How Zillow, other companies buy houses around Tampa Bay

There’s a tech race underway to become the Amazon of real estate, where homes can be bought and sold with a few clicks rather than through the traditional, paperwork-intensive process.

Some of that race is playing out in Tampa Bay, where so-called “iBuyers,” short for instant buyers, are buying homes, then quickly reselling them.

Zillow is perhaps the most recognizable name among these national players, which also includes Redfin, Offerpad and Opendoor. All but Redfin buy houses around Tampa Bay, with local homeowners selling 971 houses to iBuyers through the first half of this year, according to a Zillow report. The three companies have bought 2,500 Tampa Bay-area homes combined from 2019 through June 2021, Zillow said.

iBuyers’ pitch to sellers is one of convenience and quick cash: Skip the stressful process of putting your house on the market — which in normal times, can take months to complete — and instead sell for a few thousand dollars less.

The iBuying business model is still relatively new, and both Zillow and Redfin have yet to turn a profit on the venture, according to Nina Schmidt, a finance instructor at the University of South Florida and a licensed real estate broker. The current lightning-fast, ultra-competitive real estate market hasn’t helped, as many sellers have no trouble finding buyers. It has allowed iBuyers to bump up their resales to an average of 9.6 percent higher than the purchase price, according to Zillow’s data for the second quarter.

Despite those gains, the sale price of the flips are not what’s important to the business model. iBuyers typically aim to make their money on the transactions themselves, including fees they charge sellers plus in-house mortgage and title services.

iBuyers often complete minor maintenance, like adding a coat of fresh paint, but generally avoid big projects.

A sampling of Zillow-owned homes for sale in Tampa Bay showed a variety of markups, as well as some listed for less than the company paid.

Zillow bought one home at 2026 11th St. S in St. Petersburg in July for $237,500, records show. It’s now for sale for $7,400 more.

Zillow bought another at 6501 N 12th St. in Tampa in August for $387,700. It’s listed online for nearly $18,000 less.

Zillow announced Monday that it’s hitting pause: The company will not sign any new contracts to buy homes for the rest of the year and will focus only on transactions in process because of an “operational backlog of renovations and closings.”

But if these companies are to be successful, Schmidt said, places like Tampa Bay will be key.

“We have a lot of what they’re looking for: high turnover in the middle range of the market,” she said.

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A TikTok raises questions

While iBuyers have been trying to grow their market share, they recently have had to contend with criticism.

A TikTok video that posed a series of hypotheticals went viral.

“Let’s talk about some what-ifs,” says Sean Gotcher, a real estate agent in Las Vegas in the TikTok. “What if there was a company that everybody used ... to look for houses.”

This billion-dollar company then could use all these home searches to determine a desirable ZIP code and start purchasing in that area, Gotcher said. They buy 30 houses for $300,000 each but for their 31st purchase, they pay $340,000. This practice creates a new “comp,” or a comparable house, used to determine pricing of future sales, he explained.

That inflated price then allows this company to sell all its purchases for a higher amount, Gotcher said. “So when they go to sell these other 30 homes, that extra $40,000 ... just made them $1.2 million,” he said. “Wouldn’t that be weird if a company did that?”

In a housing market with skyrocketing prices and frustratingly tough competition, the video struck a nerve. It has been viewed 3.3 million times.

Gotcher did not name the company, but the description of a popular home searching tool that also acts as an iBuyer matches both Zillow and Redfin. He did not respond to an email requesting an interview.

“Could they manipulate transactions here and there? Is it possible? Absolutely, but why would they?” Schmidt said. “They don’t want to raise prices, they don’t want markets going up because their business model wouldn’t work so well.”

In a statement, Zillow said the video represented “misinformation and falsehoods” and that its iBuying operation is based on buying and selling houses at market rate.

“The business model is designed to generate our profit margins from the convenience fees we charge sellers — typically around 5 percent today,” the statement read. “Because our margins are so thin, it’s critical that we price a home accurately. If we overpay — we’ll lose money on the resale. If we make too low of an offer — homeowners won’t use us.”

Redfin CEO Glenn Kelman wrote in a series of tweets that the company offers every homeowner a choice of cash or a brokered sale using Redfin’s staff of real estate agents. Kelman said his company notifies sellers that they’ll make more money with the latter method.

But even if the claims in the video don’t hold true, Garrett Camfferman, president of the Tampa Tenants Union, said he’s glad to see more people expressing skepticism about big corporations’ role in driving up housing costs.

“It’s something universal. In Tampa Bay, everyone is concerned about housing,” he said. “If it didn’t resonate with people across the U.S., it wouldn’t have gone viral.”

Shooting for rapid growth

Because they rely on algorithms to price someone’s home without seeing it in person, these companies specialize in “cookie-cutter,” middle-class houses with common features, said Tomasz Piskorski, a real estate professor at Columbia University whose research has focused on iBuyers.

“If you have a complicated property, a bigger mansion with a swimming pool and a tennis court ... the algorithm is too crude for that,” he said.

He agreed that the manipulation implied in the viral TikTok is unlikely, citing iBuyers’ small role in the market so far, with only 1 percent of transactions.

But they are a growing segment. According to a May 2019 New York Times story, Zillow bought fewer than 700 homes in 2018 but planned to increase that number to 5,000 per month within three to five years. Opendoor made 11,000 purchases in 2018 and planned to move faster, the Times reported.

Piskorski wasn’t surprised by Zillow’s announcement that it was suspending new contracts, citing the overhead costs associated with trying to scale up a business of buying houses, including ongoing labor constraints. In its announcement, Zillow specifically cited shortages of workers and supplies in the “construction, renovation and closing spaces.”

“They still have to do quick minor fix-ups of the homes, they need someone to showcase the home,” Piskorski said. “For Uber to add additional drivers, it costs them virtually nothing. But iBuyers have to physically acquire homes. It’s still a brick-and-mortar business.”

If iBuyers do crack the secret to success, market manipulation could become possible, Piskorski said, and the companies would likely face regulatory scrutiny.

“If they reach say 20 percent of the national market, the kind of allegations people voice on social media could become worth considering,” he said.

For now, anyone thinking about using an iBuyer should compare all their options, said Lou Brown, a longtime St. Petersburg Realtor with his own firm, to make sure the lower price is worth it in today’s market, where houses routinely sell quickly.

“If the price is anywhere close to right, you’re going to get the activity right now,” he said.

But Mariya Letdin, an associate professor of real estate at Florida State University, said that iBuyers play an important role by giving sellers choices in an area that has historically had a uniform approach. She said companies like Zillow disrupting the way sales are done was the natural next step after they democratized listing information by putting it online.

“The process is inefficient as it is: having showings, hoping someone will have the financials to close like they said they do, and if it falls through ... you have to go back on the market,” she said.

“It’s the most stressful transaction you do in your life, for most folks.”