Here Come the iBuyers!
Internet technology has enabled innovative companies to reinvent many industries, including information services, retail, travel, financial services, transportation, entertainment and person-to-person communication. We should not be too surprised to see similar changes occurring now in the real estate industry. A new generation of companies called “iBuyers”—such as Opendoor, Offerpad and Knock— is leading a fundamental shift in our business. And other, more established players such as Zillow, RedFin and Keller Williams have announced their plans to be iBuyers as well.
What is an “iBuyer”?
iBuyers are companies that offer to purchase homes via a supposedly “easy” process that starts with filling out a form on their website. They make an offer for the home—sight unseen—within minutes (or days) based upon their valuation model. If the seller accepts the offer, iBuyers say they can close within a few days or whenever is best for the seller. Companies like Opendoor offer the seller the convenience of selling a home right away, so the seller can immediately begin to look for their new home. Opendoor is happy to facilitate that search as well.
On the selling side, these new companies offer additional innovations, such as the ability for buyers to view a property for sale by simply using their smartphone app to access homes for sale, eliminating the need to be accompanied by a real estate agent.
iBuyers such as Zillow Offers and Knock are also lenders, enabling them to capture commissions on home sales and home loans. By offering “all-in-one” services to the consumer, the iBuyer strategy is to capture multiple revenue streams associated with all the transactions involved.
By changing the way homes are being bought and sold, iBuyers may be forever changing how our business works, whether you are a broker, agent, lender or investor.
Where Are the iBuyers?
Awareness of these disruptive new companies varies. You may not have heard much about them yet, but once they arrive in your market, everyone in real estate feels the effects.
Five markets, in particular, became the initial targets for the iBuyers:
- Las Vegas, Nevada
- Phoenix, Arizona
- Dallas/Fort Worth, Texas
- Atlanta, Georgia
- Orlando, Florida
From those early markets, these iBuyers expanded and others joined the game. At this point, Opendoor appears to be the largest, in 19 major markets (as of 3/15/2019).
Most of these iBuyers are awash with venture capital dollars that they pour into advertising once they enter a market, immediately “sucking the oxygen out of the room” for all other real estate professionals in the market.
Travis Schurr, the WeBuyHouses.com business owner in Las Vegas, said: “Our cost to generate a motivated seller lead has almost tripled in the past few years as every iBuyer on the planet descended upon the Las Vegas market. As real estate investors, the thing that concerns us the most is that their ads say almost exactly the same things that ours do—fast cash, no repairs, quick close, no agents or showings, etc. It’s a challenge to compete with companies that have very deep pockets filled with VC money.”
Despite that, Schurr acknowledged that there are opportunities to work with the iBuyers. “We’ve actually sold several properties to Opendoor. In some cases, we just cleaned up a property, maybe a little paint or carpet, and they were able to pay us more than a regular buyer might have paid for the place in its current condition.”
How Are iBuyers Changing the Real Estate Game?
Think about how Uber changed the transportation business. Do you use taxi cabs anymore? In addition to the convenience of an app, Uber completely changed who drives and owns the car. Taxi drivers in many cities, such as New York City, complained and asked state and local governments to protect them from Uber’s shared ride service. Despite their attempt to fend off Uber, the ride-share service has grown into the dominant player with an estimated market value of $120 billion.
The moral of the story: It does little good to stand in the way of progress, and there’s no use complaining about it. When a consumer perceives a “new way” to be significantly better, faster or cheaper, they are likely to change their behavior. Once that happens, there’s no returning to things as they were before.
The new iBuyers offer something that consumers like—all-in-one convenience. Consider this text on the Offerpad website:
Unlike traditional real estate companies, with Offerpad, you don’t have to list your house with a realtor, pay for expensive repairs, or worry that a buyer will back out of the contract due to financing. We’ll buy your home directly from you, and even move you to your new home for free. Request your purchase offer today!
Now, you might read that and say,“Hang on, real estate investors have been saying these things for years.” That’s true, but we’ve been speaking more to “motivated” homeowners who often have “distressed” properties (i.e., those that need significant repairs). The big change with iBuyers is that they are offering to buy the homes of nonmotivated sellers for close to retail value. In essence, iBuyers actually have a different business model than a typical residential
real estate investor.
Which Sellers Are the Best Fit for iBuyers?
Real estate investors typically have a three-pronged value proposition. They offer to buy houses (1) fast, (2) for cash and (3) in as-is condition. This message appeals to a motivated seller, one that is interested in selling quickly and willing to sell at a discount in exchange for a fast sale without having to make any repairs.
Compared to a typical real estate investor, the iBuyer targets a different type of seller—the retail seller. The retail seller is usually in the process of selling their current home while looking for a new one. One of the biggest frustrations for retail sellers is the need to get the current house sold before they can purchase a new one. Plus, they know what they want for their current home, but really have no idea what they’ll get for it until it’s sold. As a result, buyers often make offers to buy with the contingency that they must sell their current home first. In general, this is a problem for the seller, who is not sure when the buyer will sell their home or whether they will have the necessary funds. So, sellers are hesitant to accept offers with contingencies, especially in a “hot” market where other buyers may not require such a contingency.
This set of problems is at the heart of the iBuyer value proposition. As Knock CEO Sean Black (who was a founding member of Trulia) says in their online ad videos, “Let’s face it, selling a house sucks…” His company tries to solve the two big questions that frustrate home sellers: When? and How much?
“Trade–In” Your House?
Knock is an interesting player in this new iBuyer space, because they don’t buy houses at all. Instead, they encourage homeowners to “Trade-In Your House Today.” The way they do that is innovative. Knock loans consumers the money they need to go ahead and buy their dream home, then Knock takes care of any repairs on the current home and handles the process of selling it. When the entire buying and selling process is completed, the new home is finally deeded to the new homeowners and Knock has made money from interest on the loans, real estate commissions, and other fees charged for related services.
OPPORTUNITIES TO WORK WITH IBUYERS
iBuyers are focused more on “retail” homeowners, whereas residential real estate investors are typically looking for distressed properties that can be bought at a discount, fixed up and sold for a profit. iBuyers make much of their revenue off commissions and fees, so it’s not as important for them to make a profit on the gap between purchase and sales price.
iBuyers prefer to purchase newer homes that don’t need significant repairs. They hope to make very minimal repairs and quickly sell houses for just a bit more than they paid for them. Investors, on the other hand, often prefer houses that need significant repairs because there is greater opportunity to make a profit by adding value to the home.
Certainly, there is some overlap in the houses that iBuyers want versus those that are a perfect fit for investors. But, for the most part, iBuyers and investors want different types of properties.
While it may be in our nature to resist change, residential real estate investors can do little to change the fact that the iBuyers are coming (if not in your market already). Once they arrive, they will attract many of your prospects to their polished marketing campaigns and promise of an “easy” solution.
Real estate agents and investors who will survive and thrive in 2019 and beyond will be those that look for opportunities in the midst of the profound changes iBuyers bring to the business. These new companies have a ton of venture capital money to spend, both on buying houses and on advertising. Smart investors should look for opportunities to sell to and buy from the iBuyers. And many real estate agents will end up working directly for the iBuyers when they set up brokerages in new markets.
Even with all the changes enabled by technology, real estate will remain hyperlocal and those of us that embrace change will find new opportunities that may not have existed before. Yes, the iBuyers are coming. Start thinking now about how you can ride this new wave.
Dev Horn
Dev Horn is the vice president of marketing at WeBuyHouses.com, a national network of professional real estate investors that buys and renovates thousands of houses throughout the United States every year.
