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Zillow’s house-flipping business flopped — then its stock dropped 30% in two days

Thursday, November 4, 2021 by Robinhood Snacks |
The dog days of iBuying [JDC/Stone via Getty Images]

The dog days of iBuying [JDC/Stone via Getty Images]

Foreclosed… Zillow’s stock plunged this week after the company reported a $330M quarterly loss and said it planned to end its house-flipping business, Zillow Offers. Zillow’s OG biz links home sellers to buyers for a fee. But in 2019, Big Z branched into iBuying — aka making instant cash offers on houses based on "Zestimates" and cutting out agents in the middle. Zillow’s goal: Fix up properties and resell them at a profit. Zillow’s iBuying revenues soared to $1.2B last quarter, but profits tanked:

  • Big losses: Offers lost $420M last quarter, which pulled Zillow into the red after making $40M in total profit in the same period last year.
  • Empty houses: Zillow still needs to offload 18K houses. It expects to sell them at a 5% to 7% loss, and to lay off a quarter of its workers.

iBlunder… Since Zillow already calculated Zestimates, iBuying seemed like a natural expansion two years ago. But it soon discovered the market wasn’t that simple: Home prices soared during the pandemic, and labor and supply shortages raised the cost of repairs.

  • Veteran house-flippers Opendoor and Offerpad slowed their iBuying when the buying boom began to diminish in October, but Zillow bought more homes at above-market rates.
  • Blame the algo: Zillow said it ended up “unintentionally purchasing homes at higher prices” than the expected selling prices because of a faulty formula.
THE TAKEAWAY

Look before you pivot… Companies need more than a market opportunity to pull off new business lines — they need the right infrastructure too. Despite Zillow’s failure, others are still iBuying: Last month, tech-focused rivals Opendoor (which reports earnings next week) and Redfin said they planned to boost iBuying. High demand for real estate is expected to continue: home prices jumped 15% this summer from a year ago, after a five-year decline.