Here is what we told shareholders and employees about our decision to wind down Zillow Offers, our iBuying operations

This afternoon we announced financial results for the third quarter and, most notably, our decision to wind down our Zillow Offers operations, which will, unfortunately, involve a reduction in our workforce of approximately 25% over the next few quarters.? This decision was not taken lightly, especially considering the hard work and commitment from the Zillow Offers team.? But, ultimately, we determined that further scaling up Zillow Offers is too risky, too volatile to our earnings and operations, too low of a return on equity opportunity, and too narrow in its ability to serve our customers.? A tough, but necessary determination.??

Before getting into the results for the quarter, I’d like to explain our logic.

As you’ve heard numerous times from me on these calls, our vision is to help people unlock life’s next chapter.? We are uniquely well-positioned to deliver on this vision given our audience, our brand, and our profitable and growing core business.? In service of this vision, we are innovating on products and services that allow us to evolve from a search-and-find company to one that is directly helping our customers transact and move.? We call this vision Zillow 2.0, and it firmly remains our vision today.

We’ve made many investments towards Zillow 2.0, one of the biggest being Zillow Offers as a way to provide a compelling product offering for home sellers.? When we decided to take a big swing on Zillow Offers three and a half years ago, our aim was to become a market maker, not a market risk-taker, and this was underpinned by the need to forecast the price of homes accurately, 3 to 6 months into the future.? We used historical data and countless simulations to test this belief.? We set unit economics targets that required us to stay within +/- 200 basis points of breakeven, holding ourselves accountable to these levels publicly with you all.?

Yet, in our short tenure operating Zillow Offers, we’ve experienced a series of extraordinary events: a global pandemic, a temporary freezing of the housing market, and then a supply-demand imbalance that led to a rise in home prices at a rate that was without precedent.? We have been unable to accurately forecast future home prices at different times in both directions by much more than we modeled as possible, resulting in large fluctuations in Zillow Offers unit economics.??

Put simply, our observed error rate has been far more volatile than we ever expected possible and makes us look far more like leveraged housing traders than the market makers we set out to be.? We could blame this outsized volatility on exogenous, black swan events, tweak our models based on what we have learned, and press on.? But based on our experience to date, it would be naive to assume unpredictable price forecasting and disruption events will not happen in the future.???

Because of the home price forecasting volatility, we have also had to reconsider what the business would look like at a larger scale.? We have offered sellers a fair market price from the start, but have also been clear that the business only becomes consistently profitable at scale.? With the price forecasting volatility we’ve observed and now must expect in the future, we have determined that this scale would require too much equity capital, create too much volatility in our earnings and balance sheet, and ultimately result in a far lower return on equity than we imagined.???

We have also experienced significant capacity and demand planning challenges, exacerbated by an admittedly difficult labor and supply chain environment. The combination of these factors has caused a meaningful backup in our processing of homes in the ZO pipeline, which we announced two weeks ago.? We judge future significant volume volatility to be a tough impediment to ramp a scaled operation, and any interruptions in the supply chain like we’ve recently experienced will result in increased holding times, further increasing our exposure to volatility and lowering our return on equity.

A final factor in this wind-down decision is that to date, we have been able to serve only a limited number of customers.? We have been able to convert only about 10% of the serious sellers who ask for a Zillow Offer, and we have tended to disappoint the roughly 90% who didn’t sell to us.? Given our hard-earned position at the top of the seller funnel with 220 million-plus average monthly unique users and the popularity of the Zestimate, we believe that there are better, broader, less risky, more brand-aligned ways of enabling all of our customers who want to move.?

So, these are the essential components of our wind-down logic: Our home price forecasting accuracy was far more volatile than we planned for and was further exacerbated by unpredictable black swan-type events.? And that volatility contributed to operational volatility and cash flow and balance sheet volatility that is beyond the tolerance level that we are comfortable with moving forward.? Lastly, we believe this is an opportunity to re-focus and more broadly address a wider audience of customers with more asset-light solutions.

And now, we start the “what’s next” conversation from a position of strength because of how the core business has performed.?As we move forward, we remain focused on the same key areas, all with the end goal of helping turn dreamers into movers.?

First and foremost, we are going to continue to create engaging experiences that attract people to our apps and sites in droves on a daily basis.? Most prominently, we believe our ability to continually improve the Zestimate to be fundamental and foundational to our top of funnel, audience, and brand advantage.??

As those that dream with us start to shop with us, we will continue to evolve our capabilities to make our shopping experience more digital and less friction-filled.? Now that ShowingTime is officially part of Zillow Group, we go to work on solving another pain point for home shoppers and agents; the cumbersome process of scheduling a tour.? The touring opportunity is spiritually similar to the opportunity we pursued with our Connections program back in 2018.? Removing friction and streamlining communication between home shoppers and agents was one of our first steps toward a better and more integrated home shopping experience.? We expect ShowingTime will help us enable another.?

Coupled with a frictionless shopping experience must be capable partners, internal operators, and seamless tools and technology to service our customers.? For our Premier Agent business, that means continuing to work with high performing partners that convert our high-intent shoppers into movers.? For Zillow Home Loans and Zillow Closing Services, that means continuing to enable integration on our moving platform.? Zillow 360 is an example of the potential golden path for our customers - a seamless move through shopping, connecting, selling, buying, financing, and closing.? A single place for all of a customer’s moving needs.??

The change necessitated by today’s announcement is the evolution of how we will help a customer sell her current home.? Before today, the selling option was overly-focused on Zillow Offers and was able to serve only a small number of our available customer set.? Going forward we will have the ability to plug in multiple, more scalable solutions to offer better customer choice.? Instead of a sole focus on solving the seller’s pain point by purchasing from her ourselves as the primary through Zillow Offers, we will expand our view and explore a marketplace of selling solutions that give her certainty and convenience, all while addressing the broader opportunity.? In solving for her move, however, we plan to focus on solutions that are asset- and capital-light for Zillow.? We can still offer choice, simplicity, speed, and convenience.? We will be open-minded about our exploration into providing these “sell” solutions ourselves and/or through partners.? Both are interesting.? And rather than having to buy her home to help her sell, we are now simply going to help her sell.?

We are confident our current and future technology platform and tools will enable us to deliver an increasingly integrated, digital, and seamless experience via our own services and through partners.? We continue to be in a competitively advantageous position due to our audience, our brand, and our healthy and profitable core business. We see opportunity in using our learnings from Zillow Offers, our tools, and our capabilities to broaden our seller focus beyond only iBuying.? Further, we look forward to using these same tools and services to increase conversion and attach rate in our large home buyer funnel.? For perspective... Zillow, overall, still only participates in a mid-single-digit market share of transactions today despite being used by almost every shopper, dreamer, renter, finance-er, and mover in the country.? The opportunity continues to be very large to drive growth with higher conversion and to increase the depth, number, and integration of the services we offer our customers.

Before I close and hand it over to Allen, I’d like you all to know how personal this is for me.? I am founder and first money into Zillow 16 years ago and am the largest individual shareholder.? I distinctly remember brainstorming to come up with the name of the company with my co-founder, Lloyd, and then buying Zillow.com for $8.95 (!) on GoDaddy all those years ago.? It weighs heavily on me that our strategic decision to wind down the Zillow Offers operation after 3.5 years involves having to let about 25% of our great colleagues go over the coming several quarters. I’m sorry for how difficult and disruptive this will be.? I am grateful to them.? They have worked hard and will be missed.? And we are committed to providing a smooth transition for those affected.??

The decision was tough, but absolutely necessary given the capital risk and volatility that is now obviously inherent to the Zillow Offers iBuying business.? After careful assessment and volatile earnings, instead of doubling down on a single, capital constrained, risk-heavy solution, we will focus on the broader problem -- helping people move.? And we continue the mission of having solutions that can be accessed by everyone moving, not just a narrow set of folks who have to negotiate with us as the primary buyer, leaving most unsatisfied when we can’t come to terms.??

We are lucky to have a strong and growing core marketplace business from which to invest moving forward.??

We are lucky to have a courageous team, who have helped us on our journey, and a strong culture of innovation that encourages taking big swings, but also is clear-eyed when we miss.??

We are lucky to have a deep untapped well of opportunity for innovation in our massive user base, partner network, and trusted brand.??

And, finally, as a shareholder, I am lucky to have fellow investors who will appreciate both the necessity and the opportunity in this decision.??

---

This blog is adapted from my remarks to Zillow shareholders on November 2, 2021. For more, visit Zillow Investor Relations.

And for more details regarding Zillow Group’s results for Q3 2021, check out our Shareholder Letter.

Forward-Looking Statements: This blog post contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that involve risks and uncertainties, including, without limitation, statements regarding the future performance and operation of our business, disruptions in operations and relationships with employees and third-parties due to the wind-down of Zillow Offers, the expected amount and timing of charges, write-downs and cash expenditures and expected wind-down plans of Zillow Offers operations, our access to and ability to finance the purchase of homes through Zillow Offers, the current and future health and stability of the residential housing market and economy and our expectations regarding future shifts in behavior by consumers and employees. Differences in Zillow Group’s actual results from those described in these forward-looking statements may result from actions taken by Zillow Group as well as from risks and uncertainties beyond Zillow Group’s control. For more information about potential factors that could affect Zillow Group's business and financial results, please review the "Risk Factors" described in Zillow Group's Annual Report on Form 10-K for the year ended December 31, 2020 and in Zillow Group’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021 filed with the Securities and Exchange Commission, or SEC, and in Zillow Group's other filings with the SEC.