Ignore the iBuyer at your own peril
Many are pinning the new iBuyer model (instant offers) down to a fad and that the age old real estate industry will continue to operate as is. But, as you can see in this article, the industry is in reality quite fragile. The traditional real estate transaction seems broke and tech companies wants to fix this. Everyone is challenging the status quo, and the iBuyer is in a very good position with backing from Wall Street.
Here are my thoughts on this particular iBuyer article:
- My opinion is that iBuyer cannot be boxed into a ‘technology’ alone. I rather proposes a new way of selling a home instantly for cash to investors. Technology forms a big part of it (most importantly predicting the house value), but it also includes the simplified transaction experience and remodeling of the home for the next buyer. The user experience is critical to the iBuyer model. It is also not house flipping. iBuyer is a model with a long term view that is designed to run at scale with very thin margins. As soon as the iBuyer model margin is refined to come in at less than what agents charge (+-6% in the US) we just may see a tipping point for exponential addoption.
- Online agencies didn’t start the iBuyer model, new tech companies did. It started with Opendoor who nailed the model, followed by Knock, OfferPad, Redfin and Zillow with some franchises like KW also starting to dip their toes into this). None are true online agencies. You are currently looking at a property portal and tech companies leading the race.
- “…aimed at buyers who need to sell in a hurry, usually due to an urgent need to relocate or some sort of personal/ financial distress…”. This is probably the biggest misconception. The attraction with the iBuyer model is a quicker, simplified sales process….plus who wouldn’t want a instant, guaranteed cash offer? A 6% iBuyer market share in Phoenix achieved in a very short timeframe is testimony to this. As the public warms up to the idea of an instant sale and iBuyer offers move closer to market value, we will see market share increase exponentially. Zillow reports an exponential increase in the number of people willing to sell direct. Maybe sellers will use the iBuyer price as their “base price” to work from, even if they end up with an agent mandate.
- “…in return for a fairly large discount on the price…”. Data from research shows that profit margins are lowered and Zillow is squeezing for a 1.5% profit margin on every house. With increased competition and refinement of the machine learning algorithms and processes, this seems achievable in future. The real money for someone like Zillow is possibly in the add on services, e.g. they own a mortgage company. Plus it is a brilliant way of generating new sellers leads. Even if people don’t opt to sell instantly, the lead can be passed on to agents (at a price).
- No, “online agencies” like Redin are not a dressed up versions of low-commission agencies we’ve seen for decades. These are technology companies build to scale. They also have unique business models that makes their agents more efficient on a fixed salary model. Redfin agents close 4.5 times more transactions than the average agent.
PropTech won’t replace agents in the near future, but it will marginalize any inefficient models. iBuyer is highly efficient as it provides an instant way of selling your home and simplifying the transaction.
This is were real estate franchise perhaps have the biggest challenge, as large overheads including royalty fees, brick-and-mortar office costs and an higher agent commission splits, will put businesses under pressure. In an already competitive market where commissions are squeezed, we are seeing an increase in the number of enquiries with Entegral from agents wanting to operate as smaller, more efficient teams.
iBuyer is here to stay, Wall Street is pouring billions into this new end-to-end customer experience. The initial target markets (cookie cutter neighborhoods where prices can be predicted more accurately) will be expanded to new markets as models are trained and the remodeling of homes becomes more efficient. This is probably best illustrated in the advancements in self driving technology through machine learning (things improve exponentially and quicker than most can anticipate). With every iBuyer home bought and sold, the model is refined.
The iBuyer with the most accurate pricing model will win. The key will be to keep supplementing and training these models with new and historic data for more accurate instant offers. Don’t discount visual analysis from virtual tours and photos. If we can build self driving cars, something like a basic curb appeal rating can be trained. It is a tech race.
At the current rate, some predict that we might see more than 50% of home sales in the US done through the iBuyer model in 5 years. That’s Uber growth like. Some predict iBuyer will stay but will be a niche market, time will tell.
In the mean time, buyers and sellers will need to get used to the new ‘Owned by Zillow’ banners and home signs in their neighborhoods:
For the iBuyer model to work you need x3 critical things:
- seller leads
- and data.
Zillow and Redfin have the advantage here as they are both well funded and their portals draw the most traffic with 37 and 15 million unique visitors a month respectively. More than any franchise or broker portal. They have all the data too.
In a South African context who is best positioned with access to loads of capital, seller leads, buyer eyeballs and historical data? Makes you think, doesn’t it.