Zillow closes home business after racking up losses

(Bloomberg) – Zillow Group Inc. is ending its tech-fueled home turnaround operation after an ambitious effort to transform the business collapsed when its much-vaunted pricing algorithms proved incompetent.

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The company plans to write down write-downs of up to $ 569 million and cut its workforce by 25% as it ceases operations in the coming months, according to a statement on Tuesday. Zillow shares plunged 11% to $ 76.22 at the end of the session.

The decision to ditch the home turnaround comes as the company’s third-quarter results showed it lost more than $ 380 million in the deal, known as Zillow Offers. The company has experienced a major glitch in recent months as Zillow tweaked its algorithms to make more aggressive offers, causing it to pay too much for homes just as the heated U.S. market began to cool. slightly.

With the company’s losses increasing, chief executive Rich Barton said it had become too risky to scale the business in a U.S. housing market that had been hot for more than a year during the pandemic.

“Basically, we haven’t been able to predict future home prices with a level of accuracy that makes it a safe business,” Barton said on a earnings conference call.

Read more: Zillow sells 7,000 homes after shutdown of turnaround operation

Seattle-based Zillow is America’s best-known real estate company. And for millions of homeowners who saw their homes increase in value during the pandemic, the company’s rapid exit raises a difficult question: is the boom over? Instead, Barton pointed out that buying and selling thousands of homes each month forces the company to put too much capital at risk.

Zillow has had some eventful weeks. On October 18, he released a statement confirming a Bloomberg News report that he would not be making any new home offers for the remainder of the year as he struggled to find workers to fix the homes he had. under contract. In the weeks that followed, it became apparent that the company had overpaid the properties and suffered greater losses on sales.

On Monday, there was another sign that something had gone wrong: Bloomberg reported that the company was marketing around 7,000 homes for around $ 2.8 billion to institutional investors.

For most of Zillow’s 15-year history, the company has been known to post online real estate listings and house price estimates – known as Zestimates – and seek to capitalize on connecting agents with real estate agents. potential customers. In 2018, Barton, one of the founders of the company, took over the role of CEO and turned to the high-tech home turnaround company called iBuying.

Read More: Zillow Suspends Home Buying As Snags Hit Tech Turnaround

Zillow used pricing algorithms to buy homes from owners, make light repairs, and put them back on the market. Barton has set an ambitious goal, looking to buy 5,000 homes per month by 2024.

Earlier this year, the company borrowed more than $ 1 billion through two bond offerings, making it the first iBuyer to tap the securitization market. It has also set up $ 500 million credit facilities with Credit Suisse Group AG, Goldman Sachs Group Inc. and Citigroup Inc.

As recently as August, Barton bragged about the popularity of the service, telling investors that the traditional way of selling a home was so “appalling and dreaded” that customers were willing to bypass potential bidding wars to sell. to Zillow ‘in this sizzling-market of hot sellers.

Zillow bought around 9,700 homes in the third quarter, due to what he called “higher than expected conversion rates.” It also recorded a $ 304 million write-down on inventory held at the end of the period “due to the unintentional purchase of higher priced homes” that the company now believes it can sell.

Zillow’s will continue to sell homes for at least a few months. The company plans to buy about 9,000 homes in the fourth quarter and said it would experience write-downs of up to $ 265 million on home purchases that close in the last three months of the year.

It became clear that Zillow mispriced the housing market, making more aggressive offers just as competitors Opendoor Technologies Inc. and Offerpad Solutions Inc. became more cautious.

Opendoor, which went public last year through a merger with one of Chamath Palihapitiya’s blank check companies, saw its shares fall 15% on Tuesday after news of the sale of 7,000 homes by Zillow has raised questions about iBuyer’s business model.

The company said in a statement Tuesday that it was “well positioned to meet consumer demand.”

“We are open for business,” said a spokesperson for the company.

Zillow’s decision to exit the company also raises questions for Barton, a serial entrepreneur who also founded Expedia Group Inc. and career site Glassdoor. He returned to the role of CEO in 2018 because he wanted to lead the movement to iBuying. For now, he’s sticking around as the company retreats to its old business of connecting homebuyers with agents.

“We believe there are better, broader, less risky, and more brand-aligned ways to enable all of our clients who wish to relocate,” Barton wrote in a letter to investors. “We now plan to focus our offerings on asset and light capital solutions. “

(Updates with quotes from the CEO of the Results Call and adds context throughout.)

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