Phoenix Provides Us A Glimpse Into Future Of Housing (#GotBitcoin?)
High-tech flippers such as Zillow are using algorithms to reshape the housing market. Phoenix Provides Us A Glimpse Into Future Of Housing (#GotBitcoin?)
Armed with loads of cash and the latest in machine learning, investors are reshaping the $26 trillion market for U.S. residential real estate, starting in Phoenix, the petri dish for America’s housing experiments.
At the edge of the city’s stucco sprawl, a beige, three-bedroom house with a gravel yard sold last month for $240,000. The seller, Opendoor Labs Inc., paid $215,000 for the house in January, replaced carpet and repainted, and put it back on the market.
A computer told the company what to offer and how much to ask. There was no need to schedule a showing with a real-estate agent. Prospective buyers of Opendoor homes can download an app to unlock the door.
Residential real estate has long been a fragmented industry. Renting, buying and selling a house generally means dealing with an assortment of local real-estate agents and local landlords, and working with the schedules of everyone involved.
Now companies such as Opendoor, among San Francisco’s flushest startups, aim to bring Wall Street-style efficiencies and Silicon Valley software to the housing business.
The house in Tolleson is one of several thousand around the city that Opendoor and two competitors—listings giant Zillow Group Inc. and Offerpad Inc.—have bought since 2014 in an attempt to perfect programmatic house flipping. Last year, they bought nearly 5,000 houses in the metro area, roughly one in every 20 existing homes sold. They’re after real-estate transaction fees and anything they can make on reselling the property. Margins are low, so volumes must be high.
They’re treading the path worn by another group of deep-pocketed investors after the foreclosure crisis: Wall Street firms that snap up suburban houses and turn them into rentals. The high-tech flippers often follow rental companies into neighborhoods, in the hope it gives them buyers of last resort should the housing market sour.
A couple of blocks from Opendoor’s sale in Tolleson is the first house that Blackstone Group LP bought in 2012 on its way to creating Invitation Homes Inc., the country’s largest single-family landlord. The three-bedroom house rents for about $1,200 a month. More than 40 of the subdivision’s 520 houses are owned by either Invitation or three of its rivals, according to tax records.
Computer-driven home flippers have bought thousands of homes in Phoenix.
Big investors now own more than 22,000 rental houses in metro Phoenix, and deploy house-hunting algorithms sophisticated enough to spot a sunny kitchen in a good school district faster than a for-sale sign can be pounded into the yard.
The promise for consumers in all this is less hassle finding a place to live. Invitation’s prospective tenants and potential buyers of Opendoor’s homes can usually pop in for a visit on their own and apply or bid online.
Sellers can request a bid by filling out a form and uploading some pictures, then get an offer. They can schedule their move without having to work around a human buyer’s needs, and don’t have to worry about a buyer getting a mortgage.
Since Opendoor, Offerpad and Zillow spiff up the houses themselves before putting them back on the market, sellers don’t need to fix drippy faucets or try to appeal to buyers’ tastes.
Consumers might also find that a few big players could gain an outsize influence over prices and the upper hand in buying in the most desirable neighborhoods. In Phoenix, the housing market cooled in 2013 when rental-home investors pulled back. Around the time the flippers revved up a year later, home prices resumed their rise. A prospective buyer who needs a mortgage can have a hard time competing against a big investor making an all-cash offer on a house.
For the flippers, human middlemen are involved—Zillow sends in a person to inspect a home before it completes a purchase, and the three companies work with brokers, giving them a cut of transaction fees. However, these operations could eventually take a chunk of work from sales agents, appraisers, mortgage brokers and title companies.
They may also professionalize other jobs where regular paychecks are rare. Offerpad, which tends to embark on more involved renovations than its rivals, has home-rehab specialists like those seen on HGTV and tradespeople such as painters on its full-time payroll.
Still, should house prices decline in a down market, the high-tech flippers could run into trouble with creditors and be forced to dump their inventory at a loss.
Arizona’s capital is an ideal proving ground. It’s one of the country’s fastest-growing metro areas. The houses are relatively inexpensive and tend to be newly built and fairly homogenous, which aids the algorithmic appraisals that guide big landlords and house-flipping firms alike.
The Phoenix Story
Residential real-estate investors have been attracted to the Arizona capital by the abundance of new, relatively inexpensive houses that change hands frequently.
Meanwhile, Arizona law welcomes risk-takers. Borrowers can walk away without recourse, amplifying busts. Mortgage lenders can repossess in as few as 120 days after missed payments without involving the courts. In March, Arizona’s governor signed a law that cuts red tape and fees for so-called proptech businesses, which could range from companies trying to transform how houses change hands to those that design high-tech home features.
Bulk buying could prove prohibitively expensive elsewhere in cities like New York and Boston. Houses around the Great Lakes can vary dramatically in vintage and design and might flummox pricing algorithms.
Big rental investors have already moved beyond Phoenix, amassing more than 300,000 rentals around the country, including in Atlanta and Dallas. Facing a shortage of houses in select markets, some big rental-home companies are cutting deals with home builders to construct new dwellings just for them.
Opendoor, now in 23 cities, is planning to launch in 27 more by 2020. Zillow aims to purchase 5,000 houses a month around the country and generate revenue at a rate of $20 billion annually within five years, applying the lessons it learned in Arizona.
“It’s the dawn of e-commerce for real estate,” said Zillow Chief Executive Rich Barton. “Phoenix is ground zero.”
Wall Street investors arrived around seven years ago, when investment firms began to scoop up foreclosures at rock-bottom prices after the housing crash, looking to turn them into rentals.
Phoenix was one of the first places where prices fell. Just a few years earlier, developers had been holding lotteries to winnow buyers for yet-to-be-built tract homes. By 2011, a glut of foreclosed homes sent prices down nearly 60% from their precrisis peak, on average. Smugglers moved into houses in sparsely populated subdivisions so that they could stash kidnapping victims from across the border without worrying about the neighbors.
Wall Street firms sent buyers to auctions with suitcases of cash. Blackstone, the world’s largest real-estate investor, teamed up with a group of locals who had been investing in trailer parks before the crash.
In April 2012, the newly formed Invitation Homes paid $100,700 at auction for its first house—the $1,200 rental in Tolleson.
Invitation now has more than 80,000 houses in 17 markets, including 7,600 in Phoenix, and is valued at more than $24 billion, including debt that is backed by its houses.
Self-storage magnate B. Wayne Hughes launched his own house hunt in Phoenix around the same time Invitation did, eventually merging with a local competitor to give his American Homes 4 Rent about 3,100 houses in the valley.
By 2014, Eric Wu, a San Francisco tech entrepreneur who helped pay his way through college in Arizona by buying and renting houses, chose his hometown to test whether it was possible to use computers to buy and sell homes.
Mr. Wu named his digital home dealership Opendoor. Investors include Invitation founders as well as the home-rental giant itself. Opendoor’s first home was located near a worm farm on Phoenix’s southern outskirts. The owner, who had paid $117,500 two years earlier, accepted Opendoor’s $165,000 offer.
Opendoor spruced up the property and put it back on the market for $200,000. It accepted $193,000 a few weeks later, a gain of $28,000, not including taxes and rehab expenses, which it doesn’t disclose.
When a homeowner requests an offer from Opendoor, its algorithms start with the typical data used by real-estate agents everywhere: square footage and comparable sales. They also incorporate more idiosyncratic factors that can affect a home’s value, such as the proximity of golf courses, overhead power lines and noisy intersections.
Opendoor pays cash, minus its fee, which ranges from 6% to 13%, depending in part on how long it expects to have to hold the home before finding another buyer. The company bought more than 3,100 houses around Phoenix last year, according to an analysis of public sales data by Mike DelPrete, who leads the real-estate technology program at the University of Colorado, Boulder.
Investors have put $1.3 billion into Opendoor, valuing the company at $3.8 billion.
As Opendoor was getting off the ground, Brian Bair had a similar idea. He had moved to Phoenix in 2005 after selling his family’s talent agency, seeking sunshine and proximity to his Arizona land investments. He got a real-estate license when the market turned, hoping to make a new career out of the crash.
He helped rental companies, including Invitation, acquire foreclosed homes and advised sellers to spend money on granite countertops and stainless steel appliances to boost their selling prices. Some suggested he buy their houses and do it himself. He saw an opportunity and started Offerpad in 2015 with one of the founders of Invitation Homes.
Like Opendoor, Offerpad uses electronic locks and home-pricing algorithms, but spends more time and money renovating the houses it buys. The company, also a big venture-capital bet, buys homes around 13 metro areas, though its biggest market remains Phoenix, where it says it bought 1,215 houses last year.
Opendoor and Offerpad have proved to be a source of inventory for the big landlords. Around 10% of the thousands of homes sold by the two companies in 2018 went to big rental investors, according to real-estate information firm Attom Data Solutions.
Listings giant Zillow came to Phoenix last spring to test its own computer-driven flipping strategy.
The Seattle company, with more than 180 million monthly visitors to its websites and apps, makes around two-thirds of its revenue selling ads and customer leads to real-estate agents. In May 2018, Zillow bought its first house, a four-bedroom ranch in a southeast suburb, for $410,000.
After a renovation, Zillow listed it 11 days later for $425,000—and ended up selling it for $403,000, around 2% less than it paid.
Zillow has kept at it, training its computer models and refining its strategy. It bought about 400 houses in Phoenix in 2018 and another 348 in the first three months of 2019, according to Mr. DelPrete.
Ultimately, Zillow aims to integrate its instant-buying program with a call-center mortgage lender it bought last year and reorient it to make loans online. The idea is for an individual to be able to sell a home, shop for a new one and get a loan to buy it all from Zillow’s digital platforms.
Sam Miller, president-elect of the 10,000-member Phoenix Association of Realtors, said that the emergence of the computer-driven house flippers is just the latest challenge agents face in the area. When prices were soaring during the boom years, many opted to sell homes without Realtors. During the crash, banks doled out listings for repossessed homes to a select few agents. Now agents are losing listings from sellers who are willing to take a lower price for their house than they might get on the open market in exchange for ease.
“Zillow and Opendoor offer tremendous conveniences, but they come at a cost,” Mr. Miller said. “I say bring them on.”
Christine Abbott was perusing properties on Zillow in March when a notification popped up asking if she wanted to sell the company her home.
In fact, she had been wanting to sell her condominium in a Scottsdale golf resort ever since her work as a private investigator took her to Las Vegas. She had already requested offers from Opendoor and Offerpad, but rejected them for being too low.
Zillow made an offer about a day and a half after she uploaded photos of her home and answered a representative’s follow-up questions. At $319,000, it was tens of thousands of dollars higher than the previous offers. She accepted, completed the sale within two weeks and relocated to Nevada.
Ms. Abbott was glad to avoid the hassles of keeping her house show-ready. “Moving is one of the biggest stressors in life,” she said. “If you can do something to save the aggravation, you might as well.”
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