Zillow Faces Shareholder Lawsuit Over Folded House Flipping Effort

A real estate sign advertising a home "Under Contract" is pictured in Vienna, Virginia, outside of Washington, on Oct. 20, 2014. (Larry Downing/Reuters)

Real estate company Zillow faces a federal lawsuit claiming the company misled investors, leading to financial losses as it ended its house flipping program.

The lawsuit was filed Tuesday in the U.S. District Court for the Western District of Washington at Seattle. The case is the first federal filing, joining two Boston-area firms in legal actions against the company.

The suit claims Zillow “materially false and/or misleading statements, as well as failed to disclose material adverse facts about the company’s business, operations, and prospects.”

The group representing the lawsuit also noted the misleading information led to significant financial losses.

“As a result of Defendants’ wrongful acts and omissions, and the precipitous decline in the market value of the Company’s securities, Plaintiff and other Class members have suffered significant losses and damages,” the lawsuit added.

Two weeks ago, Zillow announced it would stop its practice of buying and reselling homes as its “house flipping” venture was becoming too unpredictable to continue.

Through its Zillow Offers program, the company bought homes directly from sellers and completed all of the necessary upgrades or repairs without the seller having to host open houses or showings. After buying a home, Zillow prepares it for sale.

But due to a shortage of labor and supplies, Zillow couldn’t meet demands to close, renovate, and resell the homes fast enough.

Wacksman said the temporary pause on purchasing new homes will allow Zillow to focus on purchasing homes with already-signed contracts that have yet to close, and reduce its renovation pipeline.

“We’re operating within a labor- and supply-constrained economy inside a competitive real estate market, especially in the construction, renovation, and closing spaces,” Wacksman said.

“Pausing new contracts will enable us to focus on sellers already under contract with us and our current home inventory,” he added.

Zillow purchased 3,805 homes in the second quarter this year, marking a record high for the company and more than double the number of homes it bought in the first quarter, CNN reported, citing a note to company shareholders.

The company’s pause on its Zillow Offers program, also known as an iBuyer program, appears to be specific to Zillow, according to Mike DelPrete, an independent real estate technology strategist and scholar in residence at the University of Colorado Boulder.

“Zillow just kept barreling down and now they’ve hit this wall,” he told CNN.

“If you’re trying to be number one in the market, slamming on the brakes is one of the worst things you can do,” said DelPrete. “You want to make some adjustments before you get to that point—slow down, switch gears. This is not the preferred outcome for Zillow.”

Katabella Roberts contributed to this report.