This week, we’re going to take a look at an emerging technology that has the potential to revolutionize the home buying process—and which may be facing extinction because of the economic impact of COVID-19. I’m talking about iBuying, and it’s been a headline-maker for months now.
If you’re not familiar with the concept, iBuying happens when the iBuyer (Opendoor and RedFin are two of the biggest names that come to mind) uses technology to make a rapid offer to a seller on a house new to the market. If the seller accepts that offer, the iBuyer takes possession, and re-sells the property, often taking a fee for the service on the sale. For the seller, the benefit is obvious: a cash offer and the quick certainty of knowing the house has sold. IT is typically a bit less money than if they were to go through the traditional home buying process.
The concept has been praised as a unique and game-changing approach to combat real estate’s number one problem for decades: a cumbersome, uncertain process filled with logjams and poor communication.
However, while iBuying seemed to be gaining traction in several cities (Phoenix, notably, among them), everything changed with the onset of a world pandemic and immediate crash for the American economy. Forbes describes the situation well:
“…iBuyers are liquidity providers that make money by buying real estate assets at certain prices and then selling the properties at slightly higher prices later, charging additional fees while doing so. In traditional financial markets, the hallmark of liquidity providers is that they continually offer liquidity under all market conditions (not only when the accumulation of and the closing out of longer-term investment positions are needed). However, what happens when this business model is applied to a traditionally illiquid market such as residential real estate? In a stable market, there are not too many risks for such operators, who use debt that is provided by banks, equity funds, and venture capital firms. In a bear market, this real estate model is doomed to fail. https://www.forbes.com/sites/nataliakarayaneva/2020/03/19/billion-dollar-real-estate-businesses-ibuyer-suspended/#4f93cc9d2174
Among the early headlines during the pandemic were some eye-opening announcements about the leading (and wildly successful) iBuying platforms, RedfinNow and Opendoor, both of which essentially stopped operations:
A spectacular and unfortunate collapse. Some have wondered if we’ll see iBuying return once the economy returns to normality. Whenever that might be. I think we will, and agree with this premise from the same Forbes article:
“If we look at the growth of adoption, one thing becomes clear: on many occasions, consumers value certainty and speed over the money that they receive for their homes. Effectively, we can assume that the higher the risks, the more the sellers are willing to accept lower prices for their homes. The iBuyer model is also beneficial during publicly unstable situations as home tours become possible without human supervision. Realtors are now incentivized to provide virtual viewings with cameras, robots, and online check-ins.”
If anything, it would seem that the iBuying process, at its core, could be an answer in these days of social distancing. And it’s still attacking a problem that our industry has struggled to address for decades. Then again, the very business model of iBuying does seem to require a relatively stable market to work. Mike Delprete wrote a great article about just that recently, noting that the iBuyers like Zillow, Opendoor and others, while not necessarily anticipating a worldwide pandemic, do have some inherent advantages for a world of social distancing. Think about it—with a highly contagious virus raging worldwide, what better way to buy or sell a house while limiting human contact? iBuying relies on automated valuation/market algorithms; encourages REALTORS (when involved) to use video home tours and works on an all-cash purchase—addressing many of the traditional person-to-person touchpoints of a traditional transaction and automating them.
Delprete also theorizes that iBuyer platforms could make a comeback:
“In the months ahead, I would expect iBuyers to react appropriately to a slowing and uncertain market:
Delprete acutely points out that the coming year will be a powerful test of whether the inherent benefit of iBuying as a market solution will outweigh—or be outweighed—by the business model’s dependence on the market:
“The current state of the market will finally shine a light on how the iBuyer business model reacts to slowing consumer demand. On the one hand, the iBuyer proposition becomes stronger for consumers looking for certainty and to limit direct human interaction. But on the other hand, iBuyers are at-risk in a market slowdown by holding hundreds or thousands of unoccupied homes on their balance sheets. https://www.mikedp.com/articles/2020/3/17/unintended-advantages-ibuying-in-a-world-of-social-distancing
Not to make light of the thousands of jobs and livelihoods at stake, but it will be fascinating to see how the iBuyers fare, or adapt, in the coming months. Then again, that’s a fair inquiry for much of our industry.
What do you think will happen with iBuyers? Other thoughts for subject matter in Deeper Thoughts? Suggestions? Want to contribute? Just email me at email@example.com.
Until Next Week,