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Real-estate firm Zillow Group Inc. Home-flipping is going out of business, saying Tuesday that its Algorithm+ model for buying and selling homes faster doesn’t work as planned.

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ZG Zillow Group, Inc.
+1.72 (+3.16%)

The firm ended its tech-enabled home-flipping business, known as “iBuying,” follows Zillow’s announcement about two weeks ago that it was pausing all new home purchases for the rest of the year. Was. At the time, Zillow pointed to a lack of labor and supplies for its inability to rapidly renovate and flip homes.


In a statement Tuesday, Chief Executive Rich Barton said Zillow had failed to accurately predict the pace of home price appreciation, marking the end of a venture the company once said was generating $20 billion a year. can generate. Instead, the company said it now plans to cut 25% of its workforce.

Company puts homebuying on hold as Zillow stock drops

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“We have determined the unpredictability in forecasting home prices is higher than we anticipated and continuing to offer Zillow will result in significant earnings and balance-sheet volatility,” Barton said.

Zillow and other tech-driven house flippers, known as iBuyers, buy homes, renovate and then try to sell them quickly, earning money on transaction fees and home-value appreciation. Huh. Zillow used an algorithm called “gestimate” to estimate the price of a home and determine what it would pay home sellers.

Ultralow mortgage-interest rates and the need for more space to work from home have driven strong home buying demand over the past year and a half. Prices have risen sharply in almost every corner of America

“It looks like it’s going to be a tough time to lose money buying and selling homes,” said Benjamin Keys, professor of real estate at the Wharton School of the University of Pennsylvania. “This is a time frame where prices have risen dramatically in many places.”

In recent months, skyrocketing prices have forced some buyers, and the market is showing signs of cooling, as many economists expected. According to the National Association of Realtors, current home selling prices rose 13.3% in September from a year ago — still unusually strong, though down from the 23.6% year-over-year price increase in May.

Even this gradual decrease in price increases affected Zillow’s algorithms, helping the company pull the plug on the enterprise.

Zillow Rides 70% Revenue Growth in Booming Real Estate Market

Zillow’s Class C share price was down 10% on Tuesday, before the company announced market closure that it would end domestic flipping. Shares continued to fall in after-hours trading.

The move represents a huge hit for Zillow’s top line. Home-flipping was the company’s biggest source of revenue, but it never turned a profit.

Zillow, which released earnings Tuesday, said its home flipping business, Zillow Offers, lost $381 million last quarter, as measured by adjusted earnings before interest, taxes, depreciation and amortization. This resulted in a combined adjusted EBITDA loss of $169 million for the entire district.

Zillow has an inventory of approximately 9,800 homes across the United States that is currently for investors to purchase. In addition, there are another 8,200 homes in the contract that it has agreed to buy. The company expects to lose somewhere between 5% and 7% on these homes, the company said.

At the start of the summer, competitors such as OpenDoor and Offerpad pulled back from home buying in Phoenix, one of the largest domestic markets, as the red-hot pandemic market began to cool.

But Zillow accelerated the scholar-in-residence at the University of Colorado, Boulder, according to an analysis of sales records by real-estate tech researcher Mike Delpreet. According to DelPrete analysis, Zillow paid significantly more for each home it bought than its competitors, with homes priced at $65,000 on average.

As of October, the company had listed 250 Phoenix homes at an average price discount of 6.2% to what it paid for them. DelPrete called Zillow’s price mistake a catastrophic failure.

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A comprehensive look at Zillow’s national performance by analysts at KeyBanc Capital Markets found that it had listed 66% of homes for less than the prices they paid for them, with an average discount of 4.5%.

“The fact that Zillow can’t make it work shouldn’t be the ultimate death knell for iBuying,” Delpreet said. “Other companies are improving, and Zillow isn’t. They’re still losing a lot of money.”

Zillow said it expects the wind-down of its home-flipping outfits to take several quarters.