Real estate professionals have weathered a lot of changes over the years, from pencil and paper giving way to computers, to rules and regulations that shift from year to year.
With the onslaught of everything computerized, it is no surprise that new competitors have risen through the internet. iBuyers are quickly moving into the real estate industry, gradually increasing their share of the market.
Are these newcomers a serious threat?
Ryan Lundquist, author of the Sacramento Appraisal Blog, addresses this very issue in his article, “Zillow Has Officially Entered the Market.” Ryan’s article does a wonderful job of addressing the growing iBuyers and the effect on the real estate industry. He explains Zillow’s threat to real estate appraisers and agents, ameliorates some of the worry over Zillow and iBuyers as a whole, and gives realistic advice to concerned real estate workers.
Ryan’s article will be referred to frequently as we discuss these real estate newcomers, iBuyers.
Who Are the iBuyers?
iBuyer stands for “instant buyer.” What does an “instant buyer” do exactly? Let’s explain by using Zillow’s process as an example:
To use Zillow’s Offer platform, a customer logs on to the company’s site or app then answers a few questions. Within about 48 hours Zillow spits out a no-obligation cash offer. If the customer accepts the offer, Zillow sends a team to evaluate the home, the seller chooses a closing date anywhere from 5 to 90 days away, and the entire deal is completed by the closing date. The process is streamlined and supposedly simpler for the seller than traditional selling.
That leads us to the next question, who are the main iBuyers?
The top four in order of purchase volume are: Opendoor, Zillow, Offerpad, and Redfin.
While Opendoor currently leads the pack, Zillow is breathing down its neck. According to Kathleen Howley in Housingwire.com, “In January, Opendoor purchased 4.7 times the volume of Zillow, but that ratio shrank to 2.4 times by July as Zillow moved into more markets.”
Zillow continues to grow, in fact, as of October 21, 2019, Zillow is officially operating in 22 U.S. metro markets, with Tampa being the latest to launch. More than 100,000 requests for no-obligation cash offers have come through Offer already!
There is more to come! Within 3 to 5 years, Zillow hopes to be selling 5,000 homes a month and generating $20 billion a year in revenue. To give you some perspective, as of July 2019, Opendoor bought homes at the rate of approximately 1,400 homes per month and Zillow trailed behind with approximately 428 homes per month.
Zillow’s goal of 5,000 homes a month is lofty yet attainable! Zillow has the benefit of a well-known and publicly trusted brand name and the company is quickly gaining ground on Opendoor, so it won’t be surprising to see the company overtake Opendoor in the near future and eventually meet its goal of 5,000 homes a month.
Why Use an iBuyer?
iBuyers add a larger chunk to a home seller’s costs than the traditional selling method does. With fees an average of 7.0%, this higher cost may deter home sellers. However, many sellers feel that the extra cost is worth the benefits.
That said, the benefits must be enough to convince a seller to choose an iBuyer over the traditional process and its lower costs.
Just what are the benefits of selling to iBuyers, Zillow in particular?
- A seller can sell his/her house faster
- There is no need for showings
- Repairs are taken care of by Zillow (although you ultimately pay for them through the deduction from your final price)
- Sellers specify their closing and moving dates
- iBuyers help home sellers who are building a new home while living in their old one (you won’t have to move twice or carry two mortgages simultaneously)
Why to Avoid an iBuyer
The benefits of using an iBuyer are many and alluring enough to convince a growing amount of home sellers to give iBuying a try.
There is a downside though. Let’s look at why a seller might be wise to avoid selling to an iBuyer.
- A seller will earn less of a profit
- The buyer will pay more for the home
- iBuyers may drive the prices of homes lower for sellers but higher for buyers, a lose-lose situation for everyone except for the iBuyers
As Ryan points out in his article, “Remember, these corporate real estate machines have to buy low in order to make a profit.” Don’t go into the transaction believing that an iBuyer is going to give you a great financial deal!
The decision ultimately comes down to convenience versus money! You’ll be selling your home to basically a “flipper,” although Zillow does not accept that title.
Flippers make their profit from “buying below market value, doing repairs as needed, and then selling higher,” according to Ryan. He continues, “I’m not saying tech companies are going to cause prices to rise, but when the focus is on flipping homes, this won’t help keep prices lower.”
Should Real Estate Workers Be Worried?
This question is the one that Ryan addresses very clearly and convincingly in several ways.
One of the issues that arises is that MLSs worry that the homes that sell through Zillow will not be listed on the MLS.
According to Ryan,
The good news here is I’m told homes bought by Zillow are going to be listed for sale on MLS (fingers crossed this happens). By the way, Zillow is going to be using a local brokerage for their acquisitions and sales.
This is hopeful news for all real estate workers!
Another issue iBuyers create is that iBuyers are big news right now, giving consumers the impression that these newcomers have more clout in the real estate industry than they really do. As Ryan explains:
Tech companies are getting a ton of press, but these brands are the minority in the market right now by a long shot. For instance, Opendoor has 70 listings in the Sacramento region. That’s impressive for a start-up, but at the same time it’s only 1.4% of all listings. My guess is Zillow will be aiming to represent 2-3% of the market this year in terms of sales volume. Again, this is impressive, but let’s remember the vast bulk of sales in coming time are going to be sold traditionally.
Another point which may relieve the worried, is that iBuyers may stay out of certain niches in the real estate world, leaving chunks of the market untouched. Ryan explains:
Like many tech companies we’re going to see Zillow with a buy list…they’ll likely focus on conforming homes in a specific price range rather than unique or high-priced homes that might be more difficult to sell…On a side note, if you work in real estate and you’re worried about the invasion of tech companies, then diversify into places and price ranges where iBuyer models aren’t going.
If the iBuyers continue to encroach on the traditional buying and selling process, there may be more reason to be concerned in the future; however, at the current rate of growth, the iBuyers won’t be a significant threat for some time. Should traditional agents and appraisers focus on the areas where iBuyers aren’t going to venture, this helps to ensure a secure future.
One more piece of advice taken from Ryan’s post: traditional real estate workers need to educate the public about the benefit of working with traditional workers and not going through iBuyers:
If I could offer any advice though, I’d say to accept the reality that tech companies are going to be a part of the real estate scene. For now it looks like the vast bulk of homes are going to be sold traditionally though, so I recommend focusing your time and energy on the larger portion of the population that won’t be working with these tech brands. Most of all, prove your worth. Why should someone hire you instead of a tech firm? What is your value proposition in a changing market? Prove it with uncommon service, deep knowledge, and results.
While the iBuyers are gaining ground in the real estate market, traditional methods are still the most popular way to go. Educate yourself, take steps to stay relevant, and educate the public and you will keep a solid place in the real estate world for years to come!