Zillow Offers was a service to homeowners to sell without having to coordinate repairs or host open houses or showings. After buying a home, Zillow prepared it for sale by doing the same type of projects a typical seller would, then lists it on the open market.
iBuying created 1% of all U.S. home purchases last quarter for the first time as homeowners increasingly used these services to sell more than 15,000 homes nationwide.
Instant buying, or iBuying, happens when real estate companies use algorithms to evaluate a property’s worth based on comparable market data and purchase houses, directly from the seller, in quick cash transactions. Those companies then quickly list them for sale on the open market after making light repairs and updates. Benefits to the seller include cash offers, flexible move dates, and the convenience of preparing and not showing the home. For those same reasons, iBuyers tend to charge sellers a higher fee than traditional agents.
In October, Zillow announced that it was pausing its iBuying program for the rest of the year due to a backlog of houses along with supply chain and labor issues, when it came to remodeling and preparing houses it bought for the market.
That direction changed when Zillow announced their third quarter financial results which included a statement from Zillow CEO Rich Barton on the ending of Zillow Offers citing price forecasting volatility and the huge rise in home prices because of a supply-and-demand imbalance.
“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 Barton. “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.”
The wind-down is expected to take several quarters and will include a reduction of Zillow’s workforce by approximately 25%.
“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.”
According to the third quarter financial documents, Zillow Offers brought in $1.1 billion in revenue this last quarter—up 534% since last year—compared to $722 million in Q2 which represented more than 60% of the company’s total revenue in the third quarter.
The company purchased 9,680 homes last quarter, but only sold 3,032 homes. The company ended the quarter with 9,790 homes on its books. The homebuying segment posted a loss of $421 million at the end of the quarter.
“In our short tenure operating Zillow Offers, 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,” Barton said in a letter to shareholders. “We have been unable to accurately forecast future home prices at different times in both directions by much more than we modeled as possible, with Zillow Offers unit economics swinging approximately 1,200 basis points from Q2 to an expected -500 to -700 basis points in Q4 2021.”
“Because of this price forecasting volatility, we have had to reconsider what the business might look like at a larger size. We have offered sellers a fair market price from the start of Zillow Offers, while also being clear that the business would only become consistently profitable at scale. We have determined this large scale would require 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.”
Barton said that he sees volume volatility to be an impediment to ramp and scale the operation, and any future interruptions to the supply chain could result in increased holding times which in turn exposes Zillow to more risk. Instead, the company will focus on its core business, which has remained strong according to Barton.
“The change necessitated by today’s announcement is the evolution of how we will help a customer sell her current home. Before today, our seller offering was overly focused on Zillow Offers and was able to serve only a small number of the available customer set,” Barton continued. “Going forward, rather than having to buy a customer’s home to help her sell, we are now simply going to help her move. We will expand our view and explore a marketplace of scalable selling solutions that give certainty, convenience, choice, simplicity and speed, all while addressing the broader opportunity for Zillow. Importantly, we now plan to focus our offerings on asset- and capital-light solutions with an open mind as we explore providing these solutions ourselves and/or through partners.”
