5 INVESTIGATES: Online ‘instant buyers’ backing out of Twin Cities real estate deals
Online real estate companies such as Zillow are backing out of "hassle free" contracts due to concerns about COVID-19, leaving homeowners in a scramble to find new buyers right as the economy takes a major hit, 5 INVESTIGATES has learned.
Zillow won’t say how many purchase agreements it has canceled as part of its Zillow Offers program, which allows homeowners to close quickly on instant, all-cash deals without having to navigate the more traditional and lengthy real estate process.
However, financial statements reviewed by 5 INVESTIGATES show the company was under contract to buy homes worth a combined $163.4 million in 2019. Minneapolis-St. Paul is one of 24 housing markets where Zillow Offers was operating in the U.S.
"I simply wanted to get a transaction done as quickly as I could," said Scott Stenzel, of Minneapolis.
Stenzel signed a contract to sell his condo to Zillow Offers in late February so he would have cash to close on a new home this month.
"I thought they were a little short on what the price per square footage was, but you’re doing it for the convenience," Stenzel said.
But Stenzel’s plans were suddenly upended on March 24 when he got an email from Zillow Offers with a cancellation notice in red.
"The email said, ‘Sorry, we’re canceling all offers in response to COVID-19,’" Stenzel said. "I’m a little analytical, being an accountant by trade, so I quickly went out to see how many other people this impacts."
Stenzel is not alone.
Other homeowners and realtors contacted 5 INVESTIGATES about purchase agreements canceled by online homebuyer Opendoor.
Realtor Nicole Skaro said Opendoor canceled a contract with one of her clients in mid-March, right as the virus was starting to take hold in Minnesota.
"We had just signed it and we had sent it back," Skaro said. "Then we just got a blanket email from Opendoor saying, ‘We are no longer purchasing anything else. All purchase agreements are now considered void.’"
She acknowledged that contracts sometimes "fall through," but said the scale of these cancellations by instant buyers, also known as iBuyers, threatens to have a domino effect across the market.
"That canceling is very different than someone losing a job or financing not being able to go through," Skaro said. "These big iBuyers have basically just halted the market … and left all of these [sellers] in limbo."
In a blog post, Opendoor CEO Eric Wu said the company is still honoring contracts where "contingencies have been released," meaning inspections, appraisals and other conditions of the sale are already complete.
One cancellation email obtained by 5 INVESTIGATES also gave the customer an option to extend closing to July 1 or later.
Zillow is offering customers $5,000 or a no-fee listing through a local realtor, which is more than what the contract required. However, breaking the contract allows the company to unload potential inventory in a suddenly volatile housing market and shifts the burden of finding a buyer back to the homeowner, according to real estate experts.
"If the market suddenly gets dislocated underneath them … then [iBuyers] could get killed by the cost of carrying all of these unsold properties much longer than they might have anticipated," said Jacob Sagi, a professor of finance and real estate at the University of North Carolina Kenan-Flagler Business School. "That’s a big risk for them."
Sagi said the "iBuyer" business model has relatively low margins and is based on moving a lot of homes quickly, which could become more difficult during a pandemic.
"They’re not doing this as a nonprofit organization. They’re doing this because they can make money by buying quickly at say, a 5% to 10% discount, and then sell within one to three months," Sagi said.
Health and Safety
Statements from both Zillow and Opendoor said the threat to the safety of customers and employees posed by COVID-19 was the key factor in their decision to "pause" homebuying and cancel some contracts.
"This is not a decision made lightly, and was solely driven by COVID-19 health concerns and resulting market uncertainty," said Zillow spokesperson Viet Shelton.
But the company is still actively trying to sell nearly 40 Zillow-owned properties around the Twin Cities, including some just listed in the last few days, according to real estate listings.
"If they’re concerned about health and safety, I wouldn’t think that they would continue with the same transactions that they’re going through with me," Stenzel said.
Stenzel ultimately accepted the offer of $5,000 from Zillow because the only other option was to list his condo with the company’s local partner, Kris Lindahl Real Estate.
Stenzel said that would have defeated the purpose of him signing a contract with an iBuyer like Zillow.
"Even if Kris Lindahl brought a buyer on Day 1 of this, can that buyer close in two weeks when my other closing date was? Probably not," said Stenzel, who fortunately had the closing on his new home pushed back to give him more time to sell his current property.
In a statement emailed to 5 INVESTIGATES, Lindahl wrote, "We understand that this situation is creating frustration and inconvenience for some local home sellers who wanted to use the program. We stand ready to help those people as best we can."
Lindahl confirmed he has also paused his own local "Guaranteed Offer Program," which is similar to other iBuyers’ programs.
Zillow released the following statement:
"We are incredibly sorry for the inconvenience and disruption people may experience as a result of our decision to pause home buying through Zillow Offers. This is not a decision made lightly, and was solely driven by COVID-19 health concerns and resulting market uncertainty. In addition to providing added financial support to help each seller, we are also doing our best to support our buyers in contract who can no longer purchase their homes from Zillow. These are unprecedented times and we are committed to re-engaging customers through Zillow Offers as soon as it is viable to do so."
Kris Lindahl released the following statement:
"Our client made a difficult decision to pause their home buying program due to COVID-19. We understand that this situation is creating frustration and inconvenience for some local home sellers who wanted to use the program. We stand ready to help those people as best we can. We have offered to help them sell their homes in the more traditional manner, as our client has offered to provide additional financial assistance to the homeowner either directly or by paying for their listing fee. These are unprecedented times, and we are committed to doing all we can to help those affected sell their home quickly."