Backed by millions of venture capital, iBuying is moving in fast to the real estate market. But is it a movement that’s here to stay for the long term and what’s in it for the agent, admin and broker?
Recently, Inman posted an article in which the author floated the idea that by the year 2024, iBuyers will represent 60% of the real estate market. In the article, a graph depicts Uber and Lyft’s meteoric takeover of the taxicab and rental car industry with the ride-share companies skyrocketing from a 10% market share to more than 72.5% in a little over four years.
While you may think ride-share companies and large-scale real estate iBuyers may seem like two completely different business models, there’s a common theme they share as with most all successful, tech-enabled service providers today: They’re all about providing the ultimate in consumer convenience.
iBuyers are fast growing. What began in Phoenix as an incubator test market for many of the large corporate players has quickly fanned out across the country from Las Vegas and Los Angeles to Atlanta, Charlotte and Tampa. Estate heirs, downsizers and other sellers who need or want to sell their home quickly find the basic iBuyer model a particularly attractive, relatively painless option.
Typically well-funded and operating on automated valuation models (AVMs), iBuyers provide quick cash offers that average around 98% of the home’s value, renovate the home with light cosmetic upgrades and then resell relatively quickly, according to Mike DelPrete, a scholar at the University of Colorado, Boulder, and iBuyer expert. Consumers who don’t want to put up with endless buyer walk-throughs, open houses and contingencies are often willing to pay a premium for their services. By comparison, “flipping” companies typically buy distressed homes and need to purchase the house at a minimum of 30% or more below market value to balance the necessary renovation costs.
To gain more perspective, dotloop recently polled several real estate pros for their opinions on the iBuyer movement that’s sweeping the real estate industry. Here’s what they said.
The scaling of iBuying is a really interesting development in the industry right now. The question that I ask is, ‘Is it just a trend?’ I believe the true answer will show itself upon the next downturn in the market, whenever that may be. A rising tide lifts all boats, but when the tide goes out, we’ll see who remains afloat. There has always been a market for the distressed property or the very motivated seller. I do believe there will be a place in the market for that business model as well as traditional real estate sales models. There is definitely no ‘one size fits all.’ I’m also curious to see if it really just becomes a lead generator of people who are looking to sell.
Investors have found creative ways to invest in real estate since the beginning of transfers in land. iBuying happens to be the latest trend. While currently only available in a few markets across the country, without a doubt, we’ll see it become more widely available soon. Whether it’s here to stay will entirely depend on financial models. Investors calculate a minimum acceptable rate of return to invest at large volumes. If iBuying can produce this benchmark or more, it will continue to grow. If not, investors will find better alternatives to invest their capital, and the trend will dwindle.
Today’s consumer wants speed, flexibility and certainty. iBuyers are attempting to solve this problem for home sellers by leveraging technology and scale. iBuyers that provide a consumer-centric service stand to help consolidate and improve a very fragmented real estate industry, while iBuyers that focus on their bottom line will likely fall in line with institutional investors.
The biggest challenge when it comes to purchasing large amounts of properties is the rehab and making them ready for resale. There’s a whole logistics of operations involved: dealing with contractors, maintaining properties, cutting grass and so on when you’re dealing with thousands of houses across the U.S. As iBuyers perfect that part of the process, they’ll be able to get their fees down and then sellers will gravitate more toward this model. We saw that with Amazon as a platform to buy groceries. As they get their logistics down with packaging and delivery, it becomes that much more affordable.
I think that the iBuyer software/programs are a marketing tool. Very few people would buy a house ‘sight unseen’ and most sellers are going to balk at what the programs are offering. I believe that iBuying will stick around; however, I’m not sure that it will have the “Uberization” effect on the industry that many believe or are hoping that it will.
I think the ibuying trend will always have a space in the market. Whether we call it ibuyer or cash for keys. Sellers will always have the right to sell their homes for less overall dollars to obtain a ‘quick-sale.’
There’s lots of opportunity for real estate agents. First, not every seller is going to take that option, but even if the seller reaches out to explore the iBuyer option and goes with the traditional transaction model, iBuyers will be able to tap the lead gen benefit, so there’s more potential for agents to win leads.
We’re seeing that with lenders, where they’re sharing in the proceeds whether they’re getting the home sale or marketing the leads. Quicken has a program like that, for instance.
Also, we have to remember there’s two sides to the transaction. People who need to sell often need to buy. iBuying lets agents make a sale on the flip side without having to worry that the other transaction is going to fall through. It’s what consumers want and are demanding — a smoother process with more options.
There is one universal truth about real estate. Selling a home, buying a home is a very emotional process. Sellers often want more for their home than the market value. Buyers want to find a great bargain to ensure they are making a sound financial decision. And agents deal with both. I’m a highly analytical person, and paired with my industry experience, I thought I was immune to this truth when selling my home. No one was more surprised than me when my rationality flew out the window the second the ‘For Sale’ sign hit my front yard. Properties aren’t ‘properties.’ They are homes. And homes are a whole different ball game. Navigating these strong emotional tides often produces more stress on real estate agents than almost any other aspect of the deal. Selling a property on behalf of an iBuyer investment company? Buying a property from an iBuyer investment company? Now, 50% of the emotional decision-making is removed from the equation. The deals will likely be much cleaner, much less stressful and potentially easier for all parties involved.
Real estate professionals who focus on improving the consumer experience can partner with iBuyers to offer their clients more options and to generate seller leads. On the other hand, agents who focus on preserving the status quo, rather than focusing on the consumer, may see iBuyers as a threat to their business.
In my opinion, iBuyers will allow agents to focus on the sellers who want top dollar for their home and want an agent to market the home for them so that they can get that top dollar. I see it affecting the local investors more than the agents. Agents who service customers should actually be freed up to provide better service to the clients who actually want their help.
Leads. The iBuying programs identify people who are curious about selling their home. This gives us a pool of people that agents can market to. The problem is that some, if not most, of the people that turn to iBuying are probably looking for the cheapest solution to selling their home. The agents will have to show their value and prove that utilizing an agent will bring them a higher return in the end.
If the agent is working in the iBuyer space then it’s great for them. If they operate in another niche, then I would say it would have a very small effect.
The profile of a seller choosing the iBuyer route at this early stage of the trend is very narrow. For a traditional seller, the bottom line rules the decision-making for the sale of an asset. The monetary loss implicit with the iBuyer offer typically doesn’t meet sellers’ needs. How many agents have had sellers nearly walk away from deals over a $100 buyer request — a .001% loss? Taking a 10%+ loss on an asset is an unlikely decision for most sellers.
However, there is a segment of sellers where time is a greater influencing factor than money. For these sellers, having an assured closing date within days of the decision to sell could make accepting an iBuyer offer an enticing option.
iBuying is great for people who don’t have the ability to pay for repairs or those in a bad financial situation. Maybe they’ve lost their job and need to close quickly to save their credit. Also with these larger, corporate iBuying models, consumers are getting fairer deals less prone to unethical offers. A seller may be grieving the loss of a loved one and not know the market, for instance. With iBuyers, they can get market value for the house versus a flipper who may exploit someone in a desperate situation. iBuyers also add certainty of an offer, unlike traditional offers that require the seller to deal with contingencies, stress and more emotion. Also, while iBuyers may not be the cheapest option for consumers, they are the most convenient. People will pay for convenience.
The buyer perceives that they are saving on the real estate fees. While technically they are correct, the problem is that they are taking a lower offer than they could get if they put the property on the open market. I believe that the traditional methods of selling will continue to outperform iBuying as there is a lot of complexity and nuance to pricing, marketing and selling a home.
The future of iBuyers in an economic downtown will be interesting to study. During the last downtown, inventory sat for months and years. Sellers couldn’t sell homes because they either couldn’t take a loss on their asset or buyers couldn’t get financing. The very foundation of iBuying is rapid transaction turnaround. iBuyers can’t afford to keep their investment tied up in a property. To compensate for this loss in liquidity, they’ll likely have to offer even greater than the 10% to 15% loss to sellers. Would a 25% loss be palatable to sellers, just to free them up from their current home? It seems likely that iBuying would transition to resemble a hybrid of the trend we saw boom during the last downtown, purchasing discounted homes not to sell — but to keep and rent.
I actually think iBuying could save the real estate market from going into a real crash. If iBuyers are there to pick up the inventory, it will help keep the market balanced. It could keep it from what we saw in 2007 and 2008 and save people from getting into foreclosures.
What are your thoughts on iBuying? Let us know by posting in the Comments section below.