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.
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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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Great information Ryan. I’m more interested in what Zillow is doing now that they recently purchased a house two doors down from me for far more than any comparable sale in the area. The owners were going to sell with an agent and the offer they received from Zillow was far above what they would have listed their house for. The agent said they should take it and I agree since I know there are no comparable sales to support the price. Also, the owners told me how easy it was, all they had to do was move out within the grace period and Zillow even helped them with their new purchase and mortgage. The house has been vacant for about one month and I’m interested to see if it becomes a rental or gets flipped by Zillow. If they can make money off that deal and others like it, they are going to shake up the real estate market like Amazon did to retail.
Thanks Gary. I suspect if they bought above market value that it’s going to be a struggle to make money. I have yet to see them rent homes, but I’ll keep my ears open. It seems like they are employing this buying strategy sometimes to gain market share. The numbers truly don’t work on paper at all for profit for a typical flipper who has to really think about acquisition vs profit. So maybe this is about trying to gain share? Of course this is the problem with having millions upon millions of dollars at your disposal. You can basically do something unnatural to gain position in the marketplace. So it’s really a flex of power we’re seeing.
Another thought…Zillow may be paying in excess of market value on select properties to establish new comparables in the market so that they can then sell their other holdings in the area at a higher price… Thank you for always giving us something to think about, Ryan!
What a deviously brilliant approach. A good example of some of the dangers of a big iBuyer industry. Unnatural market drivers, unfair advantages.
It is quite an advantage to have a war chest of millions upon millions of dollars. It’s essentially unnatural because nobody can compete with that much money.
Thank you. That could be the case if they are buying more on MLS. If these are private acquisitions then it’s not like buyers are tied to thinking that price was reasonable. And appraisers are not going to use the private price as a benchmark for value either. I have heard this sentiment though, especially in a recent viral video on TikTok. I’d like to see if it’s truly playing out. It would be damning if it was actually happening as market manipulation is a serious thing.
But let’s remember a closed sale doesn’t establish a new value for the neighborhood as one sale doesn’t make or break a market. Appraisers have to essentially weigh each comp and sometimes we give more or less weight to something because maybe it sold for too much or too little. In short, we have to understand the story of each comp to understand the story of value in the neighborhood.
If these purchases that Zillow are making and that are above market value are within the new home buyer market/price range this could keep new buyers out of the market. They will not be able to compete with Zillow who has deep pockets.
If buying on MLS it does complicate things for buyers. There is no mistaking that.
I would say if they own many properties in the area they are looking to force the market value up by buying a few homes for way over market so when they go to sell properties they will appraise at the higher value. Sounds like a bit of manipulation of the market to me.. JMO from what I see.
Thanks Mark. This is something to keep watching. Keep me posted if you see anything interesting.
I think it’s about gaining market share too. Their difference is covered by buyers agents purchasing monthly leads. Some pay several thousand dollars a month for leads! Those agents are paying their bills!
Thanks Michelle. Yeah, huge money for these leads. I wonder if the public realizes the leads Zillow sells to agents.
Although iBuyers are only successful at purchasing 6.3% of the market share, I think a major point lost here is considering all of the offers they submit that aren’t accepted. The buyers have to be that much stronger, knowing they are competing with all cash offers. I’m sure the majority of the offers by iBuyers are denied, but if they didn’t exist, wouldn’t it be that much easier for the individual to buy?
It’s tough to say. I haven’t run any stats on how many properties iBuyers are purchasing off MLS, so it would be an assumption on my part to speak too much into that. Local agents, what are you seeing in the trenches? Are you getting many offers from iBuyers on your listings?
Let’s remember iBuyers are trying to get the public to sell homes directly to them and then flip these homes. All the radio ads say something like, “Sell us your home directly in the click of a button” or something to that effect. So in a situation like this properties off MLS aren’t technically being purchased in competition with other buyers. However, if these properties are acquired and then spruced up by the iBuyer before getting listed on MLS, one might argue the price could end up being higher for the consumer due to the updating. So I think it’s a fair critique to ask if the consumer is actually paying more since this property got flipped.
If iBuyers are buying lots of properties directly off MLS though, then that’s an issue as then they are directly competing with consumers, which doesn’t help buyers at all. I don’t have definitive stats to give much of a conclusion, but it would be a big issue if the bulk of what they were buying was indeed off MLS. I may have to run stats on that eventually. As I stated though with Invitation Homes, that fund is directly competing with consumers.
On a side note, while speaking of cash, there has been an increase in cash purchases over the past two quarters especially, though it’s not a dramatic level of cash like it was in 2012 and 2013 (roughly 30% of the entire market). I’ll push out September stats next week, but in August about 16% of sales were all cash in the region. One year ago that number was closer to 11% (which was probably a little light to be honest as some buyers were just getting back into the market after stalling during the beginning of the pandemic). In short, is the extra cash iBuyer money making the difference? It’s hard to say without more analysis, but it’s something I’ve been watching and talking about.
One clarification regarding what 6.4% means. iBuyers have a 6.4% share of all listings and pendings right now (not all recent sales). In other words, out of all the listings and pending contracts on the market right now iBuyers in the Sacramento region have 6.4% of them. Being that there are more sales each month than listings, it would be a bigger deal if they had 6.4% of all sales. From a data standpoint I’d like to track how many properties iBuyers have purchased overall, but it gets tricky since they’re buying so many off MLS. It’s an incredibly tedious stat to track and I don’t have the bandwidth for that.
I’ve been wondering if iBuyers will ultimately need to focus on communities with lower transfer taxes, as having to pay these both on the acquisition and future sale will crimp their margins considerably.
Do you have a mix of communities with differing rates of transfer taxes in your dataset, and have you seen any indication of this?
Hi Derek. Thanks for your thoughts. I suppose most communities locally would be subject to similar taxes, so this would essentially be a data point or issue that is baked into all the acquisitions. I do wonder what their criteria is for investing though and I think it would be telling to see which markets these companies are active in throughout the country.
Hi Ryan- Since IBuyers (Zillow, OpenDoor, Ect.) are emerging and purchasing properties that are essentially “Off Market” at what seems to be above market value often, are these purchases being considered in an appraisal report? As these “sales” are not seen or recorded on the MLS and only tax records. They are only posted to the MLS when they “flip” them for sale on the open market? Has this affect appraisal reports or is there no impact?
Hi Owen. That is such a great question. In short, the answer is NO. Appraisers have to report a previous purchase within recent years per USPAP standards (appraisal standards), but that previous purchase may not mean anything for value (especially if the owner overpaid or underpaid). Appraisers typically only use comps on MLS also. It is very rare to use a private sale as a comp. It can technically be done, but there’s a slim chance. I mean, why use a private comp if there are 20 in the neighborhood that listed on MLS?
In a situation like this it would be a huge leap for an appraiser to use any iBuyer acquisition in my mind because we literally don’t know anything about the transaction (credits for repairs, concessions to the seller, etc…). So it would be a blind comparison and therefore a dangerous data point to use without knowing the details.
Here is a post about using private sales as comps. https://sacramentoappraisalblog.com/2013/01/24/can-appraisers-use-private-sales-as-comps/
I may write about this issue more because this question keeps coming up.
In the event there was a short fall in an appraisal, and there was a comparable purchased by an IBuyer that would support the subject properties contract price- would you (or any appraiser) take that comparable into a “reconsideration” proposal?
Next question- have you seen any evidence on these IBuyers purchasing homes in neighborhoods where they already have listing(s) that has been sitting 60+ days at above market value to try and create a “buzz” in the neighborhood and trick the consumer into over paying? Essentially trying to artificially inflate the market? This was an interesting point one of my colleagues had a theory about, although i have seen no statistical evidence, more situational.
Hi Owen. I would look at any data point for consideration, but I may or may not end up using that sale as a comp. Appraisers have to understand the story of each sale rather than accepting something just because it closed. Sometimes stuff sells for way too much (or too little) and appraisers end up not using a sale for that reason. If this was a private iBuyer sale, I wouldn’t personally consider it because there are a ton of sales on MLS for me to look at where I can verify the details and talk to agents involved in the transaction. I would look at it though if it was a public MLS sale as I want to consider all data. But if the buyer paid too much that would mean something to me. Just because it closed at a certain level does not mean it’s a reflection of value. This is similar to the Blackstone days in 2012 and 2013 where this private equity fund was paying too much at times (technically they were using Invitation Homes to buy, so it wasn’t directly Blackstone doing the purchasing). I had to do the same thing then where I would weigh comps and give more or less weight depending on whether they sold at a reasonable level. Or even more recent there were times this spring where some sales were so far above everything else and I called them outliers more than indicators of value. In short, it’s not any different with the iBuyer model as we have to weight all comparable data. But if iBuyers get into a habit of overpaying I will definitely be really careful if using any of their sales. I would likely feel much better about their resale stuff instead of their acquisitions because the resales have likely been vetted by the market.
Regarding your second question I have not studied that.
Doesn’t seem to be good news for individuals, aka average Joe American. One of the ways individuals can build wealth is through owning real estate. Often times it’s the only way for some people. With Tech & Wall Street entering the market, it prices out the “little guy” and exacerbates the gap between the haves & have nots. Do you think these companies are satisfied with 6% market share? I doubt it. What does their market share look like in 6 months? Next year? Or 3-5 years from now? It’s a complex issue but in my opinion, large companies with endless cash is not good for the market. After all, they’re called “single family homes” not “single large corporation homes”. lol. Lastly, prior to mortgage meltdown of 2008, I believe banks & Wall Street couldn’t own single family homes (only commercial). Anyway, not sure on that….can someone clarify?
Thank you Ron. This is a big deal. We want to see more individuals own homes rather than corporations and Wall Street milk real estate for value. That’s my take anyway. I’m concerned about the future, though I understand the traditional model changing. Nothing stays the same. But as the public we ought to be concerned and pay attention when big companies start targeting residential real estate.
Its price manipulation.. and if appraisers dont catch the prior over-inflated non-market sale, they think its a real price and have(fake) support for another inflated and wrong sale price.
BTW-those pressures in the over-inflated urban markets have created false and temporary wealth which is then carried to places with much less cost where an all-cash over-market purchase happens over and over creating a falsely true over-inflated market.
Its a circular fail.
When a market has historically been 0% growth over MLS history and then in the span of 2 months(march 2020) goes to 1%/month increases that are ramping up even still.
a 270k sale 369 days ago has now entered into contract at 330k with 100% irrefutable proof of value in the 310k range and zero relevant sales over 311k and all the listings are in contract at 330-360k
Be careful, be very, very careful….
Thanks Mark. I appreciate your take. I guess my only thing is the private acquisition price isn’t likely to mean much to appraisers. Hopefully colleagues won’t be giving automatic weight. We’ll see.
I had a client offer $545,000 (plus a $20k appraisal gap, as-is, etc) on a home listed at $525,000 in North Natomas. We felt like we even offered over what the market would be as the comps put it closer to list price.
Zillow came in at $571,000. There are still no comps to support this price. Who knows maybe if the market keeps going up they’ll eventually make money on it and sell it. I’ve also heard the idea that they’re purchasing one or two homes at way over market to justify raising the price on other homes they’re selling and push the market up. But as it stands they’d need to sell it for (guessing) closer to $600k to break even and it’s just not there at the moment.
Thank you Alex. This is a concern. If they are buying privately then they can lose money all day long on their acquisitions, but if iBuyers are overpaying on publicly listed properties than they are directly competing with buyers. In my mind Zillow has tended to get a pass because people love the website. Will buyers hit a point where they begin to say something? We’ll see.
Could this also have anything to do with the new zoning in residential areas? Maybe they are planning on tearing them down and building apartments in the middle of our neighborhoods?! Filling them with low income housing?
Thanks Ashley. That’s a great question. I don’t think that’s the case here as iBuyers seem to do bare-bones flips. I have yet to see something purchased that needed a substantial remodel – not to mention a teardown.
As always, great information Ryan. Thanks for all you do.
Thank you sincerely Rick.
Ryan, is there a way for you to run a report on what percentage of the list to sales price that the Zillow and Open Door listings are selling for? It appears to me that they have more than the average amount of price reductions, giving the public the sense that the market is declining when they see prices falling, when in fact they’re just over-priced to begin with.
Hi Carol. It would be really tedious. I don’t have the bandwidth to track their listings like that. Also, it would only be meaningful data if we compared it to other brokerages and maybe county or regional stats too. So it gets complicated to do a deep dive into this.
Backing up, one of the problems with the iBuyer model is there isn’t a sense of urgency to sell quickly because profit is less of an issue. A normal flipper feels pressure due to holding costs and the need to see profit, but when you have a war chest of greenbacks it’s not really much of a concern. It’s hard to say if this is the issue with properties sitting of course.
I have seen more investor activity in the Birmingham, AL market recently. It is amazing the rents these companies are charging. It would be much more affordable for renters to buy even in this increasing market. I do see some i-Buyer activity in my area but not as much as yours. Maybe their profits are not as high in the Birmingham area.
Thanks Tom. I’ll be curious to see if they end up targeting your area more. I do wonder what it is about some areas compared to others.
As a first time homebuyer this stuff makes me so mad. As if securing housing wasn’t difficult enough already. I wish we had a real conversation in this country about housing being a basic human right, not a market for rich corporations and individuals to exploit.
Thank you Conrad. It seems like this has been flying under the radar and maybe the public won’t even care, but in my mind it’s not something to sweep under the rug. Is this a good thing? This is a viable question the public needs to ask. And for guys like you, I get the outrage because this really doesn’t help. Hang in there.
I don’t think companies or corporations should be able to own single family homes at all. Homeowners should be people and families, not Wall Street or tech companies or Zillow or Redfin. Corporate ownership is bad for the public.
Thank you Steve. I’ve heard that once or twice before. I hope to see this topic permeate public conversation a bit more. It’s worth critiquing for certain.
Thanks for the stats!
In the current market, it does come off as a bit predatory since inventory is so low.
Ultimately, If done right and ethically/fairly, I think its great and exactly what the real estate market needs to catch up with the times and shake up the ridiculous realtor/middlemen racket.
Ease of selling/buying combined with less hands in the pot of a real estate transaction is a good thing. We’ll see how far it goes though, I doubt the NAR is going anywhere any time soon, unfortunately.
Thanks M M. I hear what you are saying, but these companies are basically becoming the middle person, right?
Good information Ryan- Thanks. BVP
Thank you Bruce.
I’m in Pinellas County FL, population approx. 950,000. I just checked the property appraiser list out of curiosity. iBuyer owns 77 properties; Zillow owns 130; and Blackrock owns two. Most are SF homes; a few are condos. None listed for Redfin. I didn’t do any analysis, other than to glance through where they’re buying and at some purchase prices, and it looks like they’re buying to rent, not flip. We have a massive shortage of homes for rent here because purchase prices have literally doubled at the mid-lower end of the market, where the affordable rentals tend to be – although sales seem to be slowing down a little. On this scale of investment, it doesn’t seem like a massive “invasion” yet. People who can’t afford to or who hesitate to buy in this ridiculous market do need places to live, and I guess as an owner who doesn’t plan to sell and who’s considering a cash-out refinance the increase in values helps me for comp purposes. I think it will be interesting to see what happens when all the moratoriums end.
Thank you Amy. It’s really interesting hearing what others are seeing. I wonder if Opendoor owns in your market also. I have yet to see any iBuyer purchasing to rent, but I’m open ears if that’s the trend. I hear you on being cautious about “invasion” language, though in my area we’re seeing exponential growth lately. I’ve typically been reporting about 200-250 properties owned, so it’s wild to see what I reported in my post at 690. For any onlookers, I checked this morning and the number is 723.