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Zillow Group Inc. shareholders sued company leaders Wednesday alleging they hid the risk associated with its iBuying business, Zillow Offers, that folded at the end of the year.
The shareholder lawsuit claims the company lost more than $1.2 billion on its program. The lead plaintiff, Michael Blake Randoph, alleges the company made “materially false and misleading statements,” regarding Zillow Offers.
Essentially the company, according to the complaint, “was sacrificing money it had available for renovations in order to buy up more inventory which caused down the line issues with contractors.”
The result was that contractors could no longer be profitable and began declining jobs.
"Zillow's inventory kept growing and contractors did not complete projects on time or agreed to less projects and this caused houses to sit in inventory longer," the complaint states.
“Without enough contractors to complete renovations, Zillow’s increasing volume of homes were idle and by July the Company had built up a substantial backlog of homes that needed to be renovated. This renovation inventory backlog impacted Zillow’s ability to quickly sell its homes, thereby drastically increasing its costs,” the complaint states.
In October 2021, Zillow announced a moratorium on new contracts in the Zillow Offers division and by November announced that Zillow Offers lost close to $400 million. By the second quarter of 2021, Zillow Offers made up roughly 60% of the company's annual revenues, according to the complaint.
In February 2022, the company reported additional losses amounting to more than $880 million in the Zillow Offers division.
In June, National Mortgage Professional Magazine's cover story on the health of the iBuying segment reported, "As of early May, the Seattle-based online real estate marketplace had just 100 homes not currently under contract to sell remaining on its books, after selling nearly 9,000 homes in the first quarter of 2022. That rapid selloff helped the company post $4.3 billion in revenue in the quarter, up 20% from $1.29 billion a year earlier."
The complaint seeks unspecified damages.
"We are aware of the lawsuit filed recently and are currently reviewing it. As a general practice, we do not discuss pending litigation," a Zillow spokesperson said Thursday.
It’s not the first lawsuit the company faced this year over its Zillow Offers program.
Another lawsuit filed in the same U.S. District Court makes similar claims.
In that case, Zillow’s attorneys argued that the company made it clear from the beginning of Zillow Offers in 2018 that the program was inherently risky and that, with the onset of the global pandemic in 2020, risk became even greater with the unforeseen and unprecedented volatility in home values.
Still, the lawyers argued, Zillow officials consistently disclosed the challenges, inherent price risks, the difficulty to accurately price homes, and the shortage of labor and materials for needed improvements to homes the company had purchased.
Shareholders who filed the motion Wednesday disagree.
The plaintiffs claim Zillow CEO Richard Barton “should have known that Zillow Offers was creating significant losses for the Company. He either did not investigate and knew or failed to investigate the damages Zillow Offers caused the Company.”