2020 was going to be the year of iBuying — but proptech VR may be the COVID-19 winner
In the age of companies and industries that rectified obsolete processes by cutting out the middleman, many sought to disrupt traditional real estate transactions between broker and buyer. The solution: extend the direct-to-consumer model to real estate through iBuying, a proptech trend that has taken the space by storm. This tech-enabled strategy, employed by giants like Zillow and Redfin and smaller shops like Opendoor and Perch, leverages algorithms to identify properties for sale and instantly make an offer directly to the seller, often cutting out the broker.
Zillow Offers, Zillow’s iBuying arm, ramped up its iBuying efforts launching in 1H 2018; it was seen as significantly driving the companies top-line versus advertising revenue. Through Zillow Offers, Zillow put an “instant offer” on a seller’s property on its platform, while giving the seller the optionality to accept offers from other buyers on the platform. If the seller accepts the Zillow Offer, the onus is on the company to transition the home so it’s ready to sell; Zillow Offers buys the home at fair value less renovations for a 7% fee. The model touts tangible benefits to the seller: less times on the market, a flexible move-out timeline, and included repair costs. Zillow projected to be operating in 26 geographically diverse markets by mid-2020.
Whereas Zillow is publicly traded and was a late player to the game, Opendoor, Perch, Knock, and Offerpad are VC-backed. Hundreds of millions of proptech VC dollars went into iBuying start-ups in 2019, signaling to the market that this trend was ripe for growth and ready to take on the traditional real estate platforms.
Whether publicly traded or VC-backed, these companies all posited that the traditional home transaction process was broken. But is it possible iBuying isn’t fully sound? Is the home-buying process too complicated to be fully direct-to-consumer? In theory, iBuying could be a framework that could survive in a COVID-19 world: a tech-enabled, geographically diversified, disruptive solution to limited social interaction that cut out the middleman in the transaction. (In some cases, Zillow does use brokers in their Offers transactions.) This trend has also drawn a lot of criticism for being capital intensive and subject to fluctuations in the real estate market.
As of 2019, analysts felt the true test of iBuying would come with a recession, and they were right. In the wake of COVID-19, with major economic disruptions and demand for cash, major players like Zillow and Redfin pressed pause on iBuying by mid-March. Companies had invested heavily in this trend, justifying top-line revenue increases despite short-term bottom-line dips to refurbish or flip these properties, and 2020 was going to be the year to make up these losses. Opendoor laid off 35% of its staff in mid-April. This trend mirrors that of the broader housing market: according to Curbed, web traffic to Zillow and Redfin have dropped by close to 40% while new listings of homes for sale have dropped by almost 70%.
COVID-19 will likely have a long-lasting effect on both the perceptions and success of iBuying in the future. As these companies assess homes to buy, the uncertain economic conditions make it all the more difficult: offering a fair price that captures the value of a home in markets where cities have been hit hard by commerce restrictions and CDC requirements. Moreover, even when this trend was taking off, homes remained on balance sheets longer than investors and the shareholders were comfortable with; that trend is only going to persist with dips in real estate demand, less purchasing power from consumers, and a reduction in building materials coming from China.
That said, coronavirus is proving that tech can make the real estate buying process easier — but that doesn’t necessarily mean iBuying. Perhaps iBuying was a solution to the wrong problem: perhaps the problem is not the broker and the “flip,” but the showing. Proptech experts believe virtual buying could still be viable in a COVID world, primarily for investment properties. As long social distancing measures are in place, the viewing process — rather than the buying process as a whole — has been disrupted by virtual reality. Zillow is reporting that its 3D home tours are “through the roof.” Nest Seekers had virtual or video components on 60% of their listings and are hoping to bring that number to 100% as soon as possible. Commercial real estate is also seeing increased demand in VR for prospective tenants to its view properties. That said, brokers are still involved in these processes.
Like in other industries — from fitness to education — the question is if the uptick in this new behavior (i.e. VR property viewing and transacting virtually) will stick post-quarantine. Will this hold for investment properties and livable properties alike? Does this uptick in demand in VR outweigh the downturn in overall property demand? Will virtual tours become the new status quo? Will the increased tolerance for transacting virtually help iBuying when it returns when the world restores its natural order — or is the model too good to be true? This all remains to be seen. Industry experts predict a massive consolidation and specialization of real estate companies in the future, at which point we’ll be able to assess the true winners and losers.
