If history teaches us anything, it’s that when good ol’ American ingenuity leads to positive changes for consumers…those changes are, very often, here to stay. These changes, which consumers benefit in some way from, can come in different forms. Think of Walmart. That changed pricing and made many items more affordable to the public. It also affected the mom and pop stores in a negative way. It’s not always about our pocketbooks though. Uber disrupted the taxi business by changing how convenient and professional that service could be. Both examples were game changers. How we view and utilize those two industries today is totally different than how we felt about them prior to those two companies’ creations. In real estate, the creation of iBuying has the potential to change that industry just as dramatically.
What IS an iBuyer?
An iBuyer is a company that purchases homes directly from homeowners with cash while allowing the Sellers much more flexibility than a traditional sale. The iBuyer eventually closes on the property and resells it themselves – for a slight profit – either after performing minor renovations on the property or without. Some iBuyers sell directly to area investors, others on the open market to owner occupants. Many iBuying companies forgo the use of licensed real estate agents all together, while some are operating as their own real estate brokerage. The latter would utilize agents when they wanted to resell the property via the MLS or another similar listing service.
The offer price of iBuyers is often derived from a mathematical algorithm based on the area’s market traits. Some iBuyers can provide a Seller with an almost immediate offer price, while others may bring a human into the equation by having them physically inspect the premises before committing to a price contractually. This whole process is not that unlike the plethora of used car dealers that one can find either locally or on the internet. Some will provide an immediate price to those actively looking to sell their car. Other dealerships may offer a price based on their market data, but want a mechanic to take a look at things before finishing the transaction.
One of the keys to iBuying is the fact that the Seller is actively seeking an offer from the iBuyer. In other words, it’s the Seller that solicits the offer. The “i” in iBuyer stands for “instant.” As earlier stated, most companies that operate as iBuyers make their offers immediately or within 1-2 days’ time from the Seller asking for it. Once presented the offer, the Sellers can choose to take the cash offer or decline it and try to sell the property in another way. If the offer is accepted, the iBuyer will typically allow the Seller to take a reasonable amount of time to ready themselves before closing. For example, if the Seller needs time to pack their things, find a new home, and prepare to close on the replacement property – the iBuyer sale will likely allow for this. Conversely, if the Seller wanted to close in just a matter of several days, this also could be done. Ultimately, a good deal of flexibility for the consumer is provided. This, naturally, is quite convenient and can help make the entire process of selling and buying a home much less stressful.
Sounds good! Is it, though, for everyone?
Well…that answer depends on who YOU are. This is drastically different than most traditional sales. Gone are the days of prepping for a traditional sale. No more fixing all the little things that have been on your “Honey Do” list for the last decade (like that stupid faucet that has leaked since the second week after I moved in!!), cleaning the house before every showing, taking the kids/dogs or both somewhere while others are going through your home, and the weeks (if not months) of waiting for the right Buyer to come along. No more worrying about finding a new home in the short period of time between when the home I’m selling is under contract but has yet to close. In addition to this, people who utilize iBuyers no longer have to worry about the Buyer having the ability to obtain and close on a loan. No photographer or advertising needs paid for. And… no Realtor needs hired to sell. They want paid usually too, don’t they??
Actually, yes, Realtors do expect to earn a commission on a sale. It is work – sometimes quite a bit.
The numbers for each of the bigger iBuyers that currently exist aren’t the same across the board. They’re also hard to find. Some, though, have publicly stated that they offer/purchase on average somewhere between 95-96% of what the actual market value for the homes are. Assuming that is true, it has the potential to dramatically change how real estate sales are conducted in the future. It definitely should be viewed as direct competition to those that are real estate agents as well as others who are directly affected in a negative way (more on them later).
Think about it. Through the eyes of the consumer, would you want to go through all of the hassles that can occur during the entire sale and purchase of a replacement home if it cost you close to the same amount as an immediate cash offer from a buyer who will provide flexibility closing?
The two biggest “pinch points” (aka – stressful aspects) for Sellers are:
- The sales process, (finding and accommodating the Buyer who will offer an acceptable amount); and,
- Finding and paying for the replacement home.
We’ve already discussed what’s common among the great majority of iBuyers (how they deal with Step #1). Several, however, want to attempt to provide even more convenient services to consumers – and profit from it.
How can one make the FINANCING part of a real estate transaction easier or cheaper? If you’re the iBuying company, you can finance the sale of the replacement home too! Many do this. Zillow is one very big example.
Most agents have no idea that Zillow is an iBuyer. The fact is that they are one of the biggest and plan on growing SUBSTANTIALLY from it. They offer not only the iBuying services, they have also recently launched their own lending platform (it’s just “one click away”), and one can assume that they most likely will get into the Title/Closing business eventually. It’s a one-stop-shop for the consumer. It’s also a fantastic income stream for Zillow. If they make a modest profit on the resale of the original property and, then, make more money by providing financing on another property – they don’t have to make as much as others who provide just one of those two services. This allows them to provide services lower than many of their competitors.
Who else is in danger?
Realtors aren’t the only ones whose business may be threatened. Local investors (think flippers) and local lenders are not able to compete. The playing field is no longer even. If company X needs to charge $1,000 more for a loan just to keep the lights on, they cannot compete over the long run. The same can be said of investors who simply do not have the bandwidth of Zillow. In next week’s post I will go into the specifics and real-life numbers. These are staggering. It’s sufficient to say here, now, that every locally based investor unlucky enough to be in one of the cities where Zillow operates as an iBuyer is at a distinct disadvantage. The local guy may need to make $20,000 of profit per deal to stay in business. Zillow has shown approximately only $8,000 of profit from their resales. The key is the number of them that they’re able to do.
Zillow’s plan is similar to their iBuying brethren – to become so large and do so many transactions, that they can undercut all smaller operations to the point of putting them out of business. Remember that Walmart example? How many “mom and pop” stores have survived within close proximity to Walmart stores?
If you’re an agent thinking, “what do I have to worry about?” Well, Zillow alone did over 170,000 iBuyer transactions through just the first six months of this year. Guess what? They plan to increase that number several times over.
For now, be aware of what iBuyers are and what their modus operandi is. For consumers in the right situation, they provide a service, (i.e. – much less stressful than a traditional sale), at an unbelievable cost. It’s for this reason that they aren’t going away any time soon. The game has been changed, forever.
*Not intended as accounting or investment advice. Contact your tax preparer for more information. Not all borrowers will qualify.