What happened

Shares of real estate technology company Zillow Group (Z 2.82%) (ZG 2.68%) surged 19.3% in October according to data provided by S&P Global Market Intelligence. That was a lonely jump in an otherwise downward trajectory, with the stock down 22% year to date, including a 19% drop so far in November.

So what

Two weeks ago, Zillow said it was suspending its Zillow Offers program, which buys, repairs, and flips homes. It chalked that up to a shrinking labor pool of workers to repair homes. That tanked the stock, but it began to rise by the end of the month, probably in anticipation of the third-quarter earnings report.

The company made the surprise announcement, first reported by Bloomberg, in the third-quarter earnings release yesterday that the program was a blunder, and management is in the process of shutting it down altogether.

A family holding brown boxes in a new home.

Image source: Getty Images.

CEO Rich Barton said, "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." Home segment revenue, which includes the revenue from the Zillow Offers program, came in at $1.2 billion in the third quarter, below the expected $1.45 billion. Part of that came from expected home closings that were pushed into the fourth quarter. The company recognized a write-down of $304 million in inventory due to homes it bought in Q3 that it expects to sell for less than the purchase price, and it's expecting another $240 million to $265 million of losses for homes purchased in the fourth quarter. It's also in the process of cutting out jobs in the program, which will reduce its workforce by 25%.

There was positive news in the report as well. Sales in the internet, media, and technology segment, its core product, increased 16% to $480 million, and premier agent growth increased 20%. Mortgage revenue rose 30%, above estimates.

Now what

Zillow will be going through challenging times as it winds down Zillow Offers. That will remove a huge chunk of sales, but it should eventually emerge as a more efficient company as it focuses on what it does best. Investors may want to tread carefully, but a sinking price could be viewed as an opportunity.