Written by Edward Smith
Note: This story was originally published Oct. 22. Zillow has since announced it will end the homebuying arm of its business.
The booming home market has attracted new kinds of buyers from investment firms to tech companies. And while corporate home buying is nothing new, the injection of major capital into the market has homeowner advocacy groups worried about a future already beset by limited inventory and rising prices.
Home-buying strategies differ as widely as the companies involved. For example, online real estate marketplaces such as Zillow and Redfin are moving beyond home-buying tools to becoming property flippers. Other companies see potential in the rental markets.
Blackstone Group, Inc. is the name most associate with major capital and residential real estate markets. Following the Great Recession, Blackstone Group spent $12 billion buying and rehabilitating 30,000 homes in foreclosure.
The investment firm created the real estate investment trust (REIT) company Invitations Homes in 2012, which soon became the largest owner of single-family homes in the country.
By 2019, Blackstone Group had sold the last of its stake in Invitation Homes when it brought the REIT public in 2016.
Back in the saddle
Now, Blackstone Group has reentered the housing market with the $6 billion purchase of Home Partners of America, Inc. and its 17,000-home portfolio.
Real estate economist Ken H. Johnson at Florida Atlantic University says corporations have always been in the marketplace, offering cash for dilapidated homes.
“These concepts have always been here, they’re just being backed by more capital and by more savvy investors, if you will,” Johnson said. “In the grand scheme of things, I believe the involvement of the Zillows and [Blackstone Groups] of the world in residential housing is creating what’s called efficiency in the marketplace.”
Calls made to Blackstone Group were not returned.
Hedge funds can make selling a home easier and lower transaction costs, says Johnson. Larger funds may even provide their own financing options.
Enough to go around?
In a market that has grown at its fastest pace in nearly 14 years, Steve Flach, president-elect of the Fresno Association of Realtors and Realtor with Guarantee Real Estate, says he understands why investment firms are becoming bigger buyers.
But he fears the return of corporate buyers to the market will have a negative impact, decreasing availability and affordability. Homebuyers — especially of the first-time variety — looking to compete have a much harder time against a cash offer.
Rents have also increased as inventory shrinks and this is the potential capital firms see. The larger the role institutional investors play in a market, the greater the competition for homes, which leads to decreased opportunities for homeownership. Ownership is the easiest way to build generational wealth, he added.
Putting a number on corporate home purchases is difficult, says Don Scordino, past president of the Fresno Association of Realtors. Transactions are oftentimes not done on the open market. Major capital firms buy homes in large blocks, as they did when Fundrise LLC purchased 124 homes in Conroe, Texas for $32 million, according to the Wall Street Journal.
Online magazine Slate reported that corporate home purchases made up 15% of all sales in the first quarter of 2021.
This isn’t the first time major buyers have tinkered with supply and demand, Scordino said. Eight years ago, Fannie Mae and Freddie Mac began bulk-purchasing homes, turning them into rentals. While that activity didn’t occur much in the Central Valley, markets such as Phoenix, Las Vegas and Miami were greatly impacted by the volume of homes purchased.
Not for everyone
In a hot market where most homes are receiving dozens of offers, inflating prices far above appraised values, corporate offers are less attractive because they come in lower.
Scordino made an offer for a client on a home for $250,000 as long as the owner was willing to invest $10,000 back into the home for repairs. The seller was hesitant about the offer and received another offer of $180,000 cash on the spot. While a $10,000 investment to make $70,000 more might seem obvious, there are plenty of reasons a seller would take the lower offer. They could be low on options and need a quick buck.
Also getting into homeownership are names associated with the real estate market, but in a different capacity. In the past couple years, online listings companies including Zillow and Redfin have gotten into home buying, though their reach remains limited. This story was originally published Oct. 22. Zillow announced Tuesday that it would permanently end its homebuying business.
A pause for now
On Oct. 18, Zillow announced it would pause home-buying services under its Zillow Offers arm due to supply shortages limiting the ability to import goods to rehabilitate homes they purchased.
Zillow Offers is still only in 25 markets —the nearest being Sacramento, Riverside, Los Angeles metro and San Diego — though expansion for the real estate company is on the horizon, says Matt Kreamer, communications manager for Zillow.
Zillow was created to give homeowners access to what real estate agents have, said Kreamer. Home buying was the next logical step.
Under Zillow Offers, sellers can pick their closing date so they can coordinate the move to their next home without worrying about a lease back or getting a hotel if the two dates don’t line up.
“You don’t have to do anything about that, you just get an offer from us, we come out, we look at the house, we say ‘yes, everything is as you said it was, here’s the offer,’” Kreamer said.
In September, a TikTok video illustrated one content creator’s claims that iBuyers, the term for companies buying and selling homes, were manipulating the market by using big data to buy homes and overpaying for certain homes to establish new “comps” — comparable pricing standards appraisers use to determine the value of a home. The claim was that iBuyers would buy 30 homes at a price and then overpay for one, pushing up the value of the homes they purchased at the lower price.
The video, as well as the ire of Twitter, drew enough attention that RedFin and Zillow came out to defend themselves.
“Intentionally overpaying for homes would be a terrible business model,” a RedFin spokesperson said in an article by Marketwatch.
Kreamer denied the claim about using consumer data to pinpoint markets of interest, saying they don’t solicit offers, but rather, homebuyers come to them. He also said that comps have to be within two miles and that in most cases, outliers are eliminated, not to mention that market share is limited to 1% among the top four iBuying companies.
In line with the market
Kreamer cited a study claiming that the price Zillow offered for a home came in .09% lower on average than the price the homebuyer accepted.
Zillow’s entry into the market doesn’t stop with home buying. The company recently purchased ShowingTime, an app that allows Realtors to virtually show homes to prospective buyers.
The Zillow website said their acquisition of ShowingTime “represents the next step forward in our shared commitment to integrate an improved showing process to benefit our customers, clients and the real estate industry as a whole.”
Scordino said he was a bit leery of the move and what could mean for the spirit of cooperation that agents strive for.
“You always have to worry about the intent of a competitor who has large amounts of cash to buy up suppliers,” he said.