The collapse of Zillow Group Inc.'s home flipping business underscores the close ties between technology-driven real estate companies and Wall Street landlords looking for rental homes.
Zillow has been selling homes to prominent institutional landlords in the past few weeks, including rental companies tied to Cerberus Capital Management, KKR & Co., and Tricon Residential, which Blackstone Inc. has among its largest shareholders.
Now the Seattle-based real estate giant is pursuing bigger deals as it works to unload around 18,000 homes as its so-called iBuying store closes. The company agreed this week to sell 2,000 properties to Pretium, a New York investment firm that is the second largest US single-family home rental company with more than 70,000 homes.
Zillow is not alone. Wall Street landlords looking for property in the inventory-starved pandemic housing market have also tapped iBuying competitors Opendoor Technologies Inc. and Offerpad Solutions Inc. for purchases. According to an analysis by Bloomberg, the three companies sold more than 20% of their homes to investors this year.
The Zillow app on a mobile phone arranged in Hastings on Hudson, New York, USA on Sunday, November 7th, 2021 will reduce its workforce by 25%. Photographer: Tiffany Hagler-Geard / Bloomberg
Tiffany Hagler-Geard / Bloomberg
"The bigger that number gets, the worse I feel," said Mike DelPrete, a real estate technology strategist and fellow at the University of Colorado Boulder. “I understand there are business considerations. It makes sense for Zillow to tear down thousands of houses at once. But that's more than just business, it's living. "
Zillow has been circulating a list of 9,000 properties to potential buyers in the past few days, though that number is expected to fluctuate, according to people familiar with the selling efforts who asked not to be named as the matter is private. Some investors are drawing offers for the entire portfolio, said one of the people.
According to a release from analysts at Berenberg Capital Markets, the homes that Zillow has agreed to sell to Pretium have reached a price of nearly $ 750 million.
Representatives from Zillow and Pretium declined to comment on the transaction.
“We intend to sell our remaining inventory – which represents less than three-tenths of 1% of all US homes sold this year – the same way we have always done: by selling to all types of buyers, including individuals , Families and individual investors, institutional investors and nonprofits, ”Zillo said in a statement.
The iBuyer model emerged in 2014 when Chief Executive Officer Eric Wu, venture capitalist Keith Rabois and others founded Opendoor to improve the notoriously complex process of selling property. The company used pricing algorithms to bid on real estate, performed light repairs on the homes it acquired, and brought them back to market.
As they matured, buying thousands of homes every month, the iBuyers allowed Wall Street firms to buy properties before they went public, leaving landlords ahead of regular buyers waiting for inventory to be listed.
Bloomberg searched tens of thousands of Attom Data Solutions real estate records to find homes the top three iBuyers sold to corporations or legal entities that year. There were more than 5,800 properties on that list, most of which were acquired by companies affiliated with institutional landlords.
Opendoor, the largest iBuyer, has sold around 3,400 homes to these buyers this year, which the analysis suggests accounts for more than a quarter of the company's sales. At Offerpad it was 21% of sales; at Zillow it was 19%, not counting the Pretium transaction.
Opendoor declined to comment. Offerpad typically sells 10-20% of its home to single-family homeowners, although it "goes up and down based on buying trends," a representative said in an email.
The number of homes bought by iBuyers will increase as both groups seek to accelerate growth. It is also likely to attract stronger scrutiny. Politicians on both sides of the aisle peek at Wall Street's role in housing. IBuyers were also scrutinized. In September, a TikTok video created by a Las Vegas real estate agent alleging that the companies were manipulating property prices went viral.
This week, Democratic Senators Tina Smith, Sherrod Brown, and Jack Reed sent a letter to Zillow's chairman, Rich Barton, referring to a Nov. 1 Bloomberg News story. Lawmakers asked for information about how many homes its company sold to the Wall Street company and its plans to sell its remaining properties.
A Zillow spokesman said the company is in close contact with the committee and is working to provide information on how its iBuying business is running.
A representative from Pretium mentioned in the letter said in a statement that the company "provides a high quality living experience through consistent, reliable and attentive service in our well-kept and affordable homes."
These questions have a new urgency as rising property prices deter many potential first-time buyers from the property market.
Buyers argue that selling to investors allows them to serve more customers, gain economies of scale, and pass better prices on to home sellers. For single-family landlords, working with technology companies offers the opportunity to increase supply and meet the rampant demand that is driving up rents.
"There's a demand for rental homes and not enough of them," said David Howard, executive director of the National Rental Home Council, a trade group. "Whatever companies can do to bring more supply online, I think that's a good thing for rental apartments and it's absolutely good for tenants."