There was a good summary of the ibuyer business published yesterday:
https://www.curbed.com/2019/3/21/18252048/real-estate-house-flipping-zillow-ibuyer-opendoor
An excerpt:
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.
We’ll have even fewer motivated sellers!
From Drew:
With a new mission to “Uberize” real estate, Zillow has received over 100,000 requests for an offer since their 2018 launch. While this may not seem high on the surface, the Offers program isn’t even live in 20 markets yet.
In 2018, Opendoor flipped 10,130 homes. Assuming a graciously high conversion from lead to sale of 10%, that’s still over 100,000 listing leads generated by Opendoor alone.
Add in Redfin, Knock, and Offerpad, and the number could easily be pushing the 7-figure range. That’s a LOT of leads being diverted from traditional lead generation channels.
iBuyers have increased home valuation certainty with the introduction of cash offers at scale. Their stronger consumer value proposition encroaches on sacred turf: the listing lead.
BROKERAGE FALLOUT
The impact is significant, as I have spoken with brokers and team leaders that are saying listing leads are down 25-40% in markets where iBuyers have heavy presence. This shouldn’t be surprising: as a consumer, would you rather hand over your precious personal information for a basic home valuation (CMA), or an actual offer on your home?
Rich Barton recently went on record saying, “The closer I can get to making the Zillow Offer actually match the Zestimate the more certain people can be about what their house is actually worth.” I’ve played a part in generating hundreds of thousands of listings leads via the industry standard “What’s My Home Worth?” call to action. It’s mind boggling to think, that might not work any longer. Once the delta between the Zestimate and the Offer starts approaching zero, I can’t imagine a world where consumers would go anywhere else for a home valuation.
While the jury may still be out on the market share iBuyer’s will eventually capture, it’s clear liquidity is coming to Main Street and industry titans are taking notice.
Gary Keller recently said, “I feel like I have no choice now…I can’t allow Opendoor or Zillow to go out and be the only player in the iBuyer space and then begin to dictate terms and build brand around ‘they buy houses’.” They have plans to be operational in 8 markets by the end of 2019. He’s not alone in this sentiment, as Realogy and many independents have begun offering iBuyer services.
It’s not all doom and gloom, as Opendoor knows they need the industry’s cooperation on the buyside.
A new, highly disruptive home-selling option known as iBuyers (instant buyers) has clearly emerged:
Home sellers are excited.
Real estate agents are nervous.
Venture capitalists have been investing heavily.
Experienced real estate executives are becoming less skeptical as more and more $$$ pours in.
Offerpad, Opendoor, Zillow, Perch, Keller Williams, Redfin, Knock, and cataList Properties (Coldwell Banker) have now cumulatively raised billions of dollars to buy homes directly from homeowners who want to avoid the hassles of selling their home the old-fashioned way. The traditional home-selling process can be particularly stressful when a home buyer has a home to sell and also has to:
1. Buy with a contingency, needing the proceeds from their current home to purchase the new home.
2. Move twice if they sell their current home before they buy the new home and are unable to lease their current residence back from the new owner.
3. Pay two mortgages if they own two homes for a while.
In this episode of our podcast, Dean Wehrli interviews Offerpad co-founder Jerry Coleman to understand why this new business has emerged so quickly.
Empowering the Consumer
As with so many disruptors, the companies are using technology to empower the consumer to take control. iBuyers make it easy to sell your home: spend a few minutes online to provide details on the home and images, receive an offer within 24 hours, and choose your closing date. This won’t appeal to every consumer, but clearly it appeals to many, particularly those who place a premium on their time or stress.
Why Would a Consumer Opt Not to Obtain the Maximum Price?
Jerry reports that Offerpad’s success has not just been with the tech savvy or financially elite. Many of their clients are people who have sold homes before and remember the pains they went through: open houses, contingency sales, buyers falling out of escrow, etc. They also likely paid 6%+/- of the proceeds to the agents and are thus comfortable with paying up to 8%+/- to ibuyers to ease the process and provide surety of closing.
Valuation Errors?
After participating in more than 100,000 housing transactions over their careers, Jerry (who co-founded what became Invitation Homes) and his partner, CEO and co-founder Brian Bair, saw an opportunity to combine their acquisition experience with new technology. Offerpad has built algorithms to estimate home value and also relies on employees who know the local neighborhoods. The data to build these algorithms was not readily available 10 years ago. Jerry describes the process as roughly 90% science and 10% art. Offerpad knows that every home is different. Team members who know the neighborhoods make a big difference in getting the valuation right.
How Does This Threaten Real Estate Agents?
Think of Offerpad as a real estate agent. It is licensed as a real estate agent in all 14 MSAs where they do business. Home sellers can sell their home to Offerpad, with Offerpad keeping the equivalent of both the buyer and seller commission as well as an additional fee. Then, Offerpad lists the home on their own behalf, “keeping” the seller commission and paying a buyer commission if necessary.
With Offerpad purchasing the home and then turning around and selling it, each home transacts twice. There is likely to be no commission to an outside agent on the first transaction. The second transaction will likely involve some buyer broker commissions, with Offerpad keeping the seller’s commission as part of their fee and paying the buyer’s commission if there is a buyer representative. With Offerpad able to borrow much of the proceeds to purchase the home, the return on equity invested can be quite high when all goes well.
Will total commissions reduce over time? It is too early to tell. Total commissions might even go up as more homeowners transact now that they know the process will be easier. However, real estate agents who don’t offer an option for the homeowner to sell directly for “all cash” will likely lose market share. This is why many real estate agencies are now trying to enter the iBuyer space. Jerry believes there will always be room for the “value add” real estate agents.
Home Builders Love iBuyers
Home builders love the fact that iBuyers will remove the contingency from a prospective new home sale. 10 of the top 15 builders work with Offerpad, which can be flexible on the closing date. They also offer the seller a “free local move.” Dean notes how this “smooths out the process.” According to Jerry, 9 of 10 customers who have used Offerpad would use them again and refer them to their friends and family.
Which Markets and Price Points?
iBuyers need local scale and find it easier to execute when the homes are in a price range with a lot of volume and comparable transactions. Offerpad has a hundred markets on their expansion list.
A Surprisingly Competitive Business
While this podcast features Offerpad, we are not endorsing one iBuyer over another. We have also had the CEOs of Zillow and Opendoor keynote at our conferences, and we are working with several others as they grow their business. Market risk is clearly something they consider, and all of our clients have contingency plans in case the market softens. We can envision a future where most home sellers can quickly obtain several credible offers for their home and transact painlessly.
https://www.realestateconsulting.com/stay-informed/new-home-insights-podcast/episode-20/