Wall Street is using firms like Zillow to eat up starter homes

Elijah Nouvelage/Photographer: Elijah Nouvelage/B

Zillow Group Inc. spent last year aggressively expanding a home-flipping operation designed to make the $2 trillion U.S. real estate market better for consumers, until a bad bet on home prices pushed the company to pull the plug.

As it shuts down the operation, Zillow’s efforts to sell off its inventory of thousands of homes has highlighted a little-noticed truth about the business, called iBuying. The tech industry’s attempts to simplify the process of selling a house depend on flipping properties to some of the biggest names in global finance.

A Bloomberg News analysis of more than 100,000 property records shows that Zillow and the two other biggest iBuyers, Opendoor Technologies Inc. and Offerpad Solutions Inc., are selling thousands of homes to landlords backed by KKR & Co., Cerberus Capital Management, Blackstone Inc., and other large institutions. In many cases, those properties are never even listed, further squeezing average buyers out of competitive housing markets.

Two out of 10 homes flipped by the iBuyers last year wound up with investors and other entities, and the rate is double that in some Sun Belt metro areas, where the companies are most active. What’s more, in some of those markets, the flips are happening at a higher rate in communities of color.

The transactions raise questions about the role the iBuyers are playing in a housing market starved of affordable properties, both for rent and purchase. A diverse range of U.S. political voices, from the Biden Administration to the conservative television host Tucker Carlson, have blamed institutional landlords for crowding out regular families. Populist angst over the role investors play in housing has also expanded from Shenzhen to Seoul and Stockholm to Berlin.

“It just doesn’t feel right,” said Mike DelPrete, a scholar-in-residence at the University of Colorado Boulder, who studies iBuyers. “These companies go around saying, ‘We’re going to help mom and pop and inject liquidity into the market.’ They don’t say, ‘We’re going to suck up houses from the ordinary market and sell them to Wall Street.’”

Tech Spin

Home flipping is an old business, and investors who buy houses cheaply and fix them up can play an important role in the market by improving outdated properties. The iBuyers brought a tech-powered spin to the idea. Instead of hunting for deeply discounted homes, they use algorithms to buy near the market price, trying to capture a small profit on a large number of transactions.

The business model has resonated with customers during the pandemic, allowing property owners to sell without hosting an open house or waiting for the buyer’s mortgage to get approved. The three largest iBuyers acquired more than 27,000 homes in the third quarter of 2021, nearly twice as many as they bought in the previous three-month period. At the end of September, the companies owned more than $10 billion worth of real estate.

Acquiring homes is only one part of the iBuyers’ business; they also need to offload what they purchase. Big landlords transact quickly and buy repeatedly, helping the tech companies save money and gain scale. They’re also flush with cash, having raised more than $30 billion to acquire and develop rental houses since the beginning of the pandemic. And they tend to focus on the same moderately priced, Sun Belt suburbs where iBuyers are most active.

As Zillow neared its Nov. 2 decision to get out of the business in the face of mounting losses, it marketed thousands of homes to institutional landlords, starting a process that has helped the company wind down the business.

Zillow spokesman Viet Shelton said that the company's remaining inventory represents a tiny fraction of U.S. homes sold annually, and that the company intends to sell houses to a variety of buyers, including families, small investors, institutional landlords and nonprofits. “Leveraging these varied sales channels is common among all iBuyer companies in the space, with the noted exception that Zillow is selling these homes as we exit iBuying, while other iBuyers will continue these sales practices in perpetuity,” he said.

A representative for Offerpad said most homes it sells are purchased by individuals, and that the geography of investor purchases reflects how property funds approach the market. “We have a diverse mix of customers that benefit from the ease and simplicity of our services,” the representative said. “Where investors choose to do business is a function of their strategy.”

Opendoor declined to comment.

While selling to property funds has clear benefits for iBuyers and their customers, it's yet another way some parts of the country are being deprived of affordably priced houses.

Investors accounted for more than 18% of all U.S. home sales in the third quarter, according to research from Redfin Corp., the highest share since at least 2000. Atlanta was one of the most popular markets, with investors buying 32% of homes sold during that period.