The iBuyers: High(er)-Frequency Trading Comes to Home Buying

Stop me if you’ve heard this one before: companies have found a way to grind out steady above-market returns by leveraging superior risk management. The only catch is that they’re making a levered bet on residential real-estate appreciation.

That is, of course, the story of AIG, Bear Stearns High-Grade Structured Credit, various German banks, and a host of smaller but equally unfortunate participants in the great housing bubble. It’s also a capsule summary of the emerging “iBuyer” business. When I first heard about that business — the business of making instant offers to buy homes, and flipping them to other buyers as quickly as possible — I was convinced it was a great way to tie up tons of capital in a structurally bad business.

I was totally wrong: iBuying is the most exciting thing happening in fintech right now. As about a million clever people have noticed, the twelve most dangerous words in technology are “The four most dangerous words in investing are ‘this time is different.’” This time is different, for many reasons: while the macro situation in residential real estate is still fraught — see this writeup for an overview — the microstructure has improved in favorable ways. The top of the demand funnel has moved online, but the bottom of the funnel is still a paper-based business. And there’s a long history of technologically-savvy liquidity providers producing superior returns in all sorts of markets. From high-frequency trading in equities to building undersea telegraph cables to report exchange rates, we have many case studies of effective risk-taking leveraging new technology.

The iBuyer Model

The real estate market is obviously broken, but exactly how it’s broken is non-obvious. Commissions have plunged from 6% to “roughly 6% unless you’re buying a mansion,” and while the top of the funnel has moved online, the actual purchase process still involves lots of physical paperwork.

iBuyers aim to simplify that. When you want to sell a house, you go to their site, plug in your address, and get an offer. It’s not a great offer; it’s a fair offer, minus a commission, which is usually around 6%. You’re paying for convenience, and 6% of a $200,000+ transaction sounds like a whole lot of convenience.

As it turns out, it is.

Buying a house is not a two-party transaction. In general, you sell a house to move into another…