American real estate company Zillow Group said Tuesday that it will be shutting down its home-flipping business. The company said its tech-enabled home buying and selling business, under its "iBuying" program, has been underperforming.
The announcement comes just two weeks after the company announced that it would be halting all new home purchases until the end of the year. Zillow said that various factors, including supply and labor shortages, are hampering it from buying, renovating, and selling houses at a sustainable rate.
Zillow CEO Rich Baron said that the rapid pace of home-price appreciation has also factored in into its decision to wind down the business. As part of the shutdown, the company said it will be cutting its workforce by up to 25%.
"We've determined 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," Baron said.
Zillow's home-flipping business model involved the purchase of homes and then quickly selling them after minor renovations. The company makes most of its money from transaction fees and home-price appreciation. Using its proprietary algorithm, Zillow uses an automated system that determines home price estimates for buyers and how much it is willing to pay sellers.
In the last year and a half, strong house-buying demand has been fueled by ultralow mortgage interest rates and a need for additional room to work from home. In practically every part of the United States, prices have risen dramatically.
Analysts at the Wharton School of the University of Pennsylvania said that the current market does present challenges to businesses looking to make money out of buying and selling houses.
On Tuesday, Zillow's class C stock fell 10% before it announced the shutdown after the market closed. After-hours trading saw its shares continue to fall. The change is expected to have a significant impact on Zillow's bottom line. The company's biggest source of revenue was its home flipping business, even though it had never produced a profit.
Zillow's home-flipping business, Zillow Offers, lost $381 million last quarter, according to adjusted profits before interest, taxes, depreciation, and amortization. Zillow as a whole lost $169 million in adjusted EBITDA as a result of its Zillow Offers loss.
