Thursday, June 1, 2023

Sources: Zillow is pitching institutional investors on the sale of 7K homes for ~$2.8B to recover from buying too many, which it blames on its bidding algorithm: India 2.8b 4bchaudharybloomberg

India 2.8b 4bchaudharybloomberg: Zillow Inc. has been hiring a number of employees to sell homes to recover from buying too many, which the single-family real estate website blames on its bidding algorithm. The company is pitching institutional investors who are interested in the idea of integrating 7K homes for ~$2.8B in an attempt to not only recover from purchasing too many homes, but also scale for future growth.

Zillow spent ~$135M buying ~23K homes during Q1 2019, almost as many homes that it acquired in the entirety of 2017 (~25K), and over twice as many as in 2018. Zillow’s recent increase in hiring related to the sale of 7K homes is worth noting, as this aligns with the company’s strategy of offering institutional investors a way to purchase 7K homes with a higher degree of liquidity than otherwise possible.

Since acquiring homes to rent out and the market for single-family rentals has tightened, Zillow is looking to scale rental flow by selling homes to institutional investors, who will be responsible for renting them out. The idea is that institutional investors can gain liquidity by flipping or selling 7K homes that Zillow has acquired.

For those who aren’t familiar with this financial asset class, which is already in existence: ownership of these homes would be structured through a privately offered real estate investment trust (REIT) that would own the properties, and investors would have their shares of the REIT. Investors would not be purchasing the homes themselves. This will allow the investor to receive cash flow from rentals, while ensuring that Zillow retains some upside if landlords raise rents or sell properties at a profit.

The 7K homes that are being sold are the result of Zillow’s bid algorithm. The algorithm was designed for two reasons: to ensure that the price paid for a home reflected its true value, and to avoid overpaying for homes with low rents. But, there’s a third purpose that Zillow is referring to when speaking about these houses: “to acquire a larger amount of homes at an accelerated rate to allow for future growth. As we look to grow our portfolio of single family homes in the future, we need to acquire a larger amount at an accelerated rate. This means that our bidding algorithm will buy some homes that are overpriced (i.e., too expensive when compared to the rental income they can generate).”

Many months ago, Zillow implemented some changes to its bidding algorithm. And, there has been a significant change in the number of homes Zillow has bought that it plans to sell to investors.

Zillow has already sold 7K homes to institutional investors like Invitation Homes and Colony American Homes. Meanwhile, the company says it will “be looking at additional opportunities to sell more homes as they become available.