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You Can’t Afford to Ignore iBuyers

What if you’re conducting a listing presentation with homeowners who’ve already received an instant offer on their property? Real estate technology strategist Mike DelPrete explains how to avoid being blindsided

May 3, 2019 by Melissa Dittmann Tracey

With the emergence of iBuyers—companies that make quick, all-cash offers to home sellers online—the selling process stands to change dramatically for consumers. The “instant offer” strategy, where sellers can click a button to get an offer within hours, is gaining momentum, and real estate pros are increasingly competing against iBuyers for new business and fielding questions about them from clients. Real estate technology strategist Mike DelPrete conducted a study about the impact of iBuyers on the housing industry. REALTOR® Magazine spoke with DelPrete to learn more about this disruptor.

This is still a relatively new business model. Let’s clear up any confusion: What is an iBuyer?

I think the best definition is an “instant buyer.” It was started by Opendoor about four years ago. The idea is that homeowners can go to an iBuyer to get an instant offer on their home. If the homeowner accepts the offer, they’re done, and they’ll get their check in a couple of days. You sell your home to a company, not another person. You’re not bringing the home to the market.

The iBuyer then spruces up the home—maybe over a week or two—and then sells it. It’s similar to taking a used car to a car dealership. You sell it to them, and you don’t have to worry about the hassle of selling it on the open market.

iBuyers are not home flippers. They’re not giving homeowners a lowball offer on a property that is in some degree of disrepair and then banking on selling the home for a lot more at resale. iBuyers are looking for turnkey houses where they can get in and out quickly. They’re aiming to give fair offers—maybe 98% to 99% of the open market asking price. It’s all about the speed of the sale.

So these firms are truly making fair, instant offers on properties?

It’s impossible to know for sure since you can’t get an instant offer and bring a home to the open market. But I’ve looked at a bunch of data points, and I believe that’s an accurate assessment.

Your report showed that in 2018, iBuyers accounted for more than 25,000 transactions, or 0.2% of the market share nationwide. Is this model taking off in only certain areas of the country?

Phoenix has become ground zero for iBuyers, who have about a 6% market share there. All the major iBuyers—Opendoor, Offerpad, and Zillow—are active in Phoenix. Some have been there three or four years. They’ve collectively probably spent millions in Phoenix on marketing and raising awareness about it to consumers.

Phoenix iBuyer Chart

There are a couple of things that make for a great market for an iBuyer—and what makes Phoenix so great in particular. First, there needs to be a lot of general sales activity and a fair amount of transactions happening. Phoenix is a hot market. Second, it needs to be homogeneous. In Phoenix, housing developments mostly look the same. That is good for iBuyers because it gives them a level of certainty: They know what the value is, what price they’ll be able to get at resale, and the days it’ll spend on the market. And if you look at where iBuyers have expanded to—starting in Phoenix and then Las Vegas, Texas, Florida, Sacramento, and the Carolinas—these markets all have those same attributes.

What types of properties are ideal for iBuyers?

They tend to buy properties in the median price of $240,000. In the markets they’re in, the median price of homes is around $220,000 to $250,000. We’re just starting to see them launch in more expensive markets, like in Denver and Los Angeles. We’ll need to watch closely to see what happens at the higher price points.

But the sweet spot for the vast majority of those 25,000 transactions over the past year were in the $240,000 median average. At that price point, the properties tend to be turnkey and in good condition, and iBuyers are confident they can sell these homes fast.

iBuyer Sweet Spots Chart

What happens after the transaction? Does the iBuyer relist the property right away and for a higher price?

After an iBuyer purchases a property, they want to relist it as soon as possible—within one to two weeks is ideal. They may add new carpeting, new paint, or fix up anything in that time.

As for the price they list at, that tends to be a tad more—but not by much. If they buy a house for $240,000, they may list for $250,000, test the market, and bring it down as needed. It’s all about speed. They want to get these houses off their books as fast as they can. So they’re not going to buy a house for $220,000, put $40,000 into it, and then list it for $320,000. It’s all about single-digit percentages and very low margins.

Who are the main players in this space? Are certain firms dominating?

In the world of pure-play iBuyers, Opendoor is exponentially ahead. They’ve raised more than 10 times the capital than their next closest competitor (Offerpad). They’re buying and selling two to three times more houses, too. Offerpad hasn’t raised as much money, but they are still quite active in the space.

Then you have Zillow, which is not a pure-play iBuyer. They do a bunch of other things, too. But they are expanding, and their volumes are growing fast. (Zillow Offers launched in 2018.)

There are many other folks, too. Redfin has dabbled in it, and Keller Williams is launching one in May; 2019 is going to be a big year. It’s turning into a two- or three-horse race as opposed to a different iBuyer in every state.

iBuyer Competition Chart
iBuyer Competition Chart

In what ways are iBuyers working with real estate agents?

When Zillow launched their iBuying program, they announced they were going to keep agents involved in the process. The agents involved are their Premier Agents. So if you’re part of the Zillow ecosystem and you’ve spent a lot of money on Zillow, you’re a part of that.

Both Opendoor and Offerpad have agent partnership programs. They may co-list with agents as well as facilitate seller leads (of those who decline their instant offer). Many iBuyers offer agents standard referral fees and competitive buyer’s agent fees.

Most consumers who sell their homes to an iBuyer don’t have an agent representing them. They just go to the iBuyer, get an offer, and sell directly to them. But the majority who buy a home from an iBuyer do have agent representation. As a buyer, you don’t usually care who owns the home, whether it’s Offerpad or an individual homeowner. You tend to want your agent to help you through the buying process. So there are opportunities where agents will work with iBuyers on that, too.

We’re starting to hear about real estate brokerages entering the iBuyer space, such as Coldwell Banker and Keller Williams. Do you think more brokerages will follow suit?

Real estate agents want to be able to solve every need a customer has. And if a customer has a need for a quick sale, you should be able to provide some type of service to help them do that.

This is an interesting data point: In markets like Phoenix, up to 28% to 30% of serious home sellers get an instant offer on their home before deciding to list it. Even if they’re not going to sell their home instantly, they start the process by getting an instant offer. They just want to see it and have that data point.

If you’re a broker and you don’t provide that service, you’re then missing out on the start of a customer’s journey. Who’s going to be there instead? Zillow or Opendoor. They’ll be talking to these homeowners first, and they’ll be the ones guiding them through the process. But as an agent, you want to be the first one customers talk to. In this day and age, it’s about relevance. If you’re an agent or broker, you want to be relevant in solving consumers’ needs. You need to have some type of answer for this iBuyer space.

iBuyers are hitting their stride during a relatively good housing market, but they haven’t been tested over time. Do you think iBuyers can survive multiple market cycles?

I think in a down cycle, the iBuying proposition will get more appealing to customers. If the housing market is slow and you need to move or sell your home, I think being able to sell to an iBuyer is even more appealing. iBuyers will have to raise their service fees to customers in a slower market. But I think some consumers will pay for that convenience.

The bigger question becomes: What happens if you’re a company like Opendoor, and you have thousands of homes on your books and a slowing market? The market isn’t going to drop 20% in one month. Even during the housing crisis, the most any market went down in one month was 1.5% in value. So iBuyers will be able to spot a change in the market from far away. They could then raise their fees, lower their asking prices for the houses they have, or even stop buying houses.

But I don’t think a slowing housing market will be the death of iBuyers. I think they can still succeed. They are in enough markets that are not going to all collapse at the same time.

Is the iBuyer model a viable threat to traditional brokerages, and should real estate professionals be paying attention to this?

They absolutely should be paying attention. I’ve talked to local brokers who’ve been in the business for decades and asked them: Is this a big deal? And they all say yes. Aside from when listings first came online, this is the next biggest [disruptor] we’ve seen since then.

But I don’t think it’s going to revolutionize the industry, put agents out of business, or be the new de facto way to buy or sell homes going forward. I’m not that bullish. I’m looking at the data, and the growth is slow. But it’s definitely a new tool for your toolbox. And for some customers, it’s really going to appeal to them.

I’m hearing from more and more agents who say they’re walking into a listing presentation, and the homeowner already has three offers. What are you going to say? Are you just going to ignore it? You have to be aware, and you better have a good answer. Real estate professionals must start figuring out strategies for this.