The scramble is back on to become Amazon of home sales
IBuyers, who make instant offers, spare sellers from prepping their houses and enduring showings. But the pandemic and low inventory have slowed the growth of this new sales option.
When Opendoor, Zillow Offers and other “iBuyers” popped up a few years ago, they hoped to upend the traditional home buying by doing for real estate what Amazon has done for online shopping: use technology to eliminate the hassles and uncertainties of buying and selling. That included offering sellers “instant” online offers on properties the companies would later resell.
But last spring, with the pandemic bearing down on the economy and the future of the real estate market uncertain, iBuyers stopped buying, interrupting efforts to disrupt an industry that has long relied on face-to-face interactions. Now they’re back, but there’s a shortage of house listings, and properties are selling in record time. Some analysts are saying the promise of an instant offer isn’t enough.
"Overall, iBuyers are struggling in this high-demand, low-inventory market," said Mike DelPrete, a global real estate tech strategist. "The consumer proposition of an instant offer is less relevant and appealing now than it's been in the past."
Opendoor and at least a half-dozen players in the iBuyer space, including Zillow Offers, RedfinNow and Offerpad, said that to make the model more relevant, they have retooled the buying and selling process with new systems aimed at eliminating face-to-face contact between buyers and sellers.
And in an effort to raise more cash, Opendoor recently made its case to investors. Opendoor started trading on the New York Stock Exchange last month after an initial public offering that valued the company at $17 billion just weeks after announcing a national expansion.
The iBuyer model is the product of tech companies that have built national websites that feature house listings and real estate data that's gleaned from multiple listing services and public records. Those companies are using that information to create complicated algorithms based on recent local sales of comparable properties that enable them to quickly determine the value of a property without an initial visual inspection.
Instead of a traditional real estate commission, sellers pay iBuyers a fee that’s negotiated before the sale. After acquiring the property, iBuyers do minor repairs before listing the house for more than they paid.
Critics of the model say iBuyers deprive sellers of the opportunity to expose their property to a broader market and the possibility of a higher price. Proponents say the services offer sellers the ability to forgo all the typical premarket home preparations, including home repairs and staging. Sellers also don’t have to worry about open houses, home showings, and listing photos. They’re also offered a flexible and guaranteed closing and a quick sale.
“It was painless,” iBuyer customer Amanda Broz said. “I couldn’t imagine going the traditional sales route with two little kids and being so busy in our careers.”
She and her husband, Dave, had no intention of doing of a virtual sale, but when they received a Zillow instant offer in just a couple of days, they decided to play it through. They were enticed by not having to prepare the house for sale and being able to set a closing date based on when their new house would be ready.
“Maybe we could have gotten a few thousand dollars more (via a traditional sale), but it’s hard to know,” Amanda said. “And we didn’t do one repair to our house or touch up paint or fill nail holes. We literally just walked out of the house. We didn’t even have to clean it.”
Such deals account for just a fraction of all real estate transactions nationwide, according to an analysis of MLS and public records by real estate transactions by Redfin, which operates its own iBuyer platform via RedfinNow.
During the third quarter of 2020, iBuyers accounted for 0.2% of all U.S. home purchases. That was a slight increase from the previous quarter, but far below a peak of 0.9% during the same quarter a year earlier. Just four years ago, such transactions were virtually nonexistent.
In March, Zillow, Redfin and others halted home purchases because of local and state coronavirus shutdowns but also because of uncertainty in the housing market.
Jim Lesinski, Minnesota general manager at Opendoor, said that during the shutdown, the company updated its process to make it fully digital and contact-free for sellers. That included new virtual interior home assessments, enabling the seller to walk Opendoor reps through their home via video.
"Today, we're seeing consumers more widely adopt digital solutions," he said.
Because the company is still in the quiet phase following its IPO, it wasn’t able to provide additional details on market share or future expansion plans. But DelPrete said that while Opendoor is still the dominant iBuyer, its national market share had fallen from 70% in 2018 to 50% this year. Zillow, meanwhile, had a 3% market share in 2018, but now has 26% of the iBuyer market.
DelPrete said that while the consumer proposition of an instant offer might appear to be less relevant than it has been in the past, Opendoor, Zillow, Offerpad and all iBuyers are recoverin slowly.
"I believe iBuying is here to stay," he said. "It remains a unique customer proposition for a segment of homeowners and solves friction in the process. But the path to success and profitability is a long, uncertain road."