Brokers may see iBuyers in 1 of 3 ways: As an insignificant trend that will go away; as a big threat to the industry; or as a niche player appealing to some sellers.
DENVER – As someone who works with technology, Parker resident Lee Sutta was willing to give a new way of selling his home a shot when he learned about it in late 2018. Sutta, who was looking to close on a new home six months out, stumbled onto a Facebook ad for a company called Opendoor. It promised an instant offer on his house with the click of his mouse and a closing date of his choosing.
“My spouse didn’t believe it,” he said of the price that came back. The couple hired a real estate agent who provided an estimate that was $5,000 under what Opendoor was offering, which settled the issue. They tried something new and it paid off for them in ways they didn’t expect.
“The value of our house plummeted, and they sold it for $35,000 less in April than what they offered for it in December,” Sutta said. “We were really lucky in that sense.”
Opendoor was the first instant or “iBuyer” to enter the metro Denver market in October 2018, and Zillow Offers came in right behind it. It marked the first time the two big players in making instant offers went head to head in a new market.
By May of last year, RedfinNow, an arm of the Seattle brokerage, and Zavvie, a Boulder company, joined the fray. And other traditional brokerages are making instant offers of their own. iBuyers have gone from nothing to something in short order, but it remains to be seen how large a share of the market they will grab.
They accounted for 2.7% of home sales in metro Denver last year, but in Raleigh, N.C., a more established market, they accounted for nearly 8% of sales, estimates Redfin, the Seattle-based brokerage.
Initially, the firms started out buying newer, bread-and-butter homes needing minimal repairs in Denver’s suburbs, ones they could resell quickly. They have since spread up and down the Front Range and are bidding on older and more diverse homes.
“It is really a lot of work to sell your home,” said Jim Lesinski, Opendoor’s general manager for Denver. “It is one of the most difficult processes that a consumer can go through. Our mission is to make it a seamless buying and selling experience.”
iBuyers market the elimination of showings and having to handle repairs. They promote the certainty of a solid offer over having to haggle with a buyer who may or may not come through. They can provide a fixed closing date, one timed to the next purchase, eliminating the costs and hassle that come with double moves.
In short, they are selling a convenience not available going the traditional route, and the market is still trying to figure what that is worth.
Paul Stone, co-owner of Hinge Real Estate Group in Denver, said the brokerage community has split into three camps when it comes to iBuyers. Some consider them insignificant players and take a “this too shall pass” attitude.
Another group considers them a huge threat to the traditional brokerage industry and claims they gouge uninformed consumers with hefty fees, unreasonable repair requests and low-ball offers.
Stone takes an in-between approach, viewing them as new players filling a niche that appeals to a certain set of sellers. Rather than fearing or ignoring them, he suggests agents cooperate with them when it makes sense. They compensate agents fairly, and they provide offers that should be presented to sellers.
Nor does he think they represent the end of the brokerage model. Stone said iBuyers are making inroads with the 20% of the market that was represented by do-it-yourself sellers, who have long been neglected.
A different approach
So who is gravitating toward the new players in the market? Lesinski said Opendoor has found a good match with new-home buyers, in that it offers a way to line up a sale precisely with the completion and closing of a new home. Unlike competitors, who prefer a closing within three months of an offer, Opendoor is willing to honor an offer for up to nine months, which might be necessary given how long some homes are taking to get built with all the construction labor shortages.
RedfinNow has found a niche in working with people who want a quick closing, such as military personnel who are deploying, people relocating for a job or sellers who had a buyer back out at the last minute, said Mike Welk, the company’s senior asset manager in Denver.
The company has gotten the time it takes to provide an offer down from 72 hours to 48 hours and is looking to tighten that even more – it has gone from start to finish in seven days.
“The quicker we can deliver the offer, the higher our acceptance rate,” he said.
But it isn’t always about speed. Clif and Michelle Briley of Westminster learned about iBuying after a friend recommended Opendoor. They were skeptical, but decided to give it a try. The working couple didn’t want to have to keep their cramped townhome spotless to appeal to buyers. Nor did they relish the idea of picking up a toddler and cat on a moment’s notice to vacate so strangers could check the place out.
But the biggest draw for the couple, who have been trying to buy a larger home for 18 months, came in having a solid offer in hand when shopping for their next home.
“We made an offer on three houses and lost on all three,” Michelle said. “We can now say that we are about to get cash on our house and we can close in 24 business days. That is a much stronger offer.”
They have gone back and forth between Opendoor and Zillow Offer, but are with Zillow Offer, which Michelle said offered better customer service. At no charge, they can continually refresh the offer as they hunt for the next house, and plan to lock in once they get a purchase lined up.
Putting a price on convenience
There are three points where iBuyers can make or lose money with consumers. The first is in the initial offer on the home. Some real estate agents accuse the firms of low-balling sellers, but iBuyers say they try to get that as close to the market price as they can.
“We believe that as we get to scale in more markets, you will see us get better,” said Viet Shelton, a spokesman for Zillow Offers. “We are not intentionally doing what people accuse us of. We always knew this was going to be challenging.”
Customers need to feel like they got a good deal or they won’t be back or make referrals. Low-balling doesn’t provide a sustainable business model, Shelton said. If anything, the data seem to show that iBuyers are still missing the mark on pricing, but in a way that disadvantages them, not consumers.
Boulderite Mike DelPrete, a real estate technology analyst, recently released an analysis that estimates in the fourth quarter Zillow Offers lost an average of $6,407 on every house it resold. That’s after accounting for the spread between the purchase price and resale price, and the fees charged to cover expenses, such as agent commissions, renovation costs, and interest. And those losses are growing rather than shrinking.
Why would Zillow or any iBuyer do that? For starters, they are new companies trying to establish a new market and shift consumer behaviors; think Uber and Lyft. They are also competing to win business, while also honing their algorithms, which should improve as they complete more transactions.
But it is also important to take a broader view of the $1.9 trillion real estate market and what the price of admission is to become a player in it.
Even if a consumer rejects an offer, Zillow has gained a valuable lead on a motivated seller, one it can refer to its “Premier Agent” network, which costs money to belong to. If it does land the offer, that opens the door to selling that customer a mortgage, which represents a $44 billion market for origination services, and title and closing services, which is a $35 billion a year market, Zillow said in its annual report.
And beyond that are a host of other services the company is exploring, such as home insurance, home renovation and moving services. Those represent markets with several-fold more revenue and profit potential than the real estate marketing niche that Zillow has historically focused on.
A more direct revenue source for iBuyers are the fees they charge sellers. As a frame of reference, traditional real estate commissions can range from around 5.5% to 6% in a transaction.
RedfinNow charges a flat 7% fee on its instant offers, while Opendoor and Zillow Offers say their fees usually fall in the range of 6% to 8%. Fees go up if their models tell them the risks are higher, such as when prices are flat and falling or homes might take longer to sell.
“It is a premium service,” Lesinski said. “Everybody has to make their own determination.”
The third area where iBuyers charge consumers are for repairs to get a home ready for resale. iBuyers claim the repairs they request the sellers cover are standard items, the kind of things a listing agent or a buyer would ask for anyway.
If a home requires major renovations or expensive repairs, they usually pass on making an offer. Rather than putting the inspection near the end of the process, it comes at the beginning, eliminating surprises and last-minute haggling that can shipwreck a transaction.
Given the increasing volume of homes they repair, iBuyers claim they can purchase materials and contractor services at a much lower rate than an individual seller can, savings they pass on. For example, Lesinski said Opendoor spent $4 million on renovations with local contractors last year.
Stone, however, said he has seen cases where iBuyers have made ridiculous requests, such as replacing a toilet that only required the bolt be tightened. And new carpet and paint are pretty much a given and, for quality control reasons, they are less willing to let owners make their own repairs.
And while iBuyers may request a long list of items to repair, sellers don’t have a contractual obligation to actually do them, something Sutta said he witnessed firsthand on his Parker home.
He let Opendoor take care of most of the repairs, other than rehanging closet doors, which he did at a quarter of the price listed. Given that his new home was close to the one he sold, he could check on what got done. He noticed OpenDoor didn’t re-stain the deck, even after charging him $600 for that.
That may have cost them on the resale, however. Sutta said he thinks iBuyers have focused so much on buying that they have neglected the resale and need to do better.
“The market shifted on them, and they had a rough time selling. I almost feel bad for them,” he said.
A true believer now
Jason Shepherd, co-owner of Atlas Real Estate Group in Denver, was skeptical when he first heard about the new business model. He viewed them as the latest in a long string of fix-and-flip models, an upscale version of We Buy Ugly Houses.
But he is a true believer now, so much so that Atlas is helping Zillow Offers buy and sell homes in Colorado. And talking to consumers gives him an insight on where things might go next.
“I wasn’t expecting it to be so well received from consumers, but it has been an overwhelming response,” he said. And one thing he keeps hearing from clients is that they won’t buy or sell real estate any other way.
Some critics argue that iBuyers are floating on rafts in a market flooded with capital. If interest rates spike or financial backers pull back, the whole process could collapse. Some iBuyers could follow the path of WeWork.
Buy iBuyers argue that flexibility is built into their model. If the market softens and homes take longer to sell, fees could go up to compensate. Anxious sellers, rather than sitting on a home for months, might be willing to pay more money to avoid that risk.
“I expect us to be in it for the long haul,” Lesinski said. “We are very good about trying to mimic the market and we price accordingly. It is highly unlikely that we could get caught in a difficult position.”
© Copyright 2020 The Denver Post Corp.. Aldo Svaldi