A year ago, a new generation of buyers seemed poised to reshape the way suburban Sun Belt homeowners sold their properties. Then came the coronavirus pandemic and the hottest seller’s market in years, and owners have gone back to the old way of selling.
“IBuyers”, short for “instant buyers”, had caused a stir in some areas. During a three-month period in 2019, iBuyers recovered almost 7% of all homes sold in the Raleigh-Durham area of North Carolina and over 5% of all transactions in Phoenix.
However, businesses stopped buying in the spring as COVID-19 injected new uncertainty into the housing market. Now the top four iBuyers – Opendoor, Offerpad, Zillow Offers, and Redfin Now – are back, but consumers don’t seem so excited anymore, especially in a market where homes sell out quickly and deals come in as soon as they sell out. sale sign hits the front yard.
The numbers tell the story: In the third quarter of 2019, the Big Four iBuyers took over 0.9% of all homes sold in the United States, according to a Redfin study. By the third quarter of 2020, this share had plunged to just 0.2%.
The sharp drop in activity raises questions about iBuyers’ business model. “The value proposition doesn’t work in a sellers market,” says Rick Sharga, executive vice president of RealtyTrac, a real estate information company.
The iBuyers pitch focuses on a quick and easy sale. The businesses promise to close on the seller’s schedule, allowing sellers to unlock their home equity and focus on buying their next property.
But real estate experts say the allure of iBuyers is fading in a bustling seller’s market like today. In much of the United States, inventories of homes for sale are at historically low levels and demand from buyers is high, meaning iBuyers are competing with traditional buyers.
High fees for convenience
IBuyers are positioned as a quick way to sell. Owners take the hassle out of painting, cleaning, and cleaning every visit. While businesses typically pay the market price for homes, iBuyers also charge fees ranging from 6% to 12% of the sale price. The average commission for a traditional real estate sale is 5%.
In the slower-paced housing market of 2019, more sellers were willing to take less for the certainty of a quick sale. Now, however, many seem to prefer the cheaper cost of a traditional sale.
“Why sell to an iBuyer when you can sign up for the open market, get multiple offers, not feel like you have money on the table, and sell within days? Asks Mike DelPrete, a professor at the University of Colorado who studies iBuyers. “The customer proposition for an iBuyer is very low at the moment. Consumers can make more money and sell just as quickly on the open market. “
Origin of iBuyers
As the Internet reshaped many aspects of American business, little has changed in the process of selling a home. The first iBuyer, Opendoor, aimed to change that.
Opendoor was launched in 2014 as a venture capital funded startup and touted itself as ‘a modern way to sell’. Homeowners no longer had to hire a listing agent (and pay their commission), beautify their homes, hold open houses, and negotiate with buyers. They could just accept Opendoor’s offer.
The new business model is successful enough for others to jump in, including Offerpad, real estate tech company Zillow and real estate broker Redfin.
The iBuyers have gained the most traction in Sun Belt cities such as Atlanta, Charlotte and Phoenix. Upstarts focus on a narrow slice of the market, typically recently built homes and condos priced at $ 100,000 to $ 500,000.
Sticking to cookie-cutter properties means iBuyers have a better chance of accurately evaluating homes. And by buying homes that only require cosmetic repairs, iBuyers increase the chances of a resale within 90 days.
The iBuyers were on the verge of proving that Americans did indeed want another way to sell when the coronavirus pandemic hit. All major iBuyers stopped buying homes in the spring.
They resumed shopping in 2020, but the pace remained well below 2019 levels, even in a housing boom characterized by record housing prices.
“A buyer in a seller’s market”
Before the coronavirus crisis, skeptics wondered what would happen to iBuyers if house prices fell. The companies aim to overturn the properties in three months.
After the COVID-19 pandemic, another challenge arose: What if a vibrant market makes selling a suburban home quick and easy?
“There’s an argument to be made that we’re a buyer in a seller’s market, and it’s not really the best place to be,” acknowledges Brian Bair, Managing Director of Offerpad.
But, Bair adds, Offerpad is also a seller in a seller’s market. IBuyers say their approach is always attractive, especially for sellers who are juggling deals and having to buy another home in a fiercely competitive market.
“Even in a dynamic seller’s market, there are headaches and uncertainties that come with preparing, marketing, listing and selling your home,” says Kerry Melcher, Sales and Brokerage Manager at Opendoor. . “There are a lot more steps involved, from identifying an agent, figuring out the right price, completing the renovations and evacuating the house for open houses. “
As iBuyers increase their purchases again, they are reacting to changes in the market. For example, companies had targeted three-bedroom homes as the most marketable property type. Now, however, there is a demand for larger homes.
“The value of a four-bedroom house versus a three-bedroom house is higher today than it was six or eight months ago,” says Bair of Offerpad.
What home sellers can do
If you are selling, it makes sense to get an offer from an iBuyer. Offers are non-binding.
In some cases, iBuyers make generous offers, perhaps too generous. In one example, Zillow Offers paid $ 407,000 in September for a three-bedroom house in South Florida.
Zillow Offers put the house on the market a few weeks later for $ 423,900.
After three price cuts, the house remains on the market for $ 399,900. In this case, Zillow Offers is prepared to accept less than what it paid four months ago.
IBuyers are not an option for all sellers. Companies haven’t been active in cities like New York, Chicago, and Boston, and iBuyers tend to shy away from older homes, properties that need major renovations, and unique homes that are difficult to value.