(Bloomberg Markets)—Raad Yousif drives his pickup truck past cactuses and sandstone cliffs, hunting for Phoenix’s best real estate bargains. On this December weekday, he pulls into a subdivision of blocky pueblo-inspired town homes from the 1970s, the bare, dusty landscaping evoking the surrounding desert.
The 31-year-old Iraqi immigrant knows the neighborhood well. He got his start in the city as a janitor at Phoenix Sky Harbor International Airport, just a five-minute drive away. Now his passion is flipping homes. And he’s quite good at it. He figures he made $200,000 buying and selling them in the two-year pandemic-fueled housing boom.
Yousif punches in a code and swings open the door to his most lucrative 2022 flip, a two-bedroom town home in this development. He unloaded it last spring, just as the market was starting to sink. Big institutions from Silicon Valley and Wall Street were still on a buying binge, at times making unbelievable offers sight unseen. In this case a company called Opendoor Technologies Inc. in April paid $265,000—$30,000 above the five other bidders, he says.
Opendoor is now asking $218,000, a $47,000 loss, not including its fees and renovation expenses. But even that asking price is too high, Yousif says. After four price cuts, he smells blood. He’s eager to buy back the home he once owned. “It’s always about the right number,” he says. Opendoor says such losses reflect an unprecedented market decline.
In this slice of the Sonoran Desert, the roles of vulture and carrion have suddenly reversed. First-time buyers and small investors have the upper hand on supposedly sophisticated players that badly misjudged the market. It’s quite a turnabout. More than a decade ago, Arizona was at the center of a foreclosure wave that hit local mortgage borrowers the hardest. Private equity firms swept into Phoenix and other once-hot US markets to buy at pennies on the dollar. This time it’s the so-called smart money getting played.
The pattern is unfolding across the Sun Belt but nowhere more than in the Phoenix area, where institutions represented a bigger share of home purchases last year than in any other major US market, according to real estate data firm SFR Analytics. These companies included a new breed of homebuyer that bought and sold residential properties like securities, figuring they could diversify their holdings by balancing a three-bedroom in the suburbs with a town house in the city.
Harnessing technology to crunch data, Opendoor and others said they could make transactions quickly and nearly pain-free. It all sounded so cool and new. Borrowing a page from Apple’s Steve Jobs, they called themselves iBuyers.
Today, Phoenix illustrates some of the advantages of the old, slow, analog ways. As homes started to trade like initial public offerings, prices became more volatile on the way up—and down.
Laurie Tayrien, a former schoolteacher, and her husband, Rick, love the new market. They just snapped up the deal of a lifetime for a Phoenix three-bedroom built in the 1980s. Surrounded by golf courses, below a mountain vista, it was quite an upgrade from their previous home, in a crime-ridden neighborhood.
In November the Tayriens paid $485,000 for what they call “their forever home.” In June the seller, Opendoor, had paid $646,800. That’s a 25% loss in just five months.
Before they were married, the Tayriens had each suffered through foreclosure proceedings during the 2008 financial crisis, while Wall Street profited. Now it’s their turn. The couple are busy on a $50,000 renovation of their kitchen, where plywood counters wait to be topped in quartz. The Tayriens have the cash in part because of a bungled bet by a big institution. “They rode a wave, and it’s crashing on them,” Laurie says. “It’s a corporation. I don’t feel bad for them.”
Phoenix, Arizona’s capital, ranks among the fastest-growing US real estate markets. The metropolitan area, which includes Chandler, Glendale, Scottsdale, Tempe and Mesa, has 5 million people. It’s quite a sprawl. The city of Phoenix alone covers more than 500 square miles (1,295 square kilometers), an area larger than Los Angeles.
The region has a thriving economy of defense contractors and technology companies. Home to Arizona State, one of the largest US universities, it’s a tourist and retirement destination, known for hiking and golf courses.
Its subdivisions often feature cookie-cutter houses of beige stucco. That relative uniformity makes them easier to value from a distance, ideal for iBuyers and their computer algorithms. Their pricing software, fed with proprietary data, predicts what a home will be worth in the future. Opendoor hired Wall Street quantitative specialists, or quants, to model a portfolio that, in theory, balanced risk and reward.
Opendoor offers an alternative to listing with traditional real estate agents. It charges a similar 5% fee. The company also aims to profit by selling homes for more than they paid to buy them. Customers have loved the speed and reduced paperwork.
Plenty of others followed Opendoor’s lead. Phoenix-based Offerpad Solutions Inc. went public with backing from Spencer Rascoff, former chief executive officer of online real estate data pioneer Zillow Group Inc., and hedge fund manager Alexander Klabin. Brokerage Redfin Corp. offered the service to supplement its real estate agents.
Buyout firm KKR, Barry Sternlicht’s Starwood Capital Group and private equity firm Cerberus also hoovered up homes—in their case, to rent them out as corporate landlords. Unlike Opendoor and other iBuyers, private equity firms are buy-and-hold investors who own homes for many years. But like the tech companies, they drove up prices as repeat buyers armed with giant pools of capital.
Even when it became clear to many local analysts that the market was stalling, the iBuyers and other institutions kept purchasing. In April, the Cromford Report, a Phoenix data firm, put out a “red flag” to its 2,000 subscribers, who are mostly local agents, appraisers and investors. It warned that the slump had already begun.
The Federal Reserve’s inflation-curbing campaign had been pushing up mortgage rates, slowing sales and price gains. “If you are over-extended in your real estate investments, I advise a large increase in caution right now,” wrote Michael Orr, the University of Oxford-educated mathematician who founded the Cromford Report. Orr says iBuyers made a simple mistake: “They were paying far more than they needed to on the way up and getting far less than they should on the way down.”
In Phoenix, Opendoor lost money on 89% of the homes it sold in the fourth quarter, an average of $58,000 apiece, before accounting for fees and expenses, according to Tom Ruff, an analyst with Arizona data firm Information Market. The company in that same quarter on average flipped homes for 12% less than it had originally paid, he found. In November, Opendoor wrote down its real estate portfolio by $573 million. As of Friday, its shares had fallen 94% since their high in February 2021.
Megan Meyer Toolson, an Opendoor division president, said in a statement that the mix of a post-pandemic housing market, as well as rising inflation and interest rates, resulted in a once-in-40-year market transition. “We were anticipating a shift in the market, but it was the speed and scale of the change that was unprecedented,” she said. The company could’ve mitigated losses by canceling pending contracts but chose instead to honor them. “Our customers and their trust comes first,” she said.
While Opendoor is nursing losses, local flippers sold homes for 20% above their purchase price. They tended to buy distressed properties, though they also generally put more into renovations. The typical Phoenix homeowner is sitting on an additional $100,000 in home equity since the pandemic began, according to real estate data firm Black Knight Inc.
The big corporate landlords are, by and large, in a stronger position because they don’t have to sell in a weak market and many bought cheaply after the financial crisis. But rents are now falling. For example, Cerberus Capital Management LP's FirstKey Homes, which declined to comment, accelerated purchases all the way through the peak-home-price month of June. In December it cut its asking rent on 95 out of 104 homes listed. It even offered $250 gift cards for customers signing leases by yearend.
Dan Noma, an Arizona real estate industry fixture, prospered in the boom times. His brokerage, Venture REI, made its name helping institutional buyers purchase rental properties. In December, Noma networked among the 2,000 people attending an annual real estate conference at the Gainey Ranch Golf Club in Scottsdale. Single-family landlords, bankers and industry vendors gathered to discuss the state of the industry.
The mood was subdued. Builders circulated lists of thousands of homes, signaling readiness to accept discounts on bulk deals. But, licking their wounds, the big investors weren’t biting. “They need to see prices comes down,” Noma said.
While institutions retrench, Somone “Monie” Wilder, an Arizona real estate agent, has never been busier. Last year, her best ever, she closed 212 deals. A former CrossFit trainer and gym owner, Wilder drives a black Porsche SUV with red leather seats.
Many of her clients are first-time buyers, and she’s always on the lookout for homes that Opendoor and other iBuyers need to unload. When she sees one of those listings, “my mouth waters,” she says. In her view, the market is ideal for newcomers: “They just don’t see it that way, because all they see is the interest rate. But if they let that idea go, this is crazy.”
Her customers include Jordona Christensen and her husband, Alec Phillips, both in their early 20s. They’d saved $20,000 for a down payment. He was working as a mechanic, and she was holding down two jobs, at a fast-food restaurant and a coffee shop, while wrapping up a degree at Grand Canyon University. As mortgage rates climbed, the couple suspected that homeownership was still out of reach. In summer, Wilder surprised them. “You guys are in perfect shape,” she said.
In August, Wilder showed them a two-bedroom bungalow in Glendale, west of Phoenix. Its fenced-in yard was perfect for their two rescue dogs, Labrador retriever and pit bull mixes. It even had a garage for their six-year-old Toyota Camry. After seven price cuts, the seller, Opendoor, listed it for $346,000—$19,000 less than the company had paid for it. A lender had approved them for only $340,000, which is what they offered. Opendoor took it and even gave the couple an $8,000 credit to cover their closing costs. “I felt so powerful,” says Christensen, who now works at a marketing agency.
The first homeowner in her family, she invited her parents for Thanksgiving. Her mother, a waitress, and her father, a warehouse worker, gathered in the house with about 10 other relatives. “It’s amazing at our age to give our dogs a real yard,” she says. “We have an actual garage to put the car into. I felt so adult.”
Wilder also works with home flippers, including Yousif, who now works as a maintenance technician for commercial buildings. That $200,000 in profit he’s made since 2020 has been transformative for an immigrant who fled violence in Iraq with his family when he was a teenager.
Yousif, who has a beard and mustache and peppers conversation with the word “dude,” looks and sounds like a millennial hipster with his flannel shirt and jeans. Wilder tags along on Yousif’s latest flip, a four-bedroom house with a gabled roof.
His trick is buying low, in this case from a couple who’d already vacated the home and were eager to sell after two contracts fell through. “I came in saying ‘two weeks to close, cash offer, no messing around,’ ” Yousif says. He later sold the property for $456,000 to another woman, who had four children and was starting fresh after a split with her husband.
It wasn’t a home run, but he still came out ahead. After costs, he’ll make $2,000 in a month. He’s planning to begin buying and holding properties and renting them out. “It’s a good time to start again,” Yousif says. “Not everybody is asking for a crazy number.”
In a sweater decorated with leopards, Wilder sits on the kitchen countertop, her cowboy boots tapping against the dishwasher. She offers Yousif some advice: Make a lowball offer for the house he sold to Opendoor in April for $265,000, now listed for $218,000. Yousif knows it well. He was the one to update the house with a new bathtub. He fixed two broken stairs and put in 2,000 screws to stop the floor upstairs from creaking.
Wilder suggests Yousif make a $180,000 offer, 17% below the asking price. She tells him to buy it with a different LLC to disguise his identity. Nobody wants to sell a house to a buyer who sold it to them for tens of thousands of dollars more just months before.
A few days later, Opendoor comes back with a counter: $208,000. Yousif decides to wait. He figures the price has only one way to go—down.
To contact the authors of this story: Prashant Gopal in Boston at [email protected], Patrick Clark in New York at [email protected].
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