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Will appraisers use Zillow purchases as comps?

October 18, 2021 By Ryan Lundquist 43 Comments

Let’s talk about Zillow. I’ve been getting a TON of questions every week about what Zillow is doing and whether appraisers can use their purchases as comps.

YouTube Live TONIGHT (10/19/21): Hey, I’m doing a YouTube Live at 6:30pm PST on Jason Walter’s channel. We’ll talk shop for probably 60-90 minutes.

Big news: First off, yesterday news broke that Zillow would be suspending buying anything else until 2022. Based on articles and a few conversations with locals in the know, it sounds like their rapid pace of buying has become backlogged, so they needed to hit the pause button to catch up. In the Sacramento region they own 372 properties right now and they’ve been on a buying spree over the past few months especially. Look, there could be more to this story, but all we have right now is what Zillow says.

Assumptions: I’ve heard some people think Zillow pulling back must mean the top of the market is here. Or maybe this shows the model isn’t working. Or it’s possible other iBuyers would soon follow in backing off. But here’s the thing. These are assumptions and it sounds like Zillow is going to be buying again in about two months. If this is true, it means these assumptions are misplaced. Of course Zillow is very likely losing money, but that may not be the reason they pulled back.

WILL APPRAISERS USE ZILLOW PURCHASES AS COMPS?

Yes and no. It depends. So many people are talking about what appraisers can and can’t do, but there’s so much misinformation. I hope this helps.

NO:

When Zillow buys properties directly from owners these are very likely NOT going to be used as comps. Frankly, appraisers might not even know about these sales since they don’t show up in the MLS where appraisers typically look for comps. But even if an appraiser knew about a few Zillow purchases, here’s the important part. If an appraiser cannot verify the nature of a sale that Zillow bought directly from an owner, then it’s not good appraisal practice to use the sale as a comp. If an appraiser has no clue about condition, quality of upgrades, or any sales concessions, for instance, using a private “comp” would essentially be a blind comparison. So if someone hands me a private Zillow purchase to consider as a comp, I’m going to say, “Thank you, but I don’t know anything about this transaction. But what I do have is 10-15 MLS sales to consider.”

Technically appraisers CAN use non-MLS sales as “comps” in an appraisal report, but only if the sales can be verified with someone principle to the transaction. In other words, the appraiser needs to be able to understand the nature of the transaction from someone like an agent, attorney, title company, buyer or seller. Yet being that Zillow is seemingly buying in suburban markets where the vast bulk of sales happen on MLS, there isn’t really much of a good reason for appraisers to use these private purchases as comps.

YES:

When Zillow buys on MLS, these sales are something an appraiser can consider just the same as any other comp because the details are transparent and it’s likely easy to talk with someone in the transaction. However, just because a property closes at a certain level doesn’t mean appraisers are going to automatically use the sale without consideration of whether it represents the market or not. In other words, if Zillow paid too much for a property they bought, it doesn’t all of a sudden represent the market or set a new price level for the neighborhood. As an example, a property sold for about $50,000 higher than any other similar sale. This sale was a clear outlier and it closed so high because the buyer likely bid too much out of desperation (Zillow wasn’t the buyer). I still used it as a comp, but I gave it far less weight because it simply sold for too much.

Keep in mind Zillow flips homes and appraisers can use the homes they re-list on MLS also. This is just the same as any other sale and appraisers simply have to weigh each potential comparable.

Is Zillow manipulating the market?

There have been quite a number of accusations about Zillow manipulating the market and I’m not here to defend Zillow, but so far I haven’t seen data to back up the accusations. I’m being careful about flippantly making such a serious accusation, but if anything comes to light I’ll be first to yell from the rooftops.

You may have seen the viral TikTok video below and this guy seems really cool. It’s just having one higher sale doesn’t all of the sudden make the market higher just like one lower sale doesn’t break the market. I get what this guy is saying, but I think we need data to substantiate such a claim.

For what it’s worth, this viral video helped put Zillow under the microscope and that’s a good thing. My observation is tech companies often get a pass from the public, but their activity and motives should absolutely be kept in check.

How many homes do iBuyers own in the region?

In the Sacramento region iBuyers own 747 homes (two weeks ago they owned 690). Zillow owns 372 units, Opendoor owns 350 homes, and Redfin owns 25 units. For reference, two weeks ago Invitation Homes had 77 units (since May) and now they have 91 units.

UPDATE: I should clarify too that my stats for all of these companies are for Sacramento, Placer, Yolo, and El Dorado.

Is Zillow temporarily exiting good news for buyers?

I’ve had a few people ask if Zillow backing off for a couple of months is good for buyers. Well, it’s good in the sense of having one less cash buyer to compete with (for the MLS acquisitions at least). But realistically Zillow’s activity is not a significant chunk of the market, so it’s not like pausing operations is going to change the trajectory of prices or the feel of things in the trenches.

Where does Zillow own homes?

Here is a look at a few neighborhoods. The pins are different colors depending on whether properties are active (green), pending (yellow), purchased and not active yet (red), black (no MLS activity yet), or expired (purple).

Anyway, I hope this was helpful or interesting.

Thanks for being here.

Questions: Anything to add regarding comp selection? What do you think of Zillow exciting the market? Is the iBuyer model a good thing for the public?

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Tech companies & Wall Street targeting residential real estate

October 5, 2021 By Ryan Lundquist 44 Comments

Tech companies and investment funds have their eye on residential housing. I wrote about this a few months ago and wanted to do a follow-up piece. Here are some things on my mind as well as fresh visuals. Any thoughts?

TWO THINGS:

1) iBuyers are on a rampage:

The iBuyer model has been on a buying spree in many parts of the country. They are purchasing to flip and here is a breakdown of their activity in the Sacramento region based on Tax Records (Realist).

Opendoor, Zillow, and Redfin own 690 units in the region.
Opendoor and Zillow each own about 330 properties.
The average price of acquisition was $555,000.
The median price of acquisition was $545,000.
Besides a few outliers they are NOT targeting the luxury price point.
iBuyers represent 6.4% of all listings and pendings right now.
The iBuyer model does not represent 93.6% of the active market.
Acquisitions are spread throughout with half of purchases below the regional median price and half above.

2) Invitation Homes is back:

I reported a few months ago that Invitation Homes is back and since May they’ve purchased 77 units in the Sacramento region. In 2012 and 2013 they bought tens of thousands of units across the country in many markets. At the time they were backed by Blackstone, but these days they are not affiliated with Blackstone.

What is Invitation Homes buying?

They purchased 77 units since May 2021.
They’ve targeted homes typically between $450-550K.
74% of their acquisitions have been under $500K.
They bought 0.5% of all MLS sales since May (half of one percent).
88% of their purchases had an MLS number, which means the bulk of these sales were publicly listed for sale.
Invitation Homes is definitely competing with first-time buyers even though overall the fund doesn’t have a massive footprint in the market.

TAKEAWAYS:

1) Huge rent growth is propelling big funds: Having lofty rent gains in recent years has caught the attention of big investors and is essentially allowing them to play the market these days. It’s wild to think investors can presumably make the numbers work after ten years of price growth.

2) Hype vs Reality: Often the narrative is that investors are dominating the market and buying everything. For instance, there were sensational tales a few months back about Blackrock purchasing way above market value, but I have yet to see any data to back up those claims (I’m open ears if someone has something). Anyway, there is no mistaking growing interest from tech companies and Wall Street within residential real estate and we need to watch what they do. But we also need to keep sensational narratives in check.

3) Profit and Convenience: The iBuyer model is nowhere near a dominant force in the marketplace, but we’ve seen exponential growth over these past three quarters. A dissertation can be written on what these companies are doing, but I want to make a simple point. I often hear about how this model is designed to help make things more efficient for consumers, but let’s not forget these companies are here to infiltrate the existing real estate model to make profit. So in the midst of all the slick advertisements let’s be real about the big focus, which is to make money off consumers.

Thanks for being here.

SHARING POLICY: You can share my stats and visuals above, but please attribute the source. Here are 6 ways to share my content (not copy verbatim).

Questions: Do we want Wall Street and tech companies to own more of the real estate process? Is this a good thing for the public?

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The invasion of institutional investors in the housing market

June 21, 2021 By Ryan Lundquist 29 Comments

A couple weeks ago a viral story came out about a fund called BlackRock who was reported to be buying everything in sight and paying 20-50% above market value. Let’s talk about this as well as other institutional investors right now.

This is a longer post, so scroll topics (or digest slowly).

Market update on Thursday: On June 24th 10-11am I’m doing a big market update for the Sac Assn of Realtors. I can’t wait. Sign up here.

Some things on my mind:

Big news – Invitation Homes is back: Invitation Homes is back to buying homes in the Sacramento market. Over the past month or so they started buying again and they’ve had seven deals close between $410,000 and $495,000. All properties were purchased on MLS for reference. So far this doesn’t look like it will be 2012 again where Invitation Homes purchased thousands of units in a very short period of time, but we’ll see how it shakes out. I’ll be paying close attention, so stay tuned. What I find striking is that institutional investors are even able to make the numbers work after ten years of price growth in the region. This underscores how much rents have increased to facilitate this type of activity. For reference, KCRA shows Invitation Homes is the second largest landlord in Sacramento County behind the City of Sacramento.

If you are in a different market, what are you seeing with Invitation Homes?

How much do institutional investors own? Here’s an image from John Burns Real Estate Consulting via Rick Palacios Jr. See this tweet with additional cities. I know the font is tiny, but in Sacramento about 5% of the market is said to be owned by institutional investors. I honestly have questions about what this 5% figure represents, but I figured it was still worth sharing.

Not Blackstone: By the way, Invitation Homes is not Blackstone. Blackstone sold their interest in Invitation Homes years ago, so it’s not accurate to say Blackstone is currently buying homes in our market.

The skinny on BlackRock: When viral news about BlackRock broke I read this Wall Street Journal piece like many others. This may not be a popular take, but I felt the article was lacking data to support some of the sensational narratives being spun. Look, I’m not a BlackRock fanboy and I’m not glossing over the reality of institutional investors targeting residential real estate in the midst of a housing shortage or some of the horror stories we hear from tenants. I’m just saying I’d like to see data to support if they really are looking to buy everything in sight and pay 20-50% above market value like so many threads have been discussing. And yes, I know BlackRock was involved in the acquisition of an entire brand new neighborhood in Texas from D.R. Horton, though Financial Samurai states this neighborhood was already fully leased as it was built to be rented and was not going to be offered to individual owners. Again, I’m not pro-BlackRock and I could care less if people despise the company. I’m only thinking critically about the narrative and I haven’t seen data to back up some of the ideas. For reference, I haven’t been able to confirm any BlackRock activity thus far in the Sacramento market.

Not easy to track: One of the problems with tracking institutional buyers is they don’t always acquire properties under only one name, so it’s not so easy to gauge their activity. For instance, Zillow has four names they are currently using to buy in the Sacramento market and Invitation Homes has had at least a dozen names they’ve used through the years. As an example, here is a post I wrote in 2013 to show my numbers compared to a few other media publications and everyone had slightly different numbers (at the time I was using Blackstone and Invitation Homes interchangeably too).

The iBuyer Model: The most dominant expression of institutional investors in real estate right now is the iBuyer model (in Sacramento at least). Unlike Invitation Homes, these companies are flipping rather than holding and some of them are attempting to make their money by becoming a one-stop shop for consumers. Here are some stats and a few observations:

FOUR THINGS TO KNOW ABOUT THE iBUYER MODEL:

A) Beyond pre-pandemic levels: When the pandemic started the iBuyer model pretty much paused, which brought criticism because the idea was this model could only exist in an up market. Anyway, after a hiatus these companies ramped up their efforts and have now surpassed pre-pandemic buying levels. Well, technically this is more about Opendoor since Zillow and Redfin weren’t much of a factor as iBuyers before the pandemic.

B) iBuyers have a 1.4% share of the market: iBuyers get a ton of attention, but they only have a 1.4% share of all inventory in the Sacramento region (this includes pendings and listings). In other words, 98.6% of all listings and pendings are the traditional real estate model. In specific terms, among over 5,000 pendings and listings throughout the region iBuyers have 1.4% of that total right now. Granted, it looks like 68% of the properties they own are not on the market yet, but for what is on the market it’s only 1.4% of everything. At some point I’d like to track total volume of iBuyer sales, but that’s likely going to be impossible unless local iBuyers give me their numbers. So for now this is the best I can do.

C) Evolving strategy: Some iBuyers have seemed to increase their price threshold to compete in a market with rapid price increases. See visuals below.

D) Playing it safe: These models tend to focus on standard homes that can be easily flipped, though lately there are a few units hovering around the lower end of luxury prices. Most of what these companies buy is built after 1950, has three or more bedrooms, is located on a 0.25 acres or less, and is below 3,800 sq ft.

What iBuyers own in the Sacramento region:

At some point I’ll likely move away from scatter graphs to help visualize iBuyer purchases, but for now this is what I have.

Region = Sac, Placer, Yolo, El Dorado

CLOSING TRUTHS:

1) A growing trend: Institutional investors have been in the real estate space for years, so this isn’t something new. Yet there is no mistaking a growing focus on residential real estate whereas in the past it was all about multi-units. In short, we are still at the beginning of this trend and it’s to be determined how much it grows in the future and what sort of effect it has on the market.

2) Sifting hype: These companies are not playing a massive role in today’s housing market for now. I know that’s not popular to say, but that’s what stats indicate. I’m not downplaying the importance of watching BlackRock and this certainly doesn’t mean consumers shouldn’t be alarmed to see institutional investors flex deep pockets. This is a huge deal. It’s just not a huge chunk of the market for now.

3) Watch investors and iBuyers closely: We have to watch what happens between investors and iBuyers. For instance, this Bloomberg piece reported an investment fund named Cerberus Capital Management bought a few hundred homes directly from Zillow before the public had the chance to see them. This seemed to fly under the radar. I would think the public would be upset, but maybe everyone just loves Zillow too much to say something? Ultimately how will institutional investors and tech companies leverage their relationships with each other and big banks? We’re often so focused on how companies interact with consumers, but how about with each other?

4) Food for thought for real estate pros: For my real estate friends, I know it can feel stressful to be in the midst of change and to wonder what the future looks like. Believe me, I know this well as an appraiser as my profession especially feels like it’s on the chopping block. My advice? Focus on what you can control, have a vision for the future, realize the VAST bulk of the market has nothing to do with the iBuyer model, become your market’s expert, don’t keep doing the same thing, find ways to be more efficient, and serve like no other. Sorry for the unsolicited advice, but that’s what’s on my heart.

UPDATE: Here is a video Mike Delprete put out about iBuyers. This came out the day after my post. I figured others might like to listen.

Okay, this is getting long.

Thanks for being here.

SHARING POLICY: You can share my stats and visuals above, but please attribute the source. Here are 6 ways to share my content (not copy verbatim).

Questions: What stands out to you most above? What do you think about institutional buyers? I’d love to hear your take.

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Real estate trends to watch in 2020

January 7, 2020 By Ryan Lundquist 27 Comments

What’s the real estate market going to do in 2020? Let’s talk about some of the bigger emerging trends. Scroll quickly or digest slowly. Anything to add?

Class I’m teaching on Jan 16th: I’m doing a big market update at SAR from 9-10:30am. We’ll talk through where the market is at, tips for talking to clients, and ideas for where to focus business. I’d love to see you there. Sign up here.

TRENDS TO WATCH IN 2020:

Affordability: Buyers are struggling to afford higher prices. Despite positive economic news lately the truth is home price growth has outpaced wage growth and rents have also risen substantially. This means many buyers and renters are having a difficult time with higher prices.

Blue is the color of the year: This year the Pantone color of the year is Classic Blue. Does this mean we’ll see more blue? Maybe. Maybe not. In recent years we’ve already been seeing blue in kitchens especially. No matter what, when looking through home magazines there are many vibrant colors instead of just gray and white.

Sliding sales volume: A byproduct of shrinking affordability is a smaller pool of buyers able to handle higher home prices. This is something to watch and even more important than prices in my opinion. Often we fixate on what prices are doing, but the number of sales happening is the best indicator of the temperature of the market. Are buyers putting their foot on the gas or brakes? Show me the number of sales and I’ll let you know.

Addicted to low rates: We’ve had eight years of historically low rates and we’re now feeling the effects. Prices have risen dramatically, people are staying in their homes longer, and the market feels hyper-sensitive to rate changes. Thus what happens with mortgage rates this year will play a huge role in how the market feels and unfolds. Check out this mortgage rate table from Len Kiefer below (or here). Can you see why 2018 felt so dull? I know it seems crazy that buyers would freak over rates just above 4.5%, but that’s where we’re at (and climbing rates lessens affordability).

Ending single family zoning: There’s a movement to do away with single family zoning in order to help create more housing. In 2019 we saw Minneapolis do this by allowing up to three units to be built on a single family lot, and this is definitely something to watch in many markets across the country. By the way, if you own land, could it become more valuable if zoning changed?

Tech company invasion: It almost feels like there’s a tech bubble because so many companies are trying to get a piece of the real estate pie. On one hand some start-ups are going to fail because their algorithms are designed for labs rather than a relationship-centric real estate market. On the other hand some tech companies are poised to gain market share this year. In Sacramento Opendoor looks to have sold about 1% of transactions last year and they currently own 90 homes. I’m guessing Zillow is aiming for 1-2% of market share this year. Will they be successful? I’ll let you know next year… In all of this it’s good to remember the traditional model represents the vast bulk of the housing market despite the massive attention these companies are getting. Yet we can’t ignore this trend because it’s bound to spur the traditional model to become more efficient.

Overpricing will still be an issue: Price growth has clearly slowed, but sellers still think it’s super hot. This is a glaring issue because sellers tend to think they’re going to get ten offers at any price they choose from very desperate buyers longing for their home. It’s like sellers have shown up at the end of a movie and they have no idea what the movie is about (but they think they do). My advice? Price for the dynamics of the current market rather than a hot market from yesteryear.

Buyers grow even pickier: In 2019 there was a greater sense of hesitancy about the market. Lots of buyers felt leery. Am I buying at the top? Am I going to get stuck if the market changes? What does the future hold? These questions aren’t easy to answer of course until the future actually happens (sorry, but it’s true). The reality is uncertainty is bound to cause buyers to become even more discerning about condition, location, paying the right price and waiting for the right house.

Staying put instead of moving: We have a market of homebodies where nobody is moving. Okay, that’s an overstatement. It was reported recently that homeowners are staying put an average of thirteen years compared to just eight years a decade ago. There’s simply less incentive to sell in light of low mortgage rates and higher prices. Why move if you’re sitting pretty? This of course is one reason why we’re not seeing as many listings.

Checking out of California: Despite some residents staying put, this year there will be lots of Californians moving to all the usual places like Texas, Nevada, Arizona, Oregon, Idaho, etc… For the real estate community, I highly suggest you consider who has incentive to move this year. Remember, a California pension goes a long way in a lower-priced state. Check out a deep piece by CalMatters and you can dig around the U.S. Census Bureau site all day to try to find some data that might be insightful for your business. On a related note, let’s keep an eye on areas plagued with rising fire insurance too as that can unfortunately force migration.

More 1031 Exchanges: We’ll likely see more 1031 Exchanges this year as investors move their money. In my experience there are more in an up market than a down market, and we’re still going up, so be ready. I’ve seen quite a few Bay Area investors park their money in Sacramento, and I’ve seen some Sacramento investors move their money to lower-priced areas. That’s the dream, right? Cash out when prices are higher and buy something better elsewhere.

Consolidation in real estate: Having lower sales volume can be painful for both mortgage companies and real estate offices. Thus we’re likely to see some banks continue to lay people off, mortgage companies will join forces, and some real estate brands and brokerages will need to get creative about staying afloat and trimming the fat with less purchases flowing.

Election year hype: “It’s an election year, so it’s going to be a strong year.” That’s the sentiment we often hear in the real estate community, but an election year isn’t the silver bullet to alter the bigger trend the market is already experiencing. I have a deep blog post coming soon about this.

Flipping seminars: There will be no shortage of celebrity flipping seminars this year to teach the “secrets” of getting rich in real estate.

The narrative of Boomers & Millennials: Be on the lookout for Boomers who need to downsize and Millennials trying to get into the market. We’re bound to see lots of generational conversation this year as Boomers age and Millennials “come to age” so to speak to get into the market. One looming issue that’s been getting more press lately is there is an enormous Boomer population whereas GenX was a smaller generation. Thus at some point it makes us wonder who is going to buy the homes of aging Boomers in years to come. This is something to watch more thoroughly over the next decade. And to make a safe prediction, we’re definitely going to keep seeing “Okay, Boomer” references in articles.

Well, that’s what’s on my mind. I could go on and on, especially about things like fire insurance woes, PG&E, Prop 13 reform, rent control, cannabis laws, etc… But at some point I have to stop.

By the way, click to see 2019 market recap images for a few local counties.

I hope this was helpful or interesting.

Questions: What else do you think will be important in 2020? Did I miss something? I’d love to hear your take.

If you liked this post, subscribe by email (or RSS). Thanks for being here.

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