Zillow has announced plans to lay off a quarter of its staff after its algorithm model to buy and sell houses, which helped drive up property prices in hot markets like Atlanta and Houston, was a flop.
The real estate company also plans to take write-off as much as $569 million as it reduces its operations in coming months, according to a statement Tuesday.
Zillow shares plummeted as much as 11 percent to $76.22 during late trading hours before regaining some of its losses. It was down 3.5 percent as of 4:39 p.m.
The decision comes as the company's third-quarter financial results indicate that it lost more than $380 million in its home-flipping program, called Zillow Offers.
The program's revenue income - once predicted to bring in $20bn a year - stalled in recent months as Zillow's algorithms caused it to sell houses for less than the prices that they were being bought for, just when the U.S. market began to slightly cool-off.
'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,' Chief Executive Officer Rich Barton said in the company's earnings statement on Tuesday morning.
The wind-down on staff and operations is expected to take several quarters, possibly going into 2023.
'The most difficult part of this decision is that it will impact many of our colleagues,' Barton added. 'This is not something we take lightly. We are grateful for their efforts, and we are committed to providing a smooth transition.'
Zillow Group has said that it will stop Zillow offers, its business for flipping homes, blaming its algorithm and 'labor and supply' constraints. Pictured: A person holds a phone up showing the Zilliow app (stock image)
Zillow was co-founded in 2006 by chairman Richard Barton, a former Microsoft executive who also founded travel company Expedia and workplace review platform Glassdoor
Zillow shares fell as much as 11 percent to $76.22 during late trading hours before regaining some its losses. It was down 3.5 percent as of 4:39p.m., after announcing the closure of one of its businesses, Zillow Offers and 25 percent staff-reduction
Last month hasn't been kind to Zillow, to say the least.
The company confirmed a news report from Bloomberg on October 18, saying that it would no longer look into making any new offers on houses for the rest of the year as it struggled to find home-flipping professionals to fix the listings it had under contract.
The news prompted shares of Zillow Group Inc hit over a year's low on that day, as labor shortages and supply disruptions hamper timely sales of renovated properties.
'We're operating within a labor- and supply-constrained economy inside a competitive real estate market, especially in the construction, renovation and closing spaces,' Zillow's chief operating officer Jeremy Wacksman said in a statement at the time.
'Pausing new contracts will enable us to focus on sellers already under contract with us and our current home inventory,' he said.
Zillow's chief operating officer Jeremy Wacksman (pictured) said in a statement that the company is 'operating within a labor- and supply-constrained economy'
As of today, the company was marketing 7,000 homes for roughly $2.8 billion to institutional investors, according to Bloomberg.
Zillow Offers, launched in 2019, used tech-based pricing algorithms to buy homes from owners, make light repairs, and then list them for sale on the market. At the time, Barton set a lofty goal, striving to buy 5,000 homes per month by 2024.
Earlier this year, the company borrowed more than $1billion through two bond offerings, making it the first real estate firm with iBuying technology to tap into the securitization market. It also owed $500 million in loans, called credit facilities, to Credit Suisse Group AG, Goldman Sachs Group Inc. and Citigroup Inc.
The real estate firm's shock announcement came after Barton was boasting about the popularity of the service in August. He had told investors that the common way of selling homes was so 'dreadful and dreaded' that home owners were willing to sidestep potential bidding wars to sell to Zillow 'in this sizzling-hot sellers market.'
Zillow had bought an estimated 9,700 homes in the third quarter, due to what it called 'higher-than-anticipated conversion rates.' It also wrote-off $304 million in assets on inventory owned at the end of the period 'as a result of unintentionally purchasing homes at higher prices' than the company thinks it can sell them for.
A review from Insider claims that 963 homes recently acquired by Zillow are now for sale in five major metropolitan areas: Dallas, Houston, Phoenix, Minneapolis, and Atlanta. Insider found that 616, roughly 64 percent, of the homes were listed below their purchase price by a median amount of almost $16,000.
Zillow faces losses on 63 percent of the Houston homes it purchased and planned to redesign this year as it is trying to resell right now. Out of 155 homes, 98 — or 63.2 percent — were set at prices below what Zillow paid for
Zillow is selling hundreds of homes in other places such as Atlanta (pictured) and Phoenix, as almost two-thirds were listed for less than than what the company originally paid
After the company decided to put a halt on new purchases, it became clear that Zillow had miscalculated the housing market, adjusting its algorithms to bid more aggressive offers just as competitors Opendoor Technologies Inc. and Offerpad Solutions Inc. were taking more cautious approaches.
The company it in a statement Tuesday it was 'well-positioned to meet consumer demand.'
'We are open for business,' a spokesman for the company said.
Zillow's decision to pull the plug on its business also casts long-term doubts on Barton, a successful entrepreneur who also founded Expedia Group Inc. and the careers site Glassdoor.
He came back as Zillow's CEO in 2018 because he wanted to pioneer the company into the iBuying industry.
And although he is under pressure, he's seems to be staying on as the company falls back on its old business: connecting homebuyers with agents.
'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 a letter to investors. 'We now plan to focus our offerings on asset- and capital-light solutions.'
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