Zillow's Surprising iBuying News: What Do Our Experts Think?

Real estate tech company Zillow (ZG -0.69%) (Z -0.46%) recently surprised the market by announcing that it would permanently exit the homebuying business. In this Fool Live video clip, recorded on Nov. 5, Fool.com contributors Matt Frankel, Jason Hall, and Matt DiLallo give a rundown of the news and discuss their thoughts on the unexpected move. 

Matt Frankel: If you haven't heard the news, Zillow surprised investors with their third-quarter earnings report, not necessarily with the numbers, but with the announcement that they are going to kill their iBuying business, which Zillow has been promoting as the future of the business for a couple of years now. It caught everyone off guard.

Zillow, if you remember about two weeks ago, came out with an announcement saying they were pausing iBuying for the rest of the year because of overwhelming demand, and they weren't lying with that. Zillow bought about 3,800 homes in the second-quarter and bought 9,680 homes in the third- quarter, so almost tripling the volume. When they said overwhelming demand, they weren't kidding. They only sold 3,000 or so, of those 9,600 homes. They still own 9,790 homes on their balance sheet. They have another 8,172 under contract to buy that they plan on honoring those deals. Guys, what was your initial reaction when you saw this news?

Jason Hall: Matt, you go first here, they've heard from me a bunch on this one.

Matt DiLallo: I think my reaction was, one, completely shocked, and then two, not surprised at all because I'm not the biggest iBuying bull, and I didn't really see it being a great fit for Zillow. I totally get it from the consumer perspective, and I know we've talked about this a couple of times. As a consumer, somebody has sold a home a couple of times, that is a rough process. To solve that pain point, I'm really excited for that idea. It just didn't sit well for me that Zillow was doing it, because they're more of a marketplace, and so I just saw so many better opportunities with their core business with that.

But then just as how much they've been pushing that slightly, the second-quarter was phenomenal, iBuying was the thing, and then further fall apart that soon just blew me away. I was also surprised at how they communicated with shareholders. It was like experiencing some issues with contractors, and then you get all this other news that actually it was blowing up on them, and then they torpedo there. It's probably one of the biggest debacles that I've seen from a stock that I've owned, so I'm really interested to hear what you guys have to say.

Hall: I'm going to share a chart here. I think the interesting thing about this chart is it tells us not only with the market thinks about it in terms of Zillow, but interestingly enough, by thinking more broadly about instant buying, iBuying as a thing. You see Zillow since the first. The day before it, it announced earnings and made this announcement. It's lost basically a third of its value, but Opendoor is down, Redfin is down, Offerpad's also, and initially they were all down even more.

To me, I think there's a lot of confusion and uncertainty around iBuying as a thing. Where does it fit? Who can do it well? Who can make money? The more I thought about it, because I've had a few days and I've talked a ton about it, and I've talked to a lot of people in the real estate industry about this, and I think on the surface, Matt D, I agree the idea that for a business like Zillow, like the framework, you think about all the things they do well, the high-margin things, the operating leverage things, are all built into their platform to be a platform.

When you're also in the iBuying business, you just turned yourself into a bit of an industrial business. You have to manage the cycles, you have to take on a lot of debt to acquire the house, you have to invest money in the house, you have to source real estate professionals to come in and do repairs and upgrades, and then you've got to turn around and sell it for a few percentage points of a price increase. You're not looking to make this big margin. You can make great operating leverage, you can make great returns on the capital, but it's a low-margin.

It's exactly the opposite of why we love companies like Zscaler and CrowdStrike, and all of these great high-margin tech companies with Zillow's platform is. It can be that really high-margin business. But the thing I keep coming back to, guys, and Matt, I want to hear your thoughts on this, this is a big one for you, is in a bubble, the decision you can see it makes sense, but all of the management execution to get to this point, or lack of execution, or bad decision-making, it just makes you wonder a lot, this is really questionable to me.