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Zillow Shuts Home-Flipping Business After Racking Up Losses

Yahoo Finance | | Nov 2, 2021

zillow - Zillow Shuts Home-Flipping Business After Racking Up Losses(Bloomberg) -- Zillow Group Inc. is pulling the plug on its tech-powered home-flipping operation, after an ambitious effort to transform the company collapsed when its vaunted pricing algorithms proved unequal to the task.

The company plans to take writedowns of as much as $569 million and reduce its workforce by 25% as it winds down the business in coming months, according to a statement Tuesday. Zillow shares plunged as much as 11% to $76.22 in late trading.

The decision to abandon home flipping comes as the company’s third-quarter results showed it lost more than $380 million in the operation, called Zillow Offers. The business hit a major snag in recent months as Zillow tweaked its algorithms to make more aggressive offers, causing it to overpay for houses just as the heated U.S. market began to cool slightly.

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With the company’s losses mounting, Chief Executive Officer Rich Barton said it had become too risky to scale the business in a U.S. housing market that has been running hot for well over a year during the pandemic.

“Fundamentally, we have been unable to predict future pricing of homes to a level of accuracy that makes this a makes a safe business to be in,” Barton said on an earnings call.

For most of Zillow’s 15-year history, the company has been known for publishing online real estate listings and home-price estimates -- called Zestimates -- and seeking to profit by connecting agents with potential clients. In 2018, Barton, one of the company’s founders, reclaimed the role of CEO and pivoted into the high-tech home-flipping business, called iBuying.

Zillow used pricing algorithms to buy homes from their owners, make light repairs, and put them back on the market. Barton set an ambitious goal, seeking to buy 5,000 homes a month by 2024.

Earlier this year, the company borrowed more than $1 billion through two bond offerings, making it the first iBuyer to tap the securitization market. It has also lined up $500 million credit facilities with Credit Suisse Group AG, Goldman Sachs Group Inc. and Citigroup Inc.

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As recently as August, Barton was boasting about the popularity of the service, telling investors that the traditional way of selling a home was so “dreadful and dreaded” that customers were willing to bypass potential bidding wars to sell to Zillow “in this sizzling-hot sellers market.”

Zillow bought roughly 9,700 homes in the third quarter, due to what it called “higher-than-anticipated conversion rates.” It also booked a $304 million writedown on inventory owned at the end of the period “as a result of unintentionally purchasing homes at higher prices” than the company now thinks it can sell them for.

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