On Tuesday, a lawsuit filed in Federal Court alleged that Zillow failed to disclose to shareholders that it was struggling to predict accurate prices for its home-flipping business, which led to the company shuttering its operations this month.
For clarification, Zillow is a real estate company that supposedly offers customers “an on-demand experience for selling, buying, renting or financing with transparency.” Meanwhile, Zillow’s “Zillow Offers” business “buys and sells homes directly in dozens of markets across the country, allowing sellers control over their timeline.”
The lawsuit alleges that, throughout the Class Period, defendants made false and misleading statements while also failing to disclose that (1) despite operational improvements, Zillow experienced unpredictability in forecasting home prices for its business, (2) such unpredictability, along with labor and supply shortages, led to a backlog of inventory. (3) As a result, Zillow had to wind down its Zillow Offers business, which would have an adverse impact on its financial results, (4) and consequently, the defendants positive statements about the business, operations, and prospects were materially misleading and lacked a reasonable basis.
The lawsuit was filed on behalf of shareholder Dibakar Barua who alleged that misstatements and omissions by Zillow executives drove up share prices that later plummeted when Zillow had to shut down operations.
On October 18, 2021, Zillow announced that Zillow Offers suspended the signing of new contracts through 2021 and said it will shift focus on its current inventory, citing a “backlog in renovations and operational capacity restraints.” That same day, Zillow claimed “Pausing new contracts will enable us to focus on sellers already under contract with us and our current home inventory.” Due to this news, Zillow’s Class A and Class B share prices fell by more than 9%.
Later, on November 2, 2021, Zillow announced it would continue to wind down Zillow Offers, stating “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.”
Consequently, Zillow’s third quarter financial results included “a write-down of inventory of approximately $304 million within the Homes segment as a result of purchasing homes in Q3 at higher prices than the company’s current estimates of future selling prices.” Moreover, the company expects “an additional $240 million to $265 million of losses to be recognized in Q4 primarily on homes it expects to purchase in Q4.”
The wind-down is expected to take several quarters and will include the reduction of Zillow’ workforce by 25%. After this news was released, Zillow’s Class A share price fell by an additional 23% and Class C share price fell by an additional 25%, further damaging investors.
“Fundamentally, we have been unable to predict future pricing of homes to a level of accuracy that makes this a safe business to be in,” CEO Rich Barton said during an earnings call on November 2.
“We’re aware of the suit that was filed today,” spokesperson Viet Shelton said. “We don’t comment on pending litigation, but we are reviewing the suit.”
