The discontinuation of “iBuying” comes after the company announced the suspension of new home purchases for the remainder of 2021.

Zillow pulls the plug on its algorithmic home-flipping business after failing to meet expectations, the company announced Tuesday. The real-estate firm’s “iBuying” model was meant to buy and sell homes quickly, but it’s been unable to keep up with the rapid appreciation of home prices. Zillow had already halted all new home purchases for the rest of 2021 due to supply and labor shortages. CEO Rich Barton admitted the company’s predictive abilities were off and announced plans to cut 25% of its workforce. The once-promising venture was expected to generate $20 billion annually.

According to CEO Rich Barton, “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.” As a result, Zillow has decided to exit the home-flipping business, including its tech-enabled home-flipping arm known as “iBuying.” Zillow’s decision comes after it had previously announced that it would halt all new home purchases for the rest of the year, citing labor and supply shortages.

Zillow’s “Zestimate” algorithm was used to make home price estimates and determine what it would pay home sellers. Zillow and other iBuyers purchase homes, renovate them, and then try to sell them quickly, making money on transaction fees and home-price appreciation.

The past year and a half has seen a surge in demand for home buying due to ultralow mortgage-interest rates and the need for more space to work from home, leading to significant price increases in almost every part of the U.S.

“It feels like this would be a hard time to lose money buying and selling houses”

Despite this, the decision by Zillow to exit the home-flipping business came as a surprise to many in the industry. “It feels like this would be a hard time to lose money buying and selling houses,” commented Benjamin Keys, a professor of real estate at the Wharton School of the University of Pennsylvania. “This is a time frame where prices have gone up in a lot of places, dramatically.”

Zillow’s decision to exit the home-flipping business comes as the real estate market shows signs of slowing down after months of record-breaking growth. While prices are still high, they have started to level off, with the median sales price increasing by 13.3% in September from a year earlier, according to the National Association of Realtors. Despite the slowdown in price growth, Zillow’s algorithmic model failed to accurately predict the market, prompting the company to end its home-flipping venture.

After the announcement of Zillow’s exit from home-flipping, the company’s class C share price dropped by 10% on Tuesday. The stock continued to decline during after-hours trading, reflecting investor concerns about the impact on the company’s revenue. Home-flipping was Zillow’s biggest source of income, but it has never been profitable for the company. The decision to discontinue this venture marks a significant setback for Zillow’s financial performance.

Zillow’s Q3 earnings report revealed that the company’s home-flipping business, Zillow Offers, suffered a massive $381 million loss in adjusted earnings before interest, taxes, depreciation, and amortization. As a result, Zillow experienced a total adjusted Ebitda loss of $169 million across all its operations. Currently, Zillow has around 9,800 homes available for sale across the country and another 8,200 homes under contract for purchase. The company anticipates losing between 5% and 7% on these homes. Zillow’s competitors, including OpenDoor and Offerpad, also began scaling back home purchases in the Phoenix market as the previously hot pandemic housing market began to slow down from the summer.

An analysis of sales records by real-estate tech researcher Mike DelPrete, scholar-in-residence at the University of Colorado, Boulder, revealed that Zillow had accelerated its home-buying activity. However, Zillow paid significantly more than its competitors for each home it purchased, buying homes priced $65,000 above the median on average, according to DelPrete’s analysis.

By October, the company listed 250 homes in Phoenix at a median-price discount of 6.2% below what it had paid for them, resulting in what DelPrete called a catastrophic failure of Zillow’s pricing strategy.

Zillow’s decision to exit the home-flipping business after suffering losses worth millions of dollars has raised concerns about the viability of iBuying. Despite the failure of Zillow’s venture, real estate experts suggest that the other iBuyers, such as OpenDoor and Offerpad, have made significant improvements and are still making profits. However, Zillow’s price blunder, which saw the company list 66% of its homes at prices below what it paid for them, serves as a cautionary tale for those in the business. As the company begins its wind-down process, it is clear that iBuying is not as easy as some once thought.

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