Real estate giant Zillow Group Inc. has announced it is winding down Zillow Offers, its tech-driven home-flipping platform, citing insufficient predictability in the system’s home price forecasting algorithms, driving up risk and hurting profitability.
“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,” Zillow Group co-founder and CEO Rich Barton, said in a Nov. 2 earnings release (pdf).
Around 25 percent of Zillow’s workforce will be cut and the company will take combined third-quarter and fourth-quarter writedowns of up to $569 million, according to the release, with the wind-down of Zillow Offers likely to span several quarters.
“The most difficult part of this decision is that it will impact many of our colleagues,” Barton said. “This is not something we take lightly. We are grateful for their efforts, and we are committed to providing a smooth transition.”
Zillow Offers relied on pricing algorithms to buy homes from sellers, fix them up, and flip them at a profit. But the algorithms led it to overpay for houses, forcing the company to list properties at a loss.
Barton said in a letter to shareholders (pdf) that “as a result of unintentionally purchasing homes at higher prices than our current estimates of future selling prices,” Zillow had to write down $304 million in inventory in the third quarter.
When Zillow Offers launched in 2018, its business model was underpinned by the need to predict home prices accurately three to six months into the future.
“Our aim was to become a market maker, not a market risk taker,” Barton wrote in the letter, adding that in the several years that Zillow Offers has been in operation, “we have experienced a series of extraordinary events: a global pandemic, a temporary freezing of the housing market, and then a supply-demand imbalance that led to a rise in home prices at an unprecedented rate.”
Inability on the part of the algorithms to predict price fluctuations accurately led to sharp swings in Zillow Offers’ unit economics, Barton said, noting also that further supply chain interruptions would increase exposure to volatility.
Barton said the only way to make Zillow Offers consistently profitable was to scale it up further, but this would mean “too much equity capital, create too much volatility in our earnings and balance sheet, and ultimately result in far lower return on equity than we imagined.”
Another factor behind the decision to wind down was Zillow Offers’ low conversion rate.
‘To date, we have been able to convert only about 10 percent of the serious sellers who ask for a Zillow Offer, and have tended to disappoint the roughly 90 percent who didn’t sell to us,” Barton said in the letter.
In the third quarter, Zillow recorded $1.7 billion in consolidated revenue, with gross profit of $241 million, and a net loss of $328 million.
“We believe there are better, broader, less risky, more brand-aligned ways of enabling all of our customers who want to move,” Barton wrote in the letter. “We now plan to focus our offerings on asset- and capital-light solutions.”
