iBuyer bonds attracting Wall Street capital

Zillow raised $450M from bond backed by unsold homes

Richard Barton, CEO of Zillow (zillowgroup.com, iStock)
Richard Barton, CEO of Zillow (zillowgroup.com, iStock)

The increasing commodification of residential real estate is leading iBuyers — led by Zillow — to Wall Street.

Last month, the company raised $450 million from a bond backed by homes it planned to flip — in other words, homes that Zillow purchased, but hadn’t yet sold. The borrowing facility was modeled after how car dealerships finance floor models.

The offering, which was led by Credit Suisse Group AG, was oversubscribed, leading Zillow to sell an additional $700 million in bonds, according to Bloomberg.

Zillow moved into the iBuying sphere in 2018. Users of the company’s platform can choose to sell their home to Zillow for a “Zestimate,” derived from the company’s algorithm for determining a home’s likely sale price. Zillow then has the option of renovating the home to increase its value before flipping it to a buyer.

In addition to the recent Credit Suisse bond, Zillow also has $500 million separate credit facilities from each of Credit Suisse, Goldman Sachs and Citigroup.

Zillow isn’t alone in capitalizing on Wall Street’s interest in the housing market. Competitor Opendoor was in talks for a $2 billion revolving credit facility last month.

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iBuying still represents only a tiny fraction of overall home sales. During the second quarter, the four biggest companies in the sector purchased just about 15,000 homes, accounting for only 1 percent of all home purchases nationally.

But with Wall Street’s financial backing, that could soon change . Zillow aims to start acquiring 60,000 homes a year by 2024. Offerpad, another competitor, plans to beat that figure with 70,000 home purchases a year. Opendoor hopes to account for 4 percent of all home sales across 100 different markets.

The biggest threat to the iBuyers is a potential hit to the housing market. That appeared to be in the cards when the pandemic began, but a flight to the suburbs led instead to a massive boom in the market for single-family homes.

If the market does take a big hit, however, the financial sector’s exposure could prove to be problematic, especially if iBuying companies continue to grow as planned.

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[Bloomberg] — Holden Walter-Warner