For an industry that has stayed as traditional as possible in the face of digital disruption, the rapid rise of home-buying companies armed with algorithms to sniff out deals and snap up properties presents a new paradigm for U.S. real estate. Tech companies have entered the game, pushing the concept of “Instant Buyers” or iBuyers to the forefront of housing discourse.
This is home flipping on an industrial scale as sponsored by Silicon Valley. Companies like Zillow and Opendoor close deals and resell properties at a lightning pace—yet the impact of such revolutionary buying and selling remains to be fully understood. iBuying may unlock additional value for real estate owners as it undoubtedly adds more liquidity to the sector, but it's such a new concept that it remains unknown how many sellers plan to use it. Then, there's the question of equity ownership, along with the danger of comparisons with payday loans.
Instant does not always mean better, and iBuyers have a case to make as to why their way is the best way. It is; however, an exciting shift in the market—and one which is overdue.
But what does it mean?
iBuyers may be getting a lot of hype, but the concept is so new that it is unknown how it will impact the market in the long-run. The concept of instant offers gained momentum within the last five years to help both buyers and sellers looking for quick turnover. So far, home sellers tend to wait for a better deal than those offered by iBuyer companies.
Industry analysts estimate 90 percent of all instant offers are rejected and referred to a real estate agent, which then become regular real estate listings and sales. Some estimates put additional costs from iBuyer purchases at more than 10 percent of the fair market value of a home, compared to about five percent with agent commissions. This might also explain why the conversion rate for instant offers is so low so far.
In addition, many iBuyers focus on a narrow home price band for their offers. For instance, Opendoor’s average instant home price is just over $200,000. Nonetheless, the U.S. residential real estate market is absolutely gigantic with over $1.6 trillion in annual sales, so even a 10 percent share represents an enormous opportunity if executed well.
What we may end up seeing is iBuyers setting a price floor—or minimum value—as the norm. Instant offers, algorithmically equated, have a good chance of setting base values for homes which sellers can then accept or reject. Furthermore, the iBuyer phenomenon could provide more liquidity to the market to improve the value of homes rapidly. Ultimately, instant offers are not the end all, be all. They work well as part of a larger platform that solves problems for the client.
Zillow, Redfin, and Keller Williams all have instant offers and this trend does not look likely to end any time soon. Keller Williams CEO Gary Keller said it best in January, when he told Inman “I feel like I have no choice now.”
Between State Lines
One thing iBuyer companies must keep in mind during inevitable expansion: The U.S. is not one-size-fits-all. It sounds obvious, but the housing market of each state requires a different iBuying approach. For example, the concept has found success in states like Arizona, where subdivisions create similar housing stock, while it is yet to crack the Northeast where homes are older and varied.
The iBuyer algorithm preferences uniform homes, and this can only be said about specific parts of the country. Further, the equation must also factor in weather-related maintenance costs to accurately decide what homes are worth buying and at what price.
Companies believe the system will become more efficient as time goes on and scale only continues, but this remains to be seen. It is such a new model to homebuying that has enjoyed generally steady market conditions that some question how iBuyers will approach any market downturn or shift. Then there is the one comparison that any iBuyer company desperately wants to avoid: The payday loan.
The Payday Loan Pitfall
iBuyer companies are best advised to remember instant does not always mean better. There is a danger that instant offers on homes, often sight-unseen, are comparable to payday loans or mortgage brokers. Perhaps the owner needs to sell and sell fast, opting for an instant buyer’s speedy transaction regardless of higher fees. This is not all too dissimilar from payday loan offers, potentially posing problems for iBuyer PR. It is better to think of the deal as convenience at a cost, something which works for both parties in search of quick turnover.
Equity is important in this conversation. The average homeowner under 50 years old only owns 23 percent of their home’s equity. If homeowners are paying between 15 to 20 percent for iBuyer services, it does not leave a lot of upside for the seller after the sale. This discussion is sorely missed from iBuyer discourse, and something that each and every owner must seriously consider when going down this route.
There is no escaping that iBuyer services are growing, and it will be interesting to see how they develop over time and different parts of the nation. The iBuyer is coming to an agency near you—homeowners and home sellers are best advised to weigh up what they want against what they need and sell accordingly.
Kyle Stoner is the chief executive officer and co-founder of Abode, a one-stop-shop for real estate which helps both buyers and sellers navigate the process from start to finish.