Institutional real estate investors face pressure from U.S. Senate, Minneapolis inspectors

·4 min read

U.S. senators are putting pressure on Zillow, the real estate website, to provide transparency into its plans to sell possibly tens of thousands of homes to Wall Street investors, including a company that's the subject of inspection sweeps by the city of Minneapolis.

Zillow is shutting down its house-flipping division, with the goal of offloading its entire portfolio of single family houses by next spring. An immediate buyer is reportedly Pretium Partners, a private equity firm that owns more than 200 houses in Minneapolis, most of which are concentrated on the North Side.

Pretium's business model hinges on converting houses into rentals set up to maximize returns for shareholders — at the expense of renters, housing researchers and advocates say.

Sen. Tina Smith, D-Minn., chair of the Senate housing subcommittee, sent a letter to Zillow on Monday to express her concerns about the sales' potential to "destabilize local real estate markets."

"Troublingly, these types of sales have the ability to concentrate property ownership in the hands of a few, corporate-driven, out-of-town landlords with little meaningful connection to communities," she wrote. "In at least some areas of the country, these harms have been concentrated in communities of color, exacerbating longstanding inequities and limiting home buying opportunities."

One of those places is north Minneapolis, where the private equity firm Pretium Partners owns hundreds of single family rentals. Their management company is HavenBrook Homes, which housing activists accuse of hiking rents and charging tenants hidden fees while making minimal efforts to maintain properties.

"[HavenBrook Homes] are not in the best shape," said community organizer Chloe Jackson during a rally for rent control in Minneapolis. "These tenants have major repair issues from infestations, with possums and squirrels, to broken windows, drafty cold windows in the winter, not having access to complete rooms, electricity going out and causing electrical fires."

Minneapolis voters agreed to legalize rent control earlier this month.

City housing inspectors are currently conducting portfolio-wide inspections of HavenBrook Homes. They have inspected 80 properties out of 223 to date, finding housing code violations in 58% of properties. They include missing smoke and carbon monoxide detectors and hazardous electrical wiring. Pretium did not respond to a request Wednesday for comment about the violations.

"We have been focused on providing residents with superior service and an enhanced renter experience" since buying its Minneapolis properties, Pretium said in a statement to the Star Tribune earlier this year.

In a November letter to shareholders, Zillow announced that it would wind down its homebuying program, Zillow Offers, and sell tens of thousands of houses over the next few financial quarters. The program has been too risky while providing too little return on equity, according to the letter, which blamed "a global pandemic, a temporary freezing of the housing market, and then a supply-demand imbalance that led to a rise in home prices at an unprecedented scale" for the company's inability to accurately forecast home prices.

Shutting down Zillow Offers will force the company to reduce its workforce by one-fourth.

"If [Zillow is] losing money, then it makes sense to just sell it as a package to whoever's willing to buy them rather than one at a time," said Michael Goldman, a University of Minnesota professor of sociology and global studies, who researches private equity landlords in the Twin Cities. "That's the business of these monopolies like Pretium, is to buy huge amounts like from foreclosure, from banks… so this is perfect for them."

The Wall Street Journal reported Wednesday that Zillow has agreed to sell thousands of houses to Pretium Partners. Neither company has officially confirmed the reports.

"As we wind down our iBuying operations, we continue to sell homes the way we always have, which includes marketing them on the open market to sell them to all types of buyers such as individuals and families, institutional or individual investors, and nonprofits," Zillow said in a statement.

Smith's letter, which was also signed by Senators Sherrod Brown, D-Ohio, chair of the banking committee, and Jack Reed, D-R.I., asked Zillow to answer how many total houses it intends to sell and where they are located; what efforts Zillow has made to transfer the properties to individual buyers or community-based nonprofits; and how many properties Zillow has offloaded to institutional investors since the start of January 2020.

Zillow owns about 140 houses in the Twin Cities area.

Susan Du • 612-673-4028

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