“Too risky, too volatile, too narrow…” Is that how you want your investment prospect described? That’s what Zillow has called its own home-buying scheme, driven by algorithms. You know that Zillow is looking to flip nearly 7,000 homes it has purchased to exit a business that it probably never should have been in. Laura Forman reports for The Wall Street Journal:
Sometimes a ruler gets too ambitious and has to fall on his own sword.
So it goes for online real-estate king Zillow ZG -18.12% which, in conjunction with its earnings announcement Tuesday, said it was quitting the automated home-flipping business less than three years after reorganizing its whole kingdom to accommodate it. The pullout, the company said, would reduce its workforce by about 25% over the next few quarters. Zillow said last month that it was pausing offers on homes for which it didn’t already have signed contracts through the end of the year.
Tuesday, Zillow described the so-called iBuying business as too risky, too volatile, too narrow and, ultimately, too low on potential returns to continue. Proof is an unprofitable third quarter in which it took a $304 million write-down on inventory—the result of “unintentionally purchasing homes at higher prices than our current estimates of future selling prices.”
All told, Zillow bought 9,680 homes in the third quarter—more than 2.5 times the number of homes it purchased a quarter earlier, which itself had been a record. Further, it said it is in contract to buy another 8,172 homes, baking into its fourth-quarter guidance $240 million to $265 million in losses related to additional write-downs. Zillow’s shares, already down more than 50% from all-time highs seen in February, fell 12% in after-hours trading immediately following the news.
Here Sean Gotcher, a real estate agent, explains the Zillow scheme to viewers of his Tik Tok channel:
Action Line: Companies selling the “next big thing,” like algorithmic real estate purchases, sometimes get it wrong. The Dot Com bust was full of similar stories. Sometimes you invest, and they win, but not always. Sometimes you invest and both you and they lose. You need to build a portfolio that is built on investing, not speculating. If you need help, I would love to talk with you.