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Here's What I Think Of Zillow's iBuying Exit

By Matthew Frankel, CFP® – Nov 27, 2021 at 6:21AM

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The real estate tech giant recently shocked investors. What should investors make of the news?

Zillow (ZG 2.96%) (Z 3.24%) recently threw investors a curveball by announcing the company's exit from the home buying business. With shares down by 40% since the news broke, it's fair to say investors weren't too happy. In this Fool Live video clip, recorded on Nov. 8, contributor Matt Frankel explains to Industry Focus host Jason Moser what he thinks about Zillow's surprise move. 

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Jason Moser: Last week, Zillow announced that it is getting out of the iBuying business. Now, if this seemed a bit out of nowhere, it kind of was even given the recent headline that they were pressing pause on the initiatives for the remainder of 2021. Chris Hill and I had talked about this on Market Foolery one day and it felt like, well, you understand they want to just get their feet set underneath and then make sure they understand what they're doing and the sign was if they kept that pause button held down for a considerable part of 2022. 

If they kept on stringing that along, then you start wondering, do they really know what they're doing? And then lo and behold, they decided they're getting out of iBuying altogether. It sounded like they're getting out of it basically because it's just not working out, how they thought it would.

But I want to read what you tweeted and let's go from there because you have some strong feelings about this. Honestly, I mean, I understand where you're coming from, but I'm going to read your tweet here. You said "The recent news from Zillow is one thing I've ever been in a company I invested in, terrible execution, poor shareholder communications, and a high level of incompetence, planning to sell my shares very soon and walk away." I don't think you're the only one that feels this way, Matt, but let's dig into this a little bit. I mean, this happened so quickly. Particularly Rich Barton has been thinking about it for a while and now it sounds like it's gone.

Matt Frankel: I'm apparently not the only one who thinks this way because that was my most liked tweet of 2021 so far. Apparently, I'm not the only one who feels that way. People don't really see my salty side very often.

Moser: I love it.

Frankel: It's an old Buffett quote that I tweeted right after that. "Lose money and I will be forgiving. You lose reputation and I will be ruthless." I feel like they lost reputation here with me and that's really the problem. I have a bunch of numbers to go through, but let me tell you why I'm disappointed.

It not just that they're getting out of iBuying. If Zillow is getting out of iBuying, if it wasn't working out, if they weren't doing a good job, I'm fine pulling the plug on a money losing business before things get really bad. That's fine. I even agree with what they said. The business there, it's not working out economically the way they thought it would. They said it's alienating a lot of their customers who are disappointed in the offers they're getting, things to that effect. Fine, whatever. I don't like the misleading communication, number one.

You mentioned that they just said they were taking a pause on iBuying like a week before this came out. That means one of two things. Either this was a knee-jerk reaction to one bad quarter or they already had the decision made when that news came out. One of those has to be true.

Moser: It feels to me like the latter. It really does feel like they had that decision made. I can't believe they went from hitting pause to pulling the plug altogether in the stretch of like a week. It just doesn't add up.

Frankel: Right. It's either incompetence of management or misleading communications, it's one or the other. On that note, you have to take a step back and decide what Zillow's core business is worth because they still have their premier agent business, which is profitable. But my problem with that -- Zillow gets 227 million unique viewers a month. They had 2.8 billion visits to their site in the third quarter. They have the biggest collection of real estate data in the world in terms of residential real estate.

For them to take that, translate it to an iBuying business and have worse economics than their rivals like Opendoor (OPEN 12.99%) and Offerpad (OPAD 3.64%) and Redfin (RDFN 8.37%), who have much better unit economics on the houses they're buying and selling than Zillow. For them not to be able to leverage that data to their advantage, that's the biggest red flag to me. Because they weren't able to take the key advantages they have. They've been developing Zestimate for over a decade now, the way to algorithmically price homes. For them not to be able to have that to the point where it does a better job than their rivals of pricing homes, that is a big red flag for me.

Jason Moser has no position in any of the stocks mentioned. Matthew Frankel, CFP® owns shares of Offerpad Solutions Inc and Zillow Group (C shares). The Motley Fool owns shares of and recommends Opendoor Technologies Inc., Redfin, Zillow Group (A shares), and Zillow Group (C shares). The Motley Fool recommends the following options: short November 2021 $65 puts on Redfin. The Motley Fool has a disclosure policy.

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