New-Wave Home Flippers Halt Purchases With Market in Turmoil

(Bloomberg) -- Companies that specialize in a new spin on flipping homes are struggling as the coronavirus outbreak batters real estate.

A handful of companies, including Zillow Group Inc. and SoftBank-backed Opendoor, have leveraged big data and mountains of debt to buy and sell houses on a massive scale in recent years -- promising investors they could make money in good times and bad.

Now, they have to prove that thesis. Zillow has stopped purchasing homes in a bid to preserve capital and protect employees, the company said in a statement Monday. That followed similar moves by rivals Opendoor and Redfin Corp., companies that practice a high-tech version of flipping known as iBuying.

“No one can say what a fair price is right now, so we’re not making any instant offers,” Redfin’s Chief Executive Officer Glenn Kelman said in a statement last week.

Zillow, which had focused on online marketing, has spent the better part of two years transforming into a company that generated $1.4 billion in revenue last year buying and selling homes. Now, it’s hoarding cash and trying to sell the 1,860 homes on its books by virtual tour, not to mention preparing to operate in a recession.

Opendoor has roughly three times as much inventory, according to real estate tech strategist Mike DelPrete. That creates a drag on revenue and increases the amount of interest, insurance and property tax expenses the companies incur.

“The iBuyers are sitting on thousands of houses that cost them money every day,” DelPrete said.

Zillow said it is still marketing homes online, though it halted open houses earlier this month. An Opendoor spokesperson said that roughly half of the company’s inventory is under contract.

Quick Shift

For Zillow, the shift away from buying homes came quickly. In an interview on March 13, Barton said the Seattle-based company could operate seamlessly even as employees worked from home, and noted anecdotal evidence of virus-wary homeowners opting to sell to Zillow as a way to avoid home tours.

New challenges await as Zillow and its competitors try to sell down their existing inventories of homes. From the beginning, they have charged sellers higher fees than what traditional real estate agents charge, taking a premium to facilitate fast sales. They’ve also operated during a period when rising prices increased the likelihood that they could sell homes for more than they paid.

Proponents of the business model argued that they could increase fees to compensate for added risk in a volatile housing market, and that quick transactions would be appealing to sellers in a recession.

Now, they’re going to find out.

©2020 Bloomberg L.P.