(CNN) Zillow is getting out of the iBuying business and will shut down its Zillow Offers division, resulting in a 25% reduction in its staff.
In its quarterly earnings report on Tuesday, the company said it will see a total write-down of more than $540 million as a result of its exit from the business, which buys homes and resells them. As a result of shutting down Zillow Offers, the company said it will be cutting some 2,000 jobs. Last month, the company said it was halting new purchases of homes because supply chain disruptions and the labor shortage were causing it to get backlogged on the homes it was renovating and preparing for sale. However, the company said on Tuesday that the $304 million inventory write down it recorded in the third quarter from its Homes segment, which includes Zillow Offers, was because it bought homes during the last quarter for prices higher than it believes it can sell them.
"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," said Rich Barton, Zillow's co-founder and CEO.
Since Zillow Offers launched in 2018, real estate markets have experienced major upheaval, including a pandemic, a temporary freezing of the housing market, followed by a supply and demand imbalance that led to an unprecedented rise in home prices.
While the big price swings up were welcome, the swings down would expose Zillow to too much risk, Barton and Allen Parker, the chief financial officer, wrote in the company's shareholder letter. "Our aim was to become a market maker, not a market risk taker."
Zillow Offers gave homeowners a fair market cash offer on their home. The idea was to grow that service and offer it to a wider audience. But because of the price forecasting volatility, the company had to reconsider what the business would look like when it had grown larger, a size it needed to become in order to be consistently profitable, Barton and Parker wrote.
"We have determined this large scale would require too much equity capital, create too much volatility in our earnings and balance sheet, and ultimately result in far lower return on equity than we imagined," they wrote.
The competition in the market amid other iBuyers meant that most proposals Zillow Offers made to homeowners were not taken. Only 10% of offers made were taken. Plus, the services were available only in a handful of cities.
"While we built and learned a tremendous amount operating Zillow Offers, it served only a small portion of our customers," Barton said. "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."
Zillow ended the quarter with 9,790 homes in inventory and 8,172 homes under contract that it will still purchase, which it will sell over the next six months or so. During that time, the workforce reductions will take place.
"The most difficult part of this decision is that it will impact many of our colleagues," Barton said.
Zillow is not the largest iBuyer in the country, but it is a distant second to Opendoor. Zillow Offers launched in 2018 in Phoenix and Las Vegas and most recently operated in 25 cities across the country.
The company had been on a buying binge.
Zillow bought 3,805 homes in the second quarter and sold 2,086. This past quarter, Zillow Offers bought 9,680 homes. That pushed the business of closing on homes and preparing them for sale to a breaking point, however. As a result, Zillow only sold 3,032 homes in the third quarter, which was below expectations and the average gross profit per home sold was a loss of $80,771.
