Zillow (Z, ZG) will stop flipping homes, in a move that came just one day after Bloomberg reported that it was unloading 7,000 homes that it bought via its home-flipping business.
The company, known for its online real estate listings, probably should have never ventured into home flipping, also known as iBuying, according to Barbara Corcoran, real estate veteran and “Shark Tank” host. Zillow started Zoom Offers, its iBuying service, in 2018 under the stewardship of CEO Richard Barton, who also founded travel site Expedia. Zillow used algorithms to buy homes, repair them, and then sell them. At the time, Barton said he planned to buy 5,000 homes a month by 2024 — a lofty goal.
“Barton is a phenomenal business man. He’s a disruptor… so no one thought they could stumble. And what he did, and I’m sure he gave it a lot of thought, but he went into a space that has nothing to do with finding homes for people,” Corcoran told Yahoo Finance Live. “It is buying homes for flipping and none of the stars aligned. I remember at the time thinking, what the heck is he doing that for? It makes no sense at all.”
Like many others, the company was likely “tempted” to control the entire house-hunting market since Zillow has access to sellers, Corcoran said. But what the company failed to consider was the magnitude of volatility in the housing market — its up and downs.
“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,” Barton said in a press statement.
‘This is not a good flipping market’
In the third quarter, Zillow bought 9,700 homes and booked a $304 million writedown on inventory owned at the end of the period “as a result of purchasing homes in Q3 at higher prices than the company’s current estimates of future selling prices … Additionally, Homes segment Q3 revenue is below the company’s previously provided outlook range due to resale capacity constraints that pushed a number of closings into Q4 that were previously expected to close in Q3,” according to its latest earnings release on Nov. 2.
Zillow shares plunged 11% after it announced it would be pulling the plug on home-flipping. Its stock closed down 23% on Wednesday.
Last month, Zillow said it would cease buying houses for the rest of the year as it struggled to find workers to fix houses it had under contract. “He never predicted how difficult it is to renovate a home and close it and put it back for sale,” Corcoran said, referring to Zillow’s CEO. “So he really bit off a lot more than he envisioned.”
The wind-down of Zillow Offers is expected to take several quarters and will include a reduction of Zillow’s workforce by approximately 25%.
According to the latest report available from property data provider ATTOM, profit margins for house flipping dipped to a 10-year low in the second quarter of 2021.
“This is not a good flipping market,” Corcoran said. “This is a buyers’ and a sellers’ markets where every home is dear and how do you really make money on that spread? It’s tough.”
Amanda Fung is an editor at Yahoo Finance.