return to its core business of running a platform where people can find homes to buy and providing cost estimates.
As a fallout of closing down its Offers program, Zillow said it would have to retrench about a quarter of its staff, affecting approximately 2,000 positions.
The financial implications of throwing in the towel are huge for Zillow. It is now trying to offload about $2.8 billion worth of properties. Zillow estimates it will lose about half a billion dollars in this saga.
Unluckily for individual buyers that would love to benefit from a fire sale, Zillow wants to sell the 7,000 properties in bulk to institutional investors or Wall Street businesses. According to the data released by the company, investors bought about 20 percent of all houses in 2020, while Zillow and its competitors snapped up about 1 percent.
It is not clear yet how Zillow will come out of this housing mess, but it will go down as a cautionary tale in property market speculation. Also, we might not be far from hearing from Zillow’s competitors trying to offload their own inventory too. In that case, there will be lots of property on the market in the nearest future.
Zillow has long been accused of inflating prices on purpose on its platform by conspiracy theorists.