The Rise of iBuyer Real Estate: Industry Disruptor or Much Ado About Nothing?

Working by Zoom was a life saver last year, but has it left us craving personal collaboration? Only time will tell the full story, but some studies find that 45 percent of us miss workplace interactions and 42 percent feel more stressed working solo.

Rarely is new technology the panacea it first appears to be. For every perk there are trade-offs –– monetary, psychological, or otherwise.

So, in applying this to real estate, will iBuyer programs dominate the industry in a decade or be just another quick-sell option for a certain segment of the market?

The rise of real estate iBuyers

Online real estate companies and fast-cash offers are nothing new. Realtor.com began sharing online listings with the public in 1996 and HomeVestors has been buying “ugly houses” since the late 80s.

Today, a whole new crop of instant-offer real estate investors has hit the market, including Opendoor, Offerpad, Zillow Offers, Knock, and RedfinNow. Although still in limited markets, expansion is well underway with Opendoor entering six new markets in the first quarter of 2021, doubling its total presence.

The iBuyer model is betting that enough sellers will be open to an algorithm setting the sale price of their home in order to get an instant cash offer. To help sweeten the deal, some companies are also covering moving expenses, minor repairs, and even holding the mortgage on a client’s next home, eliminating contingency issues.

Forgoing open houses and showings, especially during the pandemic, was a big draw for some sellers, but the convenience of a quick sale comes at a cost. Let’s take a closer look at the bottom line.

A look behind the curtain

While expanding rapidly, iBuying is still in its infancy and its biggest players have yet to turn a profit. In fact, they’re still significantly in the red.

Opendoor made headlines in late 2020 with its initial public offering. According to millionacres, the company earned $4.7 billion in revenue in 2019, however, its adjusted EBITDA was a net loss of $218 million (that’s a loss of about $11,500 per house.)

Tech entrepreneur and Inman contributor Mike DelPrete recently called out Zillow and Opendoor for being less than transparent about profitability. After crunching 1Q20 numbers, he found that while painting a rosy picture for stockholders, Zillow’s net loss per home was a whopping $72,000. Indeed, both companies lost about $300 million each in 2020.

That’s not to say the low-margin, high-volume iBuyer model doesn’t have a role to play. The question is whether they can operate profitably at scale. To date, none of the major real estate iBuyers have figured out how to make money.

Does iBuying really benefit the customer?

Life happens and for homeowners who need an immediate cash offer, iBuying may fit the bill. But most people who invest in real estate want to maximize their ROI when it’s time to sell. If sellers don’t take the time to understand what they’re getting into, the end result can be less than ideal.

When it comes to consumer benefits, iBuying can fall short in several ways:

• Inaccurate valuations
  “What’s my home worth?” It’s the first question sellers ask an agent when they consider listing. With iBuying, an automated valuation model (AVM) determines the initial sale price. The problem, according to NAR, is that AVMs are not necessarily reflective of real market value. The AVM can provide a cursory estimate to determine if a deal is worth pursuing, but a thorough appraisal enhances this value and includes additional insights about the property’s actual condition.
• Lost profits
  An investigation by MarketWatch found that iBuyer sales netted owners 11 percent less than owners who chose to sell their homes on the open market, translating to “tens of thousands of dollars lost.” One real estate CEO, whose company offers both iBuying and traditional selling options, calculates that consumers who sell through Zillow Offers and Opendoor receive between $15,000 and $20,000 less net on the sale of their home.
• Lack of consumer advocacy
  A good real estate agent is a client’s best advocate, bringing a range of local knowledge, relevant data, and negotiation skills to the picture. Ideally, it’s a relationship that should last a lifetime as agents help clients build wealth through smart real estate decisions. If a quick sale is needed, real estate agents can also price a home aggressively and then help sellers field multiple offers that can occur when inventory is low. “An agent represents the interests of the seller and has a fiduciary responsibility to get the best possible offer,” says Bill Scavone. “Does an iBuyer do that? No. They represent themselves in the transaction.”

iBuyer vs real estate agent

As H.G. Wells famously cautioned –– adapt or perish. Now, more than ever, it’s pretty good advice.

As a broker, your ultimate responsibility is helping agents excel at client service, which means continuously adapting to change. Your tools and technology are cutting edge, to be sure, but top agents win repeat business and referrals because they’re knowledgeable, invested, and caring.

With that in mind, should your team think of iBuyers as competition or simply learn what they have to offer and go back to doing what they do best? We think the latter is where long-term success still comes from.

Help your agents bring value to every client by:

• Becoming the iBuyer expert. iBuyers are expanding and sellers have questions. An agent’s job is always to educate and inform with clarity and honesty. Now is no different. Helping clients understand the pros and cons of iBuying will help them make informed decisions about a major life event.

• Focusing on long-term satisfaction, not quick sales. Every interaction, from the first phone call to the open house experience to vetting multiple offers is an opportunity to build trust. Perhaps more importantly, nurturing the post-transaction relationship can build bonds that iBuyers simply cannot.

• Using tech to the fullest. While in-person interactions are key, your CRM should be bridging the gap in the agent’s absence with useful information and friendly messages that reflect your brand promise.

• Exceeding expectations. It’s something that a software can never do. Clients remember agents who go the extra mile, which can involve anything from referring a carpenter to help prep a home for market to recommending a vet or a lawyer. It’s the little things, often not related to real estate, that leave a lasting impression.

• Negotiating like a pro. Providing clients with exceptional value takes strong negotiation and marketing skills. Aside from setting the sale price, agents should always be adapting their marketing strategies to suit changing economic and industry conditions. Deal making is a thoroughly human endeavor that takes experience.

• Forging mutually beneficial relationships. Agents and clients share a community. The connections forged in this arena, through churches, schools, charities, and even hobbies, are invaluable.

• Understanding human desires. The truth is, most people want personal attention, connection, and meaningful transactions even when they’re business oriented. When it comes to homeownership decisions, it feels good to be taken care of.

Top agents win business when they focus on human connections and deliver value that a piece of technology never will.

From day one, Jim Weichert understood that “people buy people before product or service.” As a broker, your most successful agents are no doubt those who prioritize relationships. Going forward, these connections will matter more than ever. But it’s also the perfect time to get up to speed on iBuying –– so your team is fully prepared to tackle any question.

Our people-first mantra has guided us through decades of disruption, technical, economic, and social. To learn more about how we do business, take a look around our site, get to know some of our affiliates, or reach out and have a conversation. We’re always here to help!