By Nathalie Voit
Zillow reportedly paused its home-flipping operation after overbuying thousands of homes above market rate values.
According to Bloomberg, the real estate company has halted its home-buying business, Zillow Offers, following a failed buying spree in the third quarter that saw the company purchase thousands of homes above-market prices. The company is now looking to offload about 7,000 homes for $2.8 billion in a bid to recover from its operational stumble.
“Prices turned on them, and they got a little bit flat-footed, and they were probably a little too aggressive on the bidding,” RBC Capital Markets analyst Brad Erickson told Bloomberg regarding the company’s losing market strategy.
The company announced on Oct. 18 it would pause home-buying offers through the end of the year to focus on existing inventory.
“We’re operating within a labor- and supply-constrained economy inside a competitive real estate market, especially in the construction, renovation, and closing spaces,” said Jeremy Wacksman, Zillow’s chief operating officer, in a statement.
“We have not been exempt from these market and capacity issues, and we now have an operational backlog for renovations and closings. Pausing new contracts will enable us to focus on sellers already under contract with us and our current home inventory.”
Zillow’s home-flipping program, which began in December 2019, suffered significantly in the third quarter. According to investment research firm YipitData, the company listed a record number of properties in September at the lowest markups since November 2018. Zillow also scaled back prices in nearly one in two of its U.S. listings, reported Yipit.
A KeyBanc Capital Markets report from Oct. 31, which analyzed 650 homes acquired by Zillow, revealed that two-thirds were listed for less than the company originally paid for them, with an average discount of 4.5%.
“I think they leaned into home-price appreciation at exactly the wrong moment,” said Ed Yruma, the KeyBanc analyst who conducted the study.
Zillow’s decision to offer homes at a steep discount comes amid pandemic-related labor and material shortages. Higher prices on basic building inputs like steel and piping, in addition to a scarcity of construction workers, have made it harder for the company to carry out renovations on current inventory it wishes to “flip” or resell for a profit. Zillow’s stumble reflects growing investor concern regarding the state of the housing market.
“The activity we saw this summer was so unprecedented relative to the way real-estate typically moves, I can see why an iBuyer might want to take time to digest the signals coming out of the market now that it seems to have slightly more stable footing,” said Michael Greene, co-founder and CEO of ResiShares, a residential real estate investment company.
