We were talking with some friends last night about how much financial support is going towards kids, and how it will affect real estate in the future.
On one hand, it’s the Bank of Mom and Dad, and helping to keep the market afloat when funding home purchases at these lofty prices for those kids with regular jobs.
However, for those kids who never get to the point of financial stabilization, the selling of the parents home will become the lottery ticket to solve their money issues.
I suggested that this is where the ibuyers could do the most harm by taking advantage of people who want and need a quick sale and who aren’t that familiar with the values.
When we were in Las Vegas for that one-day vacation, I saw more than one ibuyer ad on TV, and they were very enticing. The kids who have been strapped for years and then inherit their parents’ house might jump at the chance to get their hands on quick money – and likely leave some on the table.
Will anyone step up to protect the unsuspecting? A new challenge/opportunity for realtors!
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?
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.
While the old tradition of broker cooperation via the MLS is slowly eroding, there is an opening for others to intrude. Two quotes seen this week in different articles:
Founder and CEO Rich Barton said in a radio interview on April 1st that he sees Zillow Offers as an evolution of Zestimates. In fact, at some point in the future, a Zestimate and a cash offer may be the same thing, he said in an appearance on National Public Radio.
“Ideally, I would like to have the Zestimate be a live offer on every home in the country,” said Barton, adding, “It will take quite some time to get there.”
Glenn Kelman, CEO of Redfin, a real-estate brokerage that has also got into the home-flipping business, said he still believes the endgame for Opendoor, as well as his own company, is to get buyers to purchase homes without necessarily using an agent.
“A large number of these companies, Redfin included, are going to be selling direct to consumers,” he said.
Will consumers trust them enough to buy and sell houses based on their fabricated estimates of value, without a realtor on their side? All that needs to happen is for these ibuyer companies to overwhelm the public with advertising, and convince you that their value estimates are close enough.
The advertising is the key. Consumers don’t have much real estate experience and education, and it’s not easy finding helpful resources (how many real estate blogs are there?). They just want to click and go!
It will be like TrueCar, where they advertise that their valuation system gives you an advantage, and to go down to one of their dealers to buy the car for that amount. TrueCar has sold over 2 million vehicles!
Mike has been the leading resource on the ibuyer industry, and he sees it the same way I do – Zillow wants (and needs) to commit fully to their ibuyer program because advertising income from agents is starting to lag, which could be a major shift in the real-estate-selling business. He is having a seminar for those who might be interested.
Zillow, the world’s largest real estate portal in terms of revenue, recently underwent a major shift in strategy. In effect, its advertising revenue stream has run out of runway; while still a billion-dollar business, growth has stopped. Thus, it is reorienting towards iBuying and its Zillow Offers program.
In the world of grand strategy, the move is a rare, bet-the-company moment focused on one thing: the battle for the start of the consumer journey. Designed as a maneuver to simultaneously disarm competitors and strengthen its already powerful position, it’s either a masterstroke or a mistake. But in either case, Zillow is clearly “all in” on the gold rush that is iBuying.
Zillow has set lofty goals: buying 60,000 houses per year and $20 billion in revenue. The stock price is up and the company is valued $2 billion higher than it was pre-announcement. This is big.
This Friday I’ll run through all of the major points from this move, complete with charts, data, and insights. I’ll look at the numbers that matter, the metrics to keep an eye on, and what it all means for the larger ecosystem. I’ll also answer your questions! Read more details and register.
Who should attend the webinar?
Zillow’s competitors and potential competitors (portals and iBuyers).
Real estate incumbents looking to formulate their iBuyer strategy.
International real estate portals looking to learn from Zillow’s move.
Investors interested in iBuying and what the market impact will be.
Start-ups with a desire to understand the new landscape, and how they fit in.
When the announcement was first made two weeks ago, Zillow stock went from 34 to 44, but it is back down to 38 today (LINK).
Buying 60,000 houses a year isn’t the game-changer by itself. What matters is what their nationwide advertising does to the seller’s psyche – and will agents keep spending big money to get connected to the sellers who want more $$ than Zillow is willing to pay.
Everyone is getting into the home-buying business. First it was the well-funded disrupters like OpenDoor and Offerpad, and then Zillow, Redfin, Knock and others jumped in – which caused Coldwell Banker, Keller Williams to also announce their programs (plus Compass and others won’t be far behind).
What will the real estate world be like if sellers have multiple choices of cash buyers? Which ibuyer will have the advantage? Zillow is already in the driver’s seat, and they include the additional service of offering a third-party realtor’s opinion too.
From Mike DelPrete – an excerpt:
Zillow announced its Zillow Offers program in Phoenix earlier this year, and started buying houses in May. It is heavily promoting the program across its site. While looking in the Phoenix market, a prominent message is displayed on all active for sale listings.
In its latest quarterly results, Zillow revealed how effective the promotion was: “Since launch, we have received more than 10,000 offer requests from potential sellers.” And: “…in Phoenix, for example, we are seeing about 15% of all dollar value that’s being sold in Phoenix any given month.” That translates to about 1,600 offer requests per month.
Opendoor is on record saying that more than “one in two sellers who received an Opendoor offer” will accept it. It’s currently buying around 300 houses per month in Phoenix, so that’s about 600 offers made per month.
There’s a difference between an offer being requested, and an offer being made. What’s clear, though, is that Zillow is generating a massive amount of offer requests each month, at volumes that rival (and exceed) Opendoor.
Most importantly, Zillow’s leads are coming with zero incremental customer acquisition cost, while Opendoor and other iBuyers must advertise directly to consumers to generate leads.
They aren’t in San Diego yet, but it’s coming. Read Mike’s full article here:
The ibuyer is the sexy new shiny object in the real estate game. While the idea of a quick and easy sale sounds great, the reality is already much different – and, as the market transitions, their quotes and repair costs should get more conservative (and home sellers be less enamored).
The only local story I’ve heard was one where the ibuyer checked out the property in person, but then didn’t offer, saying it was outside their buying range. You can’t blame them for being picky, and only take the gravy. They will probably stick to the lower-end vanilla properties that are more predictable.
Opendoor, which launched in 2014, says it’s not a house flipper. “We aim for fair market offers, making money on the fees we charge, not the profit on resale,” says Jim Sexton, head of Opendoor’s broker development. The company says it sells 800 homes a month across its 11 markets, with plans to expand to 50 markets by the end of 2020. Currently, it has nearly 3 percent market share in Las Vegas.
Opendoor eyes markets with ample volume, size, and liquidity, Sexton says, adding, “We’re looking for markets that don’t have many barriers to entry, such as hefty transfer taxes or other local or state regulations that make a transaction difficult.”
An Opendoor competitor, Offerpad, operates in eight markets with plans to expand, while Zillow, one of the newest entrants into the direct buying niche with its Instant Offer program, has been successful in Las Vegas and Phoenix, where it expects to buy and sell up to 1,000 homes by year’s end. The new Redfin Now program is available in two California test markets, and Knock, operating in Atlanta and in Charlotte and Raleigh, N.C., enables “trade-in” clients to buy a new home before their existing home is listed.
These companies all claim to speed up and simplify the real estate transaction while removing uncertainty and inconvenience for sellers and buyers. The appeal of the marketing spiel is easy to understand, but how applicable is this model for most consumers? And how likely is it that these companies will become significant players in many markets?
“The market is really driving this model,” says real estate consultant Victor Lund, founder of WAV Group. “The convenience factor, along with an alignment of circumstances are contributing to the growth of iBuyers. Consumers have built up a lot of equity in their homes since the recession, interest rates are low, days on market are low, prices are up, and there’s lots of competition, which puts cash buyers in a better position to buy.” These circumstances create the optimal environment for iBuyers to thrive. Lund believes that once prices slip and homes generally take longer to sell, consumer interest in iBuyers will fade.
Among agents who have interacted with these models, what are they finding? Despite iBuyers’ claims to revolutionize the real estate transaction, some agents are finding their transactions are neither quick nor seamless.
For example, after Ockey’s clients accepted the Opendoor offer, the next step was the inspection. A team of five Opendoor contractors—one for electrical, one for plumbing, one for foundations, and so on—went through the house with a magnifying glass, says Ockey. “They asked us to fix everything you could think of. They wanted bathtubs and toilets replaced if there was even the slightest blemish. They wanted showers retiled and regrouted. It wasn’t little projects; they wanted to remodel the home, and they wanted the seller to pay for it.”
The requested repairs came to about $16,000 on a $300,000 home. Ockey spent weeks negotiating that figure down, which added time and worry to the transaction. “Having representation saved my clients thousands of dollars, but in the end, they made about $10,000 less than they would have selling to a traditional buyer. It’s not horrible, but it’s a lot of money when you only have $20,000 or $30,000 in equity.”
The automated aspects of working with Offerpad didn’t faze Kellie Parten, an agent with HomeSmart Realty in Phoenix, who helped her clients buy a home from the company in May. “It was robotic, but in a positive way,” says Parten. “You can tell that they’re a little bit of a machine, but I didn’t mind because they were very responsive and organized. I never had to ask for something twice.”
Although Parten wouldn’t hesitate to bring a buyer to an iBuyer home, selling to one is a different story. “Offerpad and Opendoor offers on a couple of properties I’ve listed seemed exciting at first, but after you factor in the concessions they request and the additional credits in lieu of repairs after inspections, the net is usually too low and the deals never came together,” she says. One iBuyer recently offered $750,000 on a home that Parten later sold to a traditional buyer for $900,000.
Opendoor, the ibuyer who purchases your home for cash and closes escrow at your leisure (as long as you don’t mind paying their 6% to 13% fees plus home repairs) has made a deal to acquire a discount brokerage:
Opendoor announced Tuesday morning that it has acquired Open Listings, a real estate site that offers homebuyers a 50% refund on the fees their real estate agent would have received.
With the acquisition, Opendoor will now be able to buy a home directly from a seller, then help that seller find a new home (whether it’s a newly built home or an existing one), offer them a mortgage, and close on the sales through its own title operations.
Basically, buyers who use Open Listings find, tour, and buy homes through the platform. Real estate agents only come into the process when it’s time to make an offer on the home.
They are building a platform similar to the Red team’s, and both are weak in the beginning – they both offer inexperienced agents or no help at all at the initial showing of the home. These guys expect you to go to the listing agent’s open house, and then make an offer with their online agent.
I believe that every buyer should receive professional advice from their agent while at the property – and reflect those details into the offer price. Otherwise, you pay too much!
The online agents haven’t seen the house in person, and can’t offer the same expertise. Besides, if you are an online agent, you just want to hurry up and write the offer and expect any defects to come out during the home inspection. The buyers end up basing their entire investigation on a $500 guy who has no fiduciary duty to them and whose job is limited to the moving parts of the house.
But let’s say you can live with that.
These types of disrupter platforms are entirely dependent upon all agents sharing their listings on the MLS. But as the major brokerages continue to input their listings on their company website first (Redfin’s publicly-stated policy), the MLS will soon become a relic, and the marketplace of last resort.
All of the market conditions are pushing in this direction. We are transitioning from the Wild, Wild West to Full-Tilt Chaos!
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