Zillow’s Decision to ‘Wind Down’ Zillow Offers After Q3 Losses Sparks Stock-Drop Class Action

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An investor has filed a proposed class action over two drops in Zillow share prices linked to news that the company would “wind down” its Zillow Offers home-flipping business due to its inability to weather unpredictable market volatility and move hundreds of millions worth of existing inventory bought during the pandemic. 

The 20-page lawsuit alleges broadly that Zillow Group, Inc. and its top officers made materially false and/or misleading statements and failed to disclose crucial adverse information about the online real estate company’s business to investors who bought or otherwise acquired shares between February 10 and November 2, 2021 (the class period). 

Central to the case is Zillow’s disclosure in announcing that it had chosen to wind down Zillow Offers, its direct home-buying and -selling enterprise, due to “unpredictability in forecasting home prices far exceed[ing] what we anticipated.” Zillow also disclosed that “continuing to scale Zillow Offers would result in too much earnings and balance-sheet volatility,” the suit says. Zillow ultimately shared that its Q3 2021 financial results would consequently include a write-down of inventory of roughly $304 million within its home-buying segment, stemming from the company’s purchase of homes in the quarter at prices higher than its current estimates of future selling prices, the lawsuit states. 

When this news broke, prices for Class A shares in Zillow fell 23 percent, closing at $65.86 per share on November 3 on unusually heavy trading volume, according to the complaint. Zillow’s Class C share price dropped 25 percent on the same day, the suit adds. Prior to this, Zillow share prices fell nearly 10 percent on October 18 after the company announced that it would put the signing of new Zillow Offers contracts on hold due to a “backlog in renovations and operational capacity restraints,” the suit relays. 

According to the complaint, Zillow failed to disclose that the company experienced “significant unpredictability” in forecasting Zillow Offers home prices despite operational improvements for that side of the business. Moreover, the suit claims Zillow failed to disclose that the unpredictability, as well as labor and supply shortages, created a backlog of inventory and that the company would likely wind down Zillow Offers, a move that would have a material impact on its financial results. 

“As a result of Defendants’ wrongful acts and omissions, and the precipitous decline in the market value of the Company’s securities, Plaintiff and other Class members have suffered significant losses and damages,” the filing alleges. 

During the class period, the case says, Zillow represented to investors that Zillow Offers continued to “accelerate” amid the pandemic as the company offered customers a “fast, fair, flexible and convenient way to move” in a decidedly seller’s market. Zillow also affirmed that its financial results continued to meet or surpass expectations, offering no hint that it was about to run into an inventory issue in the fall of 2021, the suit relays. 

According to the complaint, the truth began to emerge with Zillow’s October 18 announcement that it would suspend the signing of new Zillow Offers contracts through 2021 to focus on its current inventory backlog. Nearly three weeks later, as it announced its third quarter financial results, Zillow disclosed that it would wind down Zillow Offers over several quarters, as well as reduce Zillow’s workforce by roughly 25 percent, the lawsuit says.

The company said it expected that, in addition to the approximately $304 million inventory write-down, an additional $240 million to $265 million in losses would be recognized in Q4 on homes it expected to buy during that quarter, the complaint continues.

The case, citing a November 2 Wall Street Journal report, states that Zillow once touted Zillow Offers as a venture that could generate $20 billion per year.

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