But as more players jump into the space and markets are saturated with various competing platforms, profit margins that are already paper thin get squeezed even more. Zillow says it’s making $1,723 per home flip at a minuscule 0.6 percent profit, which leads one to wonder if this space is really worth getting into if you don’t have multiple modes of monetization.
That’s where the concept of a one-stop shop for home buying and selling becomes especially attractive. If one company can seamlessly integrate each individual component of the real estate transaction—buying, renovating, insuring, and selling—and optimize operational efficiencies along the way, there’s a path to becoming the truly dominant real estate company.
Being the one-stop shop has been the goal of most large real estate operations, where the owners can make profits on every related service – escrow, title, loans, etc. It’s why these outside companies all jumped in to the ibuyer space – the cumulative profits look very enticing, and making as little as $1,723 per home flip doesn’t look bad as long as they get the other fee income too.
I think they will be able to dominate in the homogenized lower-priced tract neighborhoods where there isn’t much variance in values. They can make their own market too, because a first-time homebuyer won’t balk over paying a few extra thousand in price to get an easy entry into a renovated home. If great salespeople are employed, the ibuyers could make a killing.
It will also enable the ibuyers to dabble in the higher-priced areas, where losses can pile up quicker. No need to risk big money when there is no pressure on them to buy anything. I would expect their purchase quotes in the higher-end areas will be well under retail, to give them plenty of cushion.
How will sellers, buyers, and realtors react?
Sellers usually have a price in mind, and tend to be a little uncomfortable with interviewing several candidates/options. If ibuyers advertise effectively and get the first call, then all they have to do is get close to the seller’s price-in-mind, and convenience will be what decides it.
If a realtor gets the first call, and comes in with seller’s price-in-mind or higher, they will get the listing. Realtors will feel the need to quote higher-than-ever list prices.
Sellers who want quick money and convenience won’t worry about leaving a little money on the table, and take the ibuyer deal. Those sellers who want top dollar will list with a realtor.
With everything being high-priced, buyers will probably gravitate to the homes in top condition, and just pay what it takes. Hopefully we won’t run out of buyers.
Crafty agents might offer third-party reviews of the options. Sellers will already be getting biased opinions from ibuyers and realtors, and they could use a consultant to help sort out the best option. But sellers would have to be deliberate and analytical to resist winging it themselves.
The Big Question? With sellers having more equity than ever, will they mind leaving some on the table?
The successful ibuyers doing volume could smooth out any bumpy markets, because they will be determining the home values to suit their bottom line. If they can’t sell, they can always rent instead.
Home prices have been on a tear for ten years straight, and are at their highest levels ever.
Is this bubble going to pop too?
Let’s look at the statistics first. I took the most recent 45 days to get the latest scoop, plus the MLS prefers to calculate the smaller sample sizes.
NSDCC Detached-Home Listings and Sales, April 1 – May 15 (La Jolla to Carlsbad)
# of Listings
# of Sales
It is remarkable that all-time-high prices aren’t causing more people to sell!
In previous markets, once prices started reaching new highs, homeowners would jump at the chance to move. The inventory would grow and cool things off, and/or we’d hit an economic downturn and foreclosure sales would direct the market. But not today!
We are a mid-level luxury market. The more-expensive areas like Los Angeles, Orange County, and the Bay Area feed us downsizers who think we are giving it away.
Homebuying has de-coupled from jobs. We do have substantial employers like Qualcomm, bio-tech, etc. but not near enough to justify these lofty prices. How do we keep afloat? It’s the big down payments; either from previous home sales, successful business ventures, or the Bank of Mom & Dad.
They changed the rules. Banks have to give defaulters a chance to qualify for a loan modification before they can foreclose. With everyone enjoying their equity position, they will find a way to hang onto their house or sell it for a profit, instead of lose it.
Reverse mortgages are an alternative for those who need money. They might crank down the amount of money you can tap, but as long as homeowners are flush with equity, they will be able to get their hands on some of it via reverse mortgages or the typical equity line.
Buyers have been full of money, and willing to blow it. I’ve seen sales close for 10% to 25% above the comps this year, so it doesn’t seem like people are worried about a bubble. Those sales could be creating unsustainable comps, and be short-lived values, but will the next buyer question them enough?
Coming Soon vs. ibuyer. We need a gimmick to transition us to the ibuyer era, and the ‘Coming Soon’ off-market sales will be the sexy distraction. The price of an off-market sale isn’t necessarily lower than retail, and in some cases they can be higher when the buyers get jacked up about the opportunity.
The ibuyer era could be the last hurrah for open-market real estate. If the big-money corporate buyers can build enough credibility and begin to dominate the space, they will be able to dictate the prices paid for their flips, and control the marketplace. If so, they will make sure we won’t have another down market!
In the meantime, we might see prices start to bounce around, instead of the constant trend higher. But if it gets harder to sell, then many will just sit tight instead.
If you think a bubble pop will happen, ponder this question. Who is going to give away their home now?
The lawsuit alleges collusion between brokerages to make sellers pay 2.5% or more to the buyer’s agent.
The National Association of Realtors shrugged it off, and by the time the case gets to court, the current way we sell houses could be long gone anyway.
But let’s discuss being paid by commission.
The reason commissions are high is because of the home-selling process, and the amount of work involved just to have a shot of earning an actual paycheck.
Though I have a written listing contract with every seller, I can’t force you to sell your house.
I don’t do buyer-broker contracts with buyers, but if I did, you still don’t have to buy a house.
Whether I have a contract or not, there is no assurance that I will ever get paid, regardless of how much time I invest, and though I have a commission agreement with a seller, I have no control of the outcome – only the sellers decide if they can live with the resulting offers.
If an agent does get paid, it’s at the end – there’s no pay received along the way. Plus, the commission gets treated like a slush fund with many people trying to nibble away at it throughout the process. Then the brokerage and other parties take their cut, and the agent gets what’s left.
Given those conditions, shouldn’t there be a bonus, or reward attached?
Would you work for your current pay today if you knew you might not get paid anything? Or would you expect an additional bonus to live with that risk?
Just because buyers look at houses online doesn’t change the problem with being paid on commission. We’ve had these same issues before and after the internet.
Should we devise new pay structures for realtors?
The problem with a pay-as-you-go system is that you don’t know how long it could take. Consumers (both buyers and sellers) aren’t really sure what to expect in the beginning, and aren’t going to start writing checks unless, and until they get a good feeling that it would pay off. Flat-fee and salaried companies only provide transaction-processing services – which is only a small part of what I do.
There are two solutions:
A. Burn the business to the ground. This is the path we’re on, and the one-percenters will impose the systems they decide are good for you. They will also offer you their houses at prices they tell you are fair.
B. We convert to a free-market auction system.
The reason agents deserve big commissions is because of the all-encompassing nature of the service we provide. I handle every one of your real estate wants and needs all day, every day. I have skillfully navigate every possible issue/event that happens, because any one thing can kill the sale – and then you don’t get what you want, and I don’t get paid.
If the business was more predictable, less time-intensive, and had guaranteed pay, would I work for less? Absolutely, and the auction solution is the best answer.
It would take a major player like Google or Amazon to bring enough brand and reputation so consumers would consider the auction format. But if that were to happen, here are the benefits for everyone involved:
The selling process becomes structured – everyone knows how and when a house will sell. Post the auction date 30 days in advance so buyers can inspect the property – because the house is sold as-is, no repairs. On auction day, conduct the bidding out in the open where all have a fair shot at buying.
A real auction removes the agent shenanigans – no tilting the table in favor of anyone.
Sellers get a little more than retail value, and know the close date in advance.
Buyers know exactly what to expect, and have a fair shot of buying any home.
A streamlined, predictable process means less work for agents.
The hardest part? Convincing sellers that there aren’t two in the bush who will pay more.
P.S. If the current business does crash and burn, I’m thinking of being an artist:
Sure, they offer convenience, but the reason it works is because it’s so vague – sellers will never know the money difference between selling to an ibuyer or an open-market sale. The trendy-hip, sell-with-a-click factor could lure sellers into giving up an extra 5% or so without ever realizing it.
(pay 3% more in ibuyer fees and then sell for less than open-market sale)
Hat tip to reader ‘just some guy’ for sending in the article:
When Dora Cagnetto decided to sell her townhouse in Phoenix this year, a real estate agent told her that she could get around $375,000 for it. Maybe $390,000. But she would have to replace the carpet and paint the walls. At 68 years old and recently retired, she thought it sounded like a lot of work.
One evening, after the carpet had been ripped up, Ms. Cagnetto saw an online ad for Zillow Offers. Zillow, better known for telling people what their homes are worth, would buy her home itself. She uploaded some photos and got back an offer: $382,000, minus a fee for Zillow. No repair work or open houses necessary. And Zillow paid cash.
Ms. Cagnetto estimated she effectively paid $10,000 to $15,000 for the privilege of turning over to Zillow the job of replacing the carpet and the bathroom countertops and doing other light repair work.
“My son, he’s like, ‘Well, oh, I could have done that,’ and maybe he would have saved a little money,” Ms. Cagnetto said. “But to me it was like, I don’t want to do that. I don’t want to hire somebody to do that, I don’t want to put carpeting in, I don’t want to paint these walls.”
The Phoenix area has become a hub of the iBuying phenomenon. With its relatively new housing stock and miles of buff-colored subdivisions, the market is affordable, uniform in look and steadily growing.
Whether iBuying works outside markets like Phoenix and Las Vegas is an open question. The model has yet to break into the Northeast, where the housing stock is older, the weather drives up maintenance costs and there are fewer of the kind of cookie-cutter subdivisions that the industry’s algorithms assess best. Prices are higher, too, making mistakes costlier for the companies.
I’ve been saying that single agency is coming, where buyers don’t get any representation and are left to figure out pesky details like proper home valuations and investigations on their own.
Redfin has been the leader in dumbing down the business. It’s insulting that they pay trainees $50 to open a door for showings, but aren’t capable of offering any advice while on site – the time when buyers need it the most. Buyers should be insulted – you are contemplating a major purchase of your lifetime during Housing Bubble 2 which could change your life forever (good or bad), and this is all the help they offer?
It’s bad enough that Redfin is constantly pushing lies and deceit (“We sell for $2,800 more on average compared to other brokerages.”). But their latest pitch exposes who they really are – a transaction conveyor belt:
I haven’t seen their Direct Offers package in California yet – this house is in the MA.
But it’s probably coming our way.
What this means:
Redfin, a real estate brokerage, is pushing the home buyer to not use an agent.
Yesterday, we met briefly with Peter Jonas, president of the west region of Compass. He likes to reach out to agents to stay in touch with what’s happening on the ground, which is commendable.
We talked about the criticism received about the story that implied Compass doesn’t have a clear strategy for turning a profit, but the specific question was regarding the ancillary services of escrow, title, and mortgage, not the company in general.
He said that once Compass has reached 20% market share in the 20 largest markets, then they will put more focus on the next step in building the platform. While there has been a few escrow companies acquired that were owned by brokerages that joined Compass, there hasn’t been any other effort to build the ancillary-services division yet – but it’s coming.
We also discussed the I-News report that said Compass was going to implement 70/30 commission splits – which are the norm in New York City, according to Kayla. Peter confirmed that there are no plans to do that here. He said, “If we did, we wouldn’t have a brokerage!”, to which I agreed.
We marveled at the incredible growth of the local team.
Compass hired the first local agent in January, 2018.
I was #160 when we came on board in July.
Today there are 498 realtors and assistants at Compass San Diego. We also have 62 local Compass employees to support us.
I think we all can agree that changes are coming to the industry. The agents who expect to be around a while are figuring it out – you’ll need to be on the right team, just to survive.
The agent-population growth suggests that Compass is one of the best choices!
Hat tip to CB Mark for sending in another article on people leaving California – I added the U.S. Census stats for San Diego County at the bottom:
People have long dreamed of moving to California, but increasingly the people in the state are looking to get out.
According to recently released data from the US Census, about 38,000 more people left California than entered it in 2018. This is the second straight year that migration to the state was negative, and it’s a trend that is speeding up. Every year since 2014, net migration has fallen.
California’s population did still increase in 2018 by almost 160,000 people, largely due to the 480,000 people born in the state. But while migration out of the state has accelerated over the past few years, the number of annual births has been steady. The trend suggests in the next decade California’s population will begin to decline.
Besides births, the main reason California’s population hasn’t already started falling has been international migration into the state. Every year since 2011, net domestic migration has been negative—i.e., more people leave California than move in from other states. But from 2011 to 2016, the number of international migrants moving into California was larger than the number of locals who were moving out.
Since then, however, domestic departures have outstripped international arrivals. In 2018, 156,000 locals left the state, compared to 118,000 international who came.
The exodus from San Diego County is picking up steam. Where the cumulative total of domestic migration over the last eight years was only 46,596 (avg. 5,825 per year), we had 10,835 leave in the most recent 12 month segment – and the international arrivals have slowed considerably too:
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