Zillow Group announced on Tuesday that it would close its homebuying arm, Zillow Offers, and lay off a quarter of its staff, or about 2,000 employers, after revealing that the unit had suffered startling losses.
Zillow's chief executive, Rich Barton, suggested that further investment in the business could imperil the entire firm.
"We had been willing to take a really big swing on this, but not a bet-the-company swing," Barton said during a conference call with analysts.
The news dealt a blow to the $20 billion property-technology firm, which had hinged its future growth on iBuying, or instant buying, the business of quickly flipping homes for a profit and attaching lucrative ancillary services such as title insurance and mortgage financing.
Barton, who cofounded Zillow in 2004, had until recently envisioned turning the company into a homebuying behemoth that would purchase and sell 20,000 homes a year and produce $20 billion in revenue in the coming years.
In the Tuesday call discussing Zillow's third-quarter earnings, Barton said that instead the unit had been awash in hundreds of millions of dollars in losses — a dramatic turn in fortune, considering that executives at the company had in recent quarters described the business as edging toward profitability.
Barton said Zillow could not master a fundamental area of iBuying: developing an algorithm and acquisition process that could reliably predict the trajectory of the nation's housing market. It was a striking admission for the technology-sector veteran, who founded Expedia and sits on the board of the streaming giant Netflix.
"Fundamentally, we have been unable to predict future pricing of homes to a level of accuracy that makes this a safe business to be in," Barton said.
Barton pointed to the company's pandemic pause and then the roiling home market as "black swan" events that threw off its ability to accurately price homes. He said he would be "naïve" to assume other events in the future would not similarly muddle its forecasting ability.
"We pump them into the model, and the model cranks out a business that has a high likelihood at some point of putting the whole company at risk," Barton said.
Zillow said that it would write down as much as $569 million on the thousands of homes it owns and that its iBuying business had lost $422 million during the quarter, more than triple its losses in the entire first half of the year. Analysts had predicted the pain.
Shares of Zillow tumbled by 10% in after-hours trading on Tuesday.
Last month, when the company announced a pause in new home purchases, it blamed supply and labor constraints that could hamper the renovations it made before relisting the homes.
Last week, Insider reported that Zillow was marketing 64% of the nearly 1,000 homes it owned in the five busiest markets for its iBuying business at a loss. The company also said on Tuesday that its margins per home had swung from a positive 6% in the second quarter to an expected 5% to 7% loss on every home sold.
On the earnings call, Barton made clear that the supply and labor challenges were only part of the issue, describing "extraordinary volatility" in the housing market and "big markdowns on a relatively low volume of units" that had caused him to acknowledge "the inherent risk that exists in the iBuying operation."
Zillow executives also suggested that the Offers business had begun to damage its brand. Only about 10% of customers who reached out to the company for an offer ended up selling to Zillow, leaving some unhappy with their experience with the company, Barton said.
The company found itself in the uncomfortable position of having to negotiate with sellers on "the most important thing they own in their lives, emotionally and financially," Barton added.
"To have 90% of them, approximately, go do something else, some of them pretty miffed about the brand, is not what we're used to," Barton said. "It's not what we're trying to be. It's not what the history of our brand has been."
