There is a little anxiety in the air!
Agents in my company are continuing to drop by my office or call me on the phone anxious to discuss the increased presence of a certain type of home buyer popping up in the Nashville and Middle Tennessee real estate market. These buyers are making cash offers for residential properties, sight unseen and close quickly. Who are these crazy people? Well, they are investor-backed companies called “Direct Buyers” or better known to the real estate industry and consumers as “iBuyers.”
Many agents are still confused about the iBuyer home buying business model. iBuyers, such as Opendoor, Offerpad, Homego, and Knock, are companies that use automated valuation models (AVMs) and other technology to make quick offers on properties. They provide a much shorter “contract to close” period – usually in days not weeks. Once they take title to a home, they make the necessary repairs and improvements and place the property back on the market. In fact, many of the iBuyer companies will pay a REALTOR® to assist them in either bringing them a qualified buyer or market the home once it is ready to be put back on the market.
Why are they showing up now? iBuyers are moving into traditional markets and growing because of the influx of venture capital and other private and institutional investment funding in the residential real estate market. These companies are connecting a relatively small group of large, qualified investors to prospective home sellers and home buyers, for a fee. iBuyer purchases only occur online and directly from the owner of the property, usually at a small discount slightly below market price.
Less Time, but Higher Costs
The iBuyer “hook” is a simplified and expedited transaction process, unlike the standard thirty to forty-day escrow period. An iBuyer transaction allows a seller to move on to their next home or the next chapter in their life. A seller must decide whether speed and convenience trump potential increase net returns on the sale of the home. Unfortunately, the seller’s net sheet will reflect a higher cost. Sellers will more often than not get less money (sometimes, much less) for their home than they would if they listed it with a real estate agent. (I’ll explain that as you continue to read on in this post.) Again, the significant benefit for a seller going the iBuyer route instead of through a real estate professional is time.
We are beginning to see more of the “brand name” iBuyers such as Zillow and Opendoor in several metropolitan areas. Zillow – through their iBuyer division Zillow Offers – and Opendoor are gaining a foothold in large markets such as Phoenix, Los Angeles, Chicago, Las Vegas, Miami, Portland, and San Francisco. Zillow Offers is becoming more noticeable these cities as well as in medium size markets such as Minneapolis, Salt Lake City, Orlando, and Nashville – my local market. Opendoor is also entering these same markets as well as others throughout the country. Even Redfin is starting to dabble in the iBuyer market. With the continuing infusion of investment money in the industry, I anticipate new iBuyer companies will be established this year. Expect several more press announcements on where iBuyers are entering new markets to establish a foothold to purchase homes.
Something we should watch for is not their sales volume, but their net proceeds from purchasing a home then re-listing it for sale. Their higher fee may help their “bottom-line numbers” in the short term, but after I do the math it appears it is going to take a large amount of sales volume over a significant period of time to sustain long-term profitability. Just my opinion.
A Selling Option Not for Everyone
Is there a real benefit to the home seller who uses an iBuyer to purchase their home? Maybe. If a seller needs to sell their home quickly, then utilizing an iBuyer may be a choice they might want to consider. However, a property owner must understand the net proceeds from the sale of their home will certainly be less than what they would receive if they chose a professional listing agent.
The fees charged by these companies are usually higher than the traditional six-percent commission charged by REALTORS®. For example, the average Opendoor “service fee” is seven to eight-percent. This cost is higher than the customary six-percent fee charged by REALTORS®. Also, iBuyers will value a home right at or below its market value. Higher fees and a lower value will mean less money for the owner. However, as I previously noted, they might accept less money if they need to sell their home sooner rather than later.
iBuyers Will Acquire Some Business, But Not All of It
Some of my peers in the industry are saying iBuyers will have a significant impact on home selling throughout the country. It is my opinion choosing an iBuyer will not become the “go-to” option most home sellers will select to sell their home. However, I do see one type of seller who will probably benefit from using an iBuyer. Personal estate administrators and surviving heirs don’t care as much about sale proceeds as they do about selling the house quickly. Using an iBuyer to dispose of a decedent’s property will be a good option for these folks.
Many people believe iBuyers are industry disruptors and threaten to take business away from traditional brokers. Others see these new market players as a temporary industry “fad” and will fall by the wayside when the economy slows down. I do believe they are disrupting the market somewhat, but, not to the level of taking large sections of market share and altering current competitive business practices. Will they be around for the foreseeable future? Well, time will tell. I would not get too anxious about them disrupting your business as their primary objective is to assist those who want to dispose of their property in a timely manner. As I have written in previous posts, I am more concerned about companies such as Redfin and Compass who are well-funded real estate companies and are strategically seeking large segments of market share in the U.S. Currently, they two are working hard to get a large portion of everyone’s business in the markets in which they operate.
There is no question our profession continues to evolve. The iBuyer concept is indicative of what we are now seeing in the industry. Our role as real estate professionals will be different in the years ahead, but I am confident we will still have a role to play. Agents and brokers will need to adapt to the changes happening now and in the future. In the meantime, I would encourage all of us not to let all the news we read online via social media and industry news portals to interfere with our unique value proposition as REALTORS®. Sellers and buyers will always need someone they can turn to and shepherd them through the complexity of today’s real estate transaction. Always remember the fundamentals of the profession and hone your selling and relationship skills like you never have before! (My book, “Do You Have a Minute?” is all about the fundamentals of real estate selling and client and transaction management.) These basics principles of what we do will still be around even when our industry morphs into something different than what we see today.
Now, get out there and sell something and don’t let those iBuyers frighten you!