Digital real estate firm Zillow has said that it will be closing its homebuying business and cutting 25 percent of the workforce, as it’s third quarter earnings have missed the estimates by analysts.
Too Unpredictable
CEO Rich Barton has said in a release that the company has found first-hand that the unpredictable nature of “forecasting home prices far exceeds” what they had anticipated. As such, they have decided to let go of Zillow Offers, feeling that if they continue to operate it, the same will likely cause volatility in earnings and balance-sheet.
Zillow’s stocks dipped around 7.5 percent in extended trading soon after the announcement, following a 10 percent decline during regular hours. The stocks of competitor Opendoor, meanwhile, rose by 7 percent during extended trading, after having plunged earlier during the day.
The Offers business had raked in $1.17 billion during Q3 this year, a major jump from last year’s $186 million. At the same time though, the homes segment of the firm (which is mostly comprised of Offers), lost a whopping $422 million during the same three month period, resulting in an overall net loss.
An Ambitious Venture
Zillow Offers was launched in December two years ago, with markets in Southern California having had been the first to get a taste. The product was an addition to the iBuying industry, and had allowed owners to sell their homes to Zillow in exchange for cash, instead of having to go through the longer route of bidding, sales, and closing. What’s more, they are even exempted from having to pay for repairs before their house is up on the market.
That’s because once Zillow purchases a house, it takes care “of necessary repairs,” by collaborating with local contractors to give the home a touch-up, like a “fresh coat of paint, servicing HVAC units,” and certain other things, before putting it up for sale.
But it’s ambitions pretty much went down the drain, and a while before it had announced that the business would be closed down for good, the company had said that it would stop purchasing houses by the end of this year, owing to tight labor and supply. In fact, just this week, operating chief Jeremy Wacksman had said that they have had to face “market and capacity issues” due to the constrained economy, which has finally resulted in an “operational backlog.”
Which Failed to Predict Prices Accurately
However, the main reason for the closure apparently happens to be Zillow’s failure to accurately predict housing prices. In order to have been profitable, Zillow should have been accurate in predicting these prices so that it could sell homes for prices greater than the purchase price, while keeping enough margin to get through with the repair work and other expenses. But Barton has said that they aren’t in a position to do so “within a narrow margin of error.”
Source: CNBC