Today, Zillow Group announced their plan to shut down the Zillow Offers program (known as their iBuying initiative), also announcing a cut in their workforce of roughly 25%.

With a backlog of over 9,800 homes (several thousand more than they reported just days ago) that need to be sold, and a current 8,200 under contract that they’re still moving forward with purchasing, the company can’t simply cite labor and raw materials challenges.

The rapid escalation of the program in the past quarter is part of the subsequent sunsetting wherein they’ll be eating a $304 million in losses, and another $240-$265 million expected additional losses on pending properties.

They’ve instantly become famous for using their algorithm to wildly overpay on a ton of product, then losing their shirts for it.

Zillow Co-Founder and former CEO said earlier this week that he assumed purchasing would resume in Q1, but fellow Co-Founder and current CEO, Rich Barton stated, “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.”

Barton added, “While we built and learned a tremendous amount operating Zillow Offers, it served only a small portion of our customers. Our core business and brand are strong, and we remain committed to creating an integrated and digital real estate transaction that solves the pain points of buyers and sellers while serving a wider audience.”

This combination of conditions has plenty of real estate professionals (that have long hated Zillow) gloating on social media.

We recently urged our readers to not get excited about their last announcement that they’d be pausing the iBuying program, and we stand by that today for several reasons:

1. Fully 25% of their workforce got a pink slip today and that is nothing to celebrate – they’re people whose lives were just upended. But not Rich Barton’s, he’ll be just fine.
2. This program is one of many for them and these losses don’t matter much in the bigger picture – it was a very small piece of their pie.
3. Even if Zillow stopped getting every listings feed on the planet and every Realtor stopped giving them their money, they’ve created a scenario where they’ve applied for (and been granted by the federal government) nearly every conceivable generic patent on real estate online. Their evil genius will help leadership to survive any storm, like it or not.

Does the shutdown of this program spell doom for the iBuying model in general? It could be seen that way, or it could be seen that they moved far to quickly, or simply that economic conditions collided to make the perfect storm which wasn’t in their favor.

Either way, from our vantage point, the program has always felt like they were playing with Monopoly money, or like they were enjoying being WSB bros, and it’s now over and a lot of people are out of work today.

What will always remain consistent is real estate practitioners reminding each other that they’re who have fed the beast since day one, like this Realtor:

The only real downside for Zillow is the public relations hit they’re taking with consumers who are going wild about the news:

So you're telling me I could have tricked Zillow into buying my house no questions asked. pic.twitter.com/I1zBfBYPv6

— Khalid 🦃 (@buhakmeh) November 3, 2021

When I saw this on Tiktok I felt so powerless. I thought nobody would listen and that Zillow would gobble up half the houses in the US and nobody could stop them.

I'm so glad they're fucked.

— Daiv (@TheBoves) November 3, 2021

Zillow thought they were the smartest kids in the room https://t.co/jz3VaTcoMn

— 𝗣𝘂𝗻𝗸𝗥𝗼𝗰𝗸 & ᶠᵘᶜᵏ ᵗʰᵃ ᵖᵒˡⁱᶜᵉ (@PunkRockClub) November 3, 2021

Zillow a villain lowkey

— JWET ADDICT 🇭🇹 (@A1_vakabon) November 3, 2021

Stay tuned for what money moves Z makes next. This story isn’t over.

In my view, the iBuying model is fatally flawed and may only provide Consumers enhanced benefits in specific market conditions. Furthermore, there appears to be a “revenue at all costs” model to appease investors, providing the inference that a company is growing at the detriment to net profits as most homes are flipped at a net loss. 

It is my understanding that iBuyers record revenue as the sale price of the home. Recording the sale price of the house has increased iBuyer revenue exponentially, which increased stock values to all-time highs, however now there is an expectation of continuing revenue growth, which may pressure iBuyers to buy less favorable homes to maintain revenue volume.

Zillow’s recent announcement that they are “pausing” iBuying resulted in a significant drop in stock value and analyst downgrades. 

The Fallacy That Combining Brokerage, Mortgage & Escrow Services Enhances Consumer Experiences

My brokerage refers clients to third-party firms we have vetted and have a history of transacting. To gain our trust, third-party companies must exhibit excellent customer service with reasonable rates.

iBuyer agents may provide referrals because they share a cubical with the respective service provider. 

Navigating Down Markets

Sales are simple in an appreciating market, and profitability is enhanced (or losses softened). Conversely, transacting in a flat or price-correcting environment may disproportionally impact iBuyers as they are glorified home flippers who might rely on appreciation.

In a study by Mike DelPrete, arguably the preeminent residential real estate analyst, states, “In Q2 2021, home price appreciation accounted for 70 percent of Opendoor’s gross profit margin.”

Federal Investigations Into iBuyer Representations | Per OpenDoor’s SEC Disclosure

“Federal Trade Commission (“FTC”) sent a civil investigative demand (“CID”) to Opendoor seeking documents and information relating primarily to statements in Opendoor’s advertising and website comparing selling homes to Opendoor with selling homes in a traditional manner using an agent and relating to statements that Opendoor’s offers reflect or are based on market prices. Thereafter, Opendoor responded cooperatively to the CID and related follow-up requests from the FTC.” 

“On December 23, 2020, the FTC notified the Company that they intend to recommend that the agency pursue an enforcement action against the Company and certain of its officers if we are unable to reach a negotiated settlement acceptable to all parties. The FTC has indicated that they believe certain of Opendoor’s advertising claims relating to the amount of its offers, the repair costs charged to home sellers, and the amount of net proceeds a seller may receive from selling to Opendoor versus selling in the traditional manner were inaccurate and/or inadequately substantiated.”

When previously visiting Opendoor, in what appears to be a four-point font, OpenDoor discloses the following: 

“* Beginning on September 30, 2020, for new offers, Opendoor’s service charge will be no more than 5%. Service charge is subject to change, and has historically been as high as 14%.”

OfferPad appears to match the 5% cap, so we may witness a “race to zero” in the iBuying market. If a firm has difficulty achieving net profit when fees have “historically been as high as 14%,” profiting with a 5% cap may prove to be impossible. 

Acquiring Via Special Purpose Entities | Reminiscent Of Enron | Complex Financial Reporting The Average Investor May Not Understand

OpenDoor’s SEC 8K States: 

“The Company utilizes inventory financing facilities consisting of asset-backed senior credit facilities and asset-backed mezzanine term debt facilities to provide financing for the Company’s real estate inventory purchases and renovation. The credit facilities are secured by the assets and equity of one or more SPEs. Each SPE is a consolidated subsidiary of Opendoor and a separate legal entity. Neither the assets nor credit of any such SPE are generally available to satisfy the debts and other obligations of any other Opendoor entities, except to the extent other Opendoor entities are also a party to the financing arrangements.

These facilities are non-recourse to Opendoor and, with limited exceptions, non-recourse to other Opendoor subsidiaries. These SPEs are variable interest entities and Opendoor is determined to be the primary beneficiary based on its power to direct the activities that most significantly impact the economic outcomes of the entities through its role in designing the entities and managing the real estate inventory purchased and sold by the entities. The Company has potentially significant variable interest in the entities based upon the equity interest the Company holds in the VIEs.”

Understood?

Even OpenDoor is having difficulty with accounting/reporting as they disclosed the following: 

“We have identified material weaknesses in our internal control over financial reporting and may identify additional material weaknesses in the future or fail to maintain an effective system of internal control over financial reporting, which may result in material misstatements of our consolidated financial statements or cause us to fail to meet our periodic reporting obligations. We have identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.”

Generally speaking, it is time for all PropTech firms to reevaluate the accuracy of public representations as FTC complaints are filed and class-action law firms are evaluating claims.

The days of misleading consumers while denigrating Realtors are over. 

Ask Jack Ryan and REX Homes. 

REX Homes yesterday initiated a second round of layoffs in the past two months, has now shut down operations in Chicago and all of New York as part of a company restructuring, and intends on testing out joining local MLSs.

Layoffs are a common part of startup life, and REX Co-Founder, President, and COO, Lynley Sides assured remaining employees in a company-wide call that they are “done with downsizing efforts,” which they say they did their best to do “respectfully,” and the new goal is to move forward, focusing on the customer experience, on profitable markets, and on “winning” now that the company has “the right plan.”

The first round of layoffs was in late August and eliminated roughly 60 positions (a number which has not yet been verified by REX). No severance was paid, but the company offered resume coaching and allowed impacted staff to retain all company technology as a “creative” move, Sides said on the call.

The company has earned several rounds of private equity funding and is not publicly traded. They had not closed their Series D round of funding in August, but did shortly thereafter.

The second round of layoffs was Thursday, October 7th and impacted 34 employees who did receive severance and were also allowed to keep company technology.

Because of the timing of the Series D closing, Sides told staff on the call that they would be revisiting severance with employees cut in the first round.

She also noted that they would have preferred one round of layoffs and had hoped that would suffice, but instead took measures to cut “all costs,” including reducing marketing spends “notably,” addressing overhead, negotiating with vendors, and even subleasing some of their space to “reduce the impact of the second wave.”

It is unclear what markets they continue to serve as their website still allows users to select New York, but not Chicago, and several past and current staff say the number of areas they service have been drastically reduced in this calendar year but none agree on the actual number. Sides noted a shift toward focusing exclusively on the most profitable markets.

Sides also said on the call that REX would be “trying to join a few MLSs which is the right thing to do for our business and our customers” as they focus on the “customer experience.”

The pilot test is notable given the company’s lawsuit against NAR and Zillow, alleging a cartel surrounding MLSs and commission structures. Although a recent court ruling urged the company to not use the term ‘cartel,” the lawsuit stands.

Also fascinating is that the real estate tech startup was able to avoid all news coverage of the layoffs, market closings, or a shift toward joining any MLS.

Regardless, Sides concluded her portion of the call by assuring her teams that she remains “incredibly optimistic about REX’s future,” a sentiment others on the call echoed.

We have reached out to REX Homes for comment, as we don’t know the precise number of employees dismissed in August, the size or date of their Series D round of funding, or what markets they still serve.