What is an iBuyer

Mar 01, 2021

What exactly is an iBuyer? Although iBuying represents one of the largest fundamental shifts in the residential real estate model, the term doesn’t quite encompass all of the interesting new companies that are popping up…. or at least not according to them. I start each week with a rough idea for an article topic and then I learn as much as I can by talking with as many leaders in that space as possible. As I reached out to the companies that I considered to be iBuyers, I received feedback from some with a pretty blunt message, “Just to be clear, we are not iBuyers”. I tried to piece together whether iBuying has a negative connotation to it, even though the amount of homes being purchased through non-conventional methods are hard to ignore.

iBuying has been around for some time now, but it was often just an ancillary service that some traditional brokers offered as a listing tool, opposed to an entire model like exists today. The simplest way to explain an iBuyer is as follows: A company will buy your house site unseen, based on a valuation that is generated by a computer, with a few simple clicks. Behind the scenes the process is considerably more complex, requiring significant data streams, algorithms, and really smart (or gutsy) people who are betting billions of dollars on modeling out transactions within a slim margin of error. To the consumer however, none of that really matters (or at least the industry doesn’t want you to worry about how the sausage is made). The goal for the consumer is convenience and liquidity. And the pitch is a pretty compelling one: “Enter your address on our website, click a few buttons, accept our cash offer, and your house is sold.” Selling a home can be a nightmare, so the idea of instantly selling sounds pretty appealing to me. Even though the offer that you get from an iBuyer is likely less than the top range that you may be able to get on the open market, the seller is rewarded with certainty and convenience. To be clear, iBuyers are not interested in owning homes… They are interested in selling homes.

For years individual agents offered promotions that sounded like this: “Either I’ll sell your home, or I will buy it myself”. ERA, one of the worlds largest Franchisors even used the famous tagline: “We will sell your house, or ERA will buy It!”. The truth is that while it is possible that some of these purchases actually took place, they came with a lot of stipulations and in many cases it was not much more than a marketing gimmick. All of that changed in 2014 with Opendoor.

The Players

Opendoor theorized that they could build a complete strategy around instant offers, but to do so at scale required a lot of capital. They closed a $9M round in 2014, and then 7 subsequent rounds to bring the total raised in debt and equity to $1.5B. New competitors came into the market (notably Offerpad raising $155B). Then, existing players started offering iBuying as an added service: Zillow with Zillow Offers, Redfin with RedfinNow, Realogy with RealSure, among others). For me, the moment that I realized that this was no longer a novelty and truly represented a fundamental shift in the industry was in February of 2019 when the 800-Pound Gorilla (Zillow) announced that they were pivoting their entire focus to “buying and selling homes.” Just this week, Zillow made the announcement that they will now make cash offers for homes based on their Zestimate.

Personally, I still have a lot of questions about this model. I would assume that sellers will get multiple offers from every iBuyer, and either squeeze every dollar of margin out of the deal, or create a scenario where deals no longer work in the underwriting model. It's important to note that there is upside in packaging together all of the services that come along with a sale including mortgage, title, and insurance. Another concern that I have is what will happen when the market conditions deteriorate and iBuyers are stuck with massive inventories that they cannot sell. In March of 2020, as the COVID pandemic created uncertainty in the market, most major iBuyers temporarily suspended all purchases, and iBuying purchases dropped 88% during Q2 2020 according to Housingwire. Within months, as the market caught fire, the suspensions lapsed, and the pace of purchases grew quickly. Time will tell if instant offers are really the future of the industry, or if the current insanity of the market is camouflaging a model that isn’t sustainable. One thing for sure is that the level of convenience that iBuyers are providing to sellers is hard to ignore.

What do the Agents Think?

Jennifer Leahy, top producing agent at Douglas Elliman, thinks that the market is big enough for many different types of players, and companies need to think tech forward to avoid being left behind. However, clients need the knowledge of a local expert with boots on the ground. To illustrate her point, she used an example of a client who wanted to buy a home that had nearby wetlands. It takes the knowledge of an expert, with hyper local knowledge at the street level, to know that the house next door had a major flood. Technology is not going to replace that local knowledge.

Not Everybody is an iBuyer

As mentioned above, during my research for this article, several companies were quick to point out that they are not iBuyers. Janice McDill, Knock’s Head of PR, was very clear with her message to me: “We are not an iBuyer. Consumers get the convenience of buying before they sell, while benefiting from selling their old house on the open market for the maximum price.” Although I agree that these new breeds of companies are not necessarily iBuyers, I do credit Eric Wu, CoFounder and CEO of Opendoor, with paving the way for entrepreneurs to look at new approaches to an old industry. Below I detail 3 of these new models and what makes them unique.

Knock (The Home Swap - buy before you sell)

The Knock Home Swap includes a fully integrated and competitively priced mortgage as well as up to $250,000 in an interest-free bridge loan to cover the down payment on the new home. In addition to home prep they offer up to six months of mortgage payments on the old house.

With the Home Swap, consumers immediately take ownership and begin earning equity in their new home, avoiding the hassles of living through repairs and showings. The homeowner works with their agent to list and sell their old house on the open market for the maximum price. As part of its Home Prep Concierge, Knock provides access to its approved contractor network and manages the payment of all bills upon client-approved completion of work. Additionally, Knock provides a backup offer on the old house in the unlikely event that it doesn't sell within six months. According to Knock, “Ninety percent of their homes sell in 90 days or less”.

The Knock Home Swap is available in 18 markets -- Atlanta, Austin, Charlotte, Colorado Springs, Dallas-Fort Worth, Denver, Fort Lauderdale, Houston; Jacksonville, Los Angeles Miami, Orlando, Phoenix, Raleigh, San Antonio, Tampa, Tucson, and West Palm Beach. Knock plans to nearly double the number of markets it serves in 2021 and be in 75 markets by 2023. This past Thursday, Knock’s CoFounder and CEO Sean Black, announced Knock’s expansion into Los Angeles with a partnership with well established luxury brokerage The Agency. Knock also pointed out to me that their fees are much cheaper than an iBuyer. “We charge a convenience fee of 1.25% on the purchase price of the new home… iBuyer’s fees are much higher and consumers sell their home at a discount”.

Flyhomes (The All Cash Offer)

Cash offers are typically accepted over offers that come with a mortgage contingency, even when the offer is lower. When an offer is accepted with a mortgage contingency, it is far from a done deal because if the buying party cannot sell their home, or if their mortgage falls through (which can happen for many different reasons), the contract is voided and the seller needs to start all over. Cash offers reduce most of that uncertainty, but rarely do buyers have enough cash to purchase a home without the need for a mortgage. Flyhomes aims to make all offers cash offers. Here is how they pitch their service: “Level the playing field. Compete with other offers and win the home you love. We’ll use our cash to buy on your behalf. Later, you choose a mortgage lender and buy the home directly from us for the same price”.

Orchard (Move before you Buy)

Orchard’s goal is to reduce the rush of selling before you buy and they promise up to 90% of your home value upfront to put toward your new home purchase. With the instant equity that this provides, “you become a non-contingent buyer and can make a strong offer even before we list your home”. The last thing that a new owner wants to deal with is getting their old home ready to list (they want to enjoy their new home), and Orchard promises to take care of that as well. After you’ve moved, Orchard will “handle getting your home list-ready with a complimentary cleaning, professional photos, and a 3D tour.” To add to the value proposition, when your home sells to a new buyer, you’ll receive the additional proceeds above your instant equity amount.

Will Traditional Brokerages Prevail?

For many years there has been chatter about the death of the traditional brokerage model (I wrote an entire article on the subject), but traditional models have always prevailed. However, in the past most of the companies that promised to disrupt the industry used reduced commissions as their hook. Reduced commissions proved unsustainable, and most of the large discount brokers either went out of business or pivoted. This time may be different because these new models are not built on commission reduction. They are designed around fundamentally changing the game. Instead of selling your home to another person or family, you are selling your home to a company (or they are buying on your behalf). iBuyers still represent under 1% of all purchases made in the US, but they are currently only present in a handful of cities. As noted above, mass expansion is underway and the next 12 months will surely be telling.

PropTech Future

Discussion about this post