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Mega Landlords Are Snapping Up Zillow Homes Before the Public Can See Them

Updated: Jun 18, 2021

Hot housing market drives alliance with real estate tech firms as landlords flush with cash tap iBuyers to find properties

Wall Street firms scouring the frenzied U.S. housing market are tapping a new source of properties that regular buyers can’t reach.

Cerberus Capital Management and related entities bought more than 200 houses in the first quarter through next-generation home flippers called iBuyers, including 138 from Opendoor Technologies Inc. The pipeline to Wall Street from Silicon Valley often means the homes never hit the open market.

Other single-family landlords, flush with cash to bet on the demand for suburban rentals, are applying the same strategy. Their purchases come as many Americans can’t afford to buy houses — a side effect of the pandemic-driven real estate rush that’s sparked bidding wars for a shortage of available properties.

“At a moment when we have once-in-a-generation low inventory, we have for-profit companies making the decision to withhold houses from the market,” said Mike DelPrete, a real estate tech strategist who follows the iBuyers. “As a society, are we cool with that?”

Cerberus, which manages $53 billion in assets, operates more than 24,000 rentals through a portfolio company called FirstKey Homes. The firm recently borrowed $2.5 billion against a portion of the property portfolio at a fixed rate of 1.99%, according to Kroll Bond Rating Agency.

In addition to the homes it bought from Opendoor in the first quarter, Cerberus purchased 52 from Zillow Group Inc., the listing site that started flipping homes in 2018, and 28 from Offerpad, according to analytics firm PropertyRadar. The data, which was compiled from public records, may not be complete.

“Homes purchased through iBuyers are a minimal 1% of our entire portfolio of homes,” a representative for FirstKey said in a statement.

IBuyers have sprung up in recent years seeking to profit by streamlining the notoriously complex process of selling a home. They use software to estimate values and make rapid offers to homeowners who express interest in selling their properties. When an owner accepts, the iBuyers make light repairs and put the home back on the market, seeking to profit by charging convenience fees.

Read more: Opendoor Faces an Expensive Path to Profitability in Real Estate

Cerberus isn’t the only large landlord turning to the tech companies. Invitation Homes Inc., the largest single-family landlord, tapped iBuyers for more than 5% of the 700 homes it purchased in the first quarter, Chief Executive Officer Dallas Tanner said on a recent conference call. Tricon Residential Inc. and Donald Mullen’s Pretium also bought homes through this emerging channel.

For the iBuyers, selling to Wall Street can offer better economics and a leg up in the race to get bigger. It limits expenses, cutting out commissions to real estate agents, and lets the tech firms move homes quickly and benefit from economies of scale. But in a tight housing market, there’s increasing competition for the entry-level properties sought by first-time buyers and landlords alike.

“We’re in housing shortage, and whatever inventory institutional landlords are gobbling up means there’s less available to first-time homebuyers,” said Lawrence Yun, chief economist at the National Association of Realtors. “In that sense, the investors are an obstacle to the everyday buyer.”

Overall, the homes landlords bought through iBuyers were a tiny fraction of U.S. home sales during the first quarter. But for the tech companies, they add up. At Opendoor, which went public last year through a merger with one of Chamath Palihapitiya’s blank-check companies, entities that bought multiple homes accounted for 21% of the company’s first-quarter sales. For Offerpad, the number was 16%, according to PropertyRadar. For Zillow, it was 9%.

Representatives for Opendoor and Offerpad declined to comment. A representative for Zillow said that the company adjusts its strategies for selling homes to move inventory quickly and reduce the fees it charges sellers.

“These strategies include selling homes to all types of buyers, including individual families, non-profit organizations and investors,” Zillow said in a statement.

Institutional landlords are rushing to buy homes now, as the work-from-anywhere era accelerates the millennial generation’s shift to the suburbs. With backyards and extra space in high demand, investors have been betting that Americans who lack the cash for down payments will gravitate to single-family rentals.

A parade of investors, including JPMorgan Chase & Co.’s asset-management arm, Nuveen Real Estate and Brookfield Asset Management Inc. have committed billions in new capital to single-family rentals since the pandemic began.

Read more: Rent Surges on Single-Family Homes With Landlords Testing Market

But raising money to buy homes is proving easier than finding houses to acquire. In some cases, investors are partnering with homebuilders to develop houses that won’t be ready for tenants for months — or even years.

“The supply of single-family homes remains well short of growing demand,” said Tanner, the Invitation Homes CEO, on the recent conference call. “There is so much capital coming into the space that everything is pretty competitive.”

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