India 2.8b 4bchaudharybloomberg: Sources: Zillow is pitching institutional investors on the sale of 7K homes for ~$2.8B to recover from buying too many, which it blames on its bidding algorithm
In yet another move in what has been a tumultuous year for Zillow, the company is now asking potential buyers of its forthcoming institutional sale to pay $35 million over and above what they would normally pay in order to help it recoup losses.
We’re told investors have been drawn to the deal, known as Stagecoach, because of Zillow’s ability to sell homes at a significant premium to its asking price. In addition, Zillow’s new approach to selling homes would benefit from the backing of some big-name institutional investors such as Fidelity Investments and BlackRock.
But as we previously wrote, the process still has some big hurdles that could ultimately prevent Zillow from raising $2.8 billion for Stagecoach. The biggest one is whether a buyer would agree to pay the roughly $35 million premium.
Sources said Zillow is conducting due diligence on the deal with Fidelity and BlackRock, which are expected to make their final decision by the end of June. Fidelity and BlackRock both declined to comment.
But investors will only be signing on if they are convinced the deal would make sense for their portfolios. That’s because buying up homes to flip them is a risky endeavor that could ultimately send home prices spinning out of control. If they agree to the $35 million premium, those buyers will make money only if Zillow can sell the houses at a higher price than it had paid for them.
As we’ve written before, Zillow loses money on every sale. Every home has a price tag that includes the commission from the broker and any other fees. So every time Zillow sells a house, it has to spend more than it gets in order to make up for the losses on selling.
In an effort to make up for those losses, Zillow has been aggressively buying and selling homes over the past year and a half. But now the company says it has bought too many homes, and that its algorithms are to blame.
“We’re in an active discussion with investors on how we can remedy the oversupply of homes,” said a person familiar with Stagecoach. “The prices at which our business historically sold homes were much lower than the prices at which we would sell them today due to a range of factors including growing supply, reduced inventory and increased transactions. We’ve come to the point where we need to take action.”
The company has been selling homes on a “market-by-market basis,” and it’s in the process of asking its buyers to pay higher prices for homes due in part to the fact that Zillow is paying more than it costs for those properties.
The company has been talking with about 80 institutional investors about Stagecoach, which is aimed at raising $2.8 billion. Zillow has said the deal will be bigger than any other real estate investment in the country.
However, Zillow has only reserved $178 million for Stagecoach, which means it will have to take on a huge amount of debt to cover the gap. The company said Stagecoach would use a “conventional approach,” although some sources we’ve spoken with say that could mean Zillow would issue bonds for the transaction.
Zillow declined to comment on Stagecoach or its debt situation.
What’s more, Zillow has already raised $3.3 billion this year, with offers of $2 billion coming in only recently. The company has said it will use the remaining money to pay down debt and continue focusing on its core business while also growing its international business.
In a regulatory filing last week, Zillow disclosed that it had borrowed $1.9 billion from general partners and other investors to buy back stock and pay down debt earlier this year.
