iBuyers are at the intersection of real estate, big data and technology. And they have quickly moved from being on the horizon of real estate investing to now racing across the landscape. The rapid forward momentum of iBuyer platforms are beginning to transfix investors and sellers alike.
So what are iBuyers and how are iBuyers changing the real estate market? iBuyers are large, well-funded investor corporations that make the selling process very easy for property owners. iBuyers have recognized the parts of the selling and buying process that are unfamiliar, expensive, annoying and hard to negotiate and replaced them with choices based on the seller’s needs.
Gone are the need to repair a property, to show a property, to balance a property sale with the purchase of a new property. In some instances property owners don’t even have to qualify for a new mortgage when they buy a new property!
iBuyers have done what every smart business owner does. They’ve identified the customer’s needs and problems and created a process that, in many cases, works better. As real estate professionals, we ignore this market shift at our own peril.
What are iBuyers?
The question is a valid one, since the first iBuyer platform, Opendoor, was only established in 2014. You may , understandably, have only heard the term recently. IBuying is the latest, most advanced technological evolution in buying and selling real estate. Fueled by the deep pockets of large corporations, IBuying uses sophisticated data analysis to provide property owners with fair market instant offers. They also offer home “trade-ins,” all cash payouts, and expedited escrows with closings scheduled at a time the seller chooses.
Now, that is a short definition of the technique. Basically, iBuying is designed to be easy, convenient, uncomplicated, and as fast or as slow as the seller wants. Many options for personalizing the deal are built into the structure of IBuying.
How are iBuyers different?
A new job and new possibilities
Jon got a new job that minimized the constant long-distance commute his former job required. With a shorter commute and more time available, he decided to sell his current house. He liked the idea of shedding his cookie-cutter, early 21st century house, with its postage stamp yard and block wall fence, sitting squarely in a quiet cul-de-sac-laced neighborhood.
He had always wanted an early 20th century Craftsman cottage in the heart of the urban core, surrounded by a wraparound, ample yard—all within walking distance of neighborhood haunts that were bustling with energy and activity. He believed now was the time.
With his new job (and now a home move) in view, Jon had a lot of work to do. First, he decided to sell his existing house quickly, so he could get that headache out of the way and focus on his new job. A friend gave him the name of a Realtor he had used, and Jon set up a meeting.
The Realtor explained what Jon was going to need to do to get the house ready for showings, open houses, and tours. It was not going to be terribly costly, but it would still require finding contractors, getting bids, and making time for the repairs. Once that was done, Jon would have to work his schedule around prospective buyers traipsing through his house—often with only an hour’s notice.
He also had to make sure to take his dog Scrapper with him, because, as his realtor explained, pets needed to be off the premises during showings. Naturally, this would make it really difficult if the notice of a showing came while he was at work. And he wasn’t sure how patient his new boss would be with the interruptions.
A new home search
As if this wasn’t enough, he needed to start looking for his new home. But looking at listings, setting up tours with real estate agents, and strolling through house after house required even more time that he really didn’t have.
Also, Jon did not have the cash saved up to put a down payment on another home until he sold the one he was in. This would put him in a difficult spot when he did find a property he wanted. He couldn’t close on a new house until he had his money out of the sale of his existing house.
Suddenly, the exciting idea of buying a new home was becoming more like work than his new job. Finally, out of frustration, Jon decided he would just have to wait until he had more time in his daily life to continue the search for a new house.
About two months later, Jon was chatting with Monica after a meeting at work. She was relating the fun of shopping for new furniture for the new home she had recently purchased. Jon confided to her about his experience and how dispiriting it had been. He asked her how she had found the time and energy to get all the pieces to fall in place.
An easier way to sell a home.
Monica told him she had not experienced any of those issues or, as she described them, those “old style” problems in selling her home. She explained to him she had used an iBuyer. She went to the computer, pulled up an iBuyer company she’d seen advertised, and plugged in her house info. Within 48 hours, she had an offer . It was accompanied by a complete explanation of the fees. The offer was more than she had expected. She liked it, so she accepted it.
The iBuyer had scheduled a convenient time to have an affiliated Realtor do a walk-through of her home to verify its condition. Once that visit was completed, they asked her when she wanted to close the transaction and receive her funds. They also gave her the option of receiving all cash or, if she wished, using her house as a “trade-in” on another home to make her financing simpler.
Monica chose to get a payout of her profits, but she wanted to stay in her old house until she chose her new home. The iBuyer was fine with that. So, Monica took another six weeks to find her new home.
Once she was able to give the iBuyer a move-out date, her sale was finalized, and she arranged her move. This spared her the discomfort of figuring out how to store her household belongings and where to live between closing on the old house and closing on the new home. She had found the whole process easy and relaxed, and she told Jon she had done the majority of it all from the comfort of her couch.
You can definitely see the benefits for a seller.
iBuying: a brief history
I routinely watch ways in which data analysis and technology change the world around us. So as you might expect, I’ve been watching the iBuyer industry with interest for a few years. It’s a natural outgrowth of the type of buying and selling we have always done as real estate investors.
The classic formula we all learned and have grown familiar with in our industry is:
- Add value
- Sell or hold
If you look at it objectively, that is exactly what the iBuyers are doing, too, except on a massive scale and with a greater focus on customer needs.
This same simple formula was originally automated on a large scale back in 1989 by the company HomeVestors through their brand We Buy Ugly Houses. They took the same process defined by those four steps and mechanized the processes of offers and purchases. This process, though, still focused primarily on the investor’s needs and didn’t provide much added value to the property owner.
In 2006, Zillow came along and launched the “Zestimate.” This—for the first time—gave homeowners direct and immediate access to information about their home’s value and how it compared to the value of other homes in their neighborhood. With a few clicks of the keyboard, both buyers and sellers suddenly had definitive data at their fingertips to help them compare their home value to other homes in their area.
Neither the seller nor the buyer was any longer dependent on a real estate agent to provide a valuation. Gone was the need to hang out on the computer at the county offices, looking through screen after screen of previous sales in the neighborhood to define a property value for a potential offer. This shift became the great equalizer for both sellers and buyers.
Time moves quickly in the digital world
Fast forward to 2014: Opendoor launched its full-service platform, offering sellers a vast array of new conveniences.
For home sellers, the hassles involved in a traditional home sale were endless. iBuyers like Opendoor directly targeted those hassles. By addressing the seller’s problems and simplifying the process, Opendoor increased the willingness of a seller to use their platform for the selling process.
Here is a partial list of benefits Opendoor offers sellers:
- All cash offers
- Immediate, hassle-free sale
- Short escrow
- Quick close
- No waiting for a buyer to qualify
- No risk of a buyer not qualifying
- No staging
- No open houses
- No continuous showing appointments or last-minute notice of showings
- No requirement to keep the home constantly pristine
- An as-is sale with no repairs necessary (the iBuyer does any repairs after the seller has moved out)
- No outside appraisal
- No need to list the property
- No signs in front of the house
- Complete privacy
A substantial disruptor to the normal business model
From its inception in 2014, Opendoor offered home buying and selling. In 2016, they added a trade-in option.
Sellers immediately understood the trade-in option because it is the exact purchase model they are accustomed to using to buy a car. Bring in your old car, and trade it in on the purchase of your new car. Because they were familiar with the process, home sellers were comfortable trusting it.
Since its launch just five years ago, Opendoor has already bought and sold more than 50,000 homes. It currently operates in 23 cities, with more cities planned. But here is the real kicker; this year alone Opendoor is on track to purchase $5B worth of homes. Those are some deep pockets, indeed.
An explosion of iBuyers
Today, Opendoor is not the only player in the IBuying realm. Currently, in the SFR (single family residence) arena, the established iBuyer players include:
These brands have even created cooperative relationships with each other under the funneling, lead-generating website banner of iBuyer.com. This website takes the seller’s information and then directly connects them with the iBuyer portal (or portals) operating in their specific region.
If only one iBuyer is currently operating in an area, that who gets the lead. If multiple iBuyers are operating in an area, the potential seller gets multiple choices.
Are there multifamily iBuyers?
With this tsunami of change happening in the real estate industry, it has become obvious no sector of the asset class will be left untouched by the iBuyer phenomenon. This includes multifamily housing.
There are already several iBuyers in the multifamily playing field. Because of the overt success of the original class of SFR-specializing iBuyers, these start-ups have gained traction and venture capital very quickly.
As of now, the most established multifamily iBuyers are:
But that’s not where it ends.
What about iBuyers for vacant land?
Yes, there are already iBuyers for vacant land, as well.
The iBuyer trajectory is shifting the current paradigm of real estate transactions. The ramifications of this are going to continue creating disruption and change across our entire industry.
Consider how Amazon changed retail
In 1994, a company with the non-sequitur name of a river in South America opened an online bookstore, Amazon. And books were the ONLY product they sold.
Since that time, Amazon has become the dominant retailer on the Internet. In the process, the long-existent brick and mortar retail industry dramatically compressed. “Main Street” stores closed as more and more retail moved exclusively onto the Internet. The remaining brick and mortar retailers have had to become more creative or be washed away by customers’ desire for convenience, ease, better prices and reduced hassle.
Amazon’s entrance into retail changed the world of retail sales forever. It is important for us to look at this fact with clear, uncompromised vision.
Today, Amazon sells over 606 million products, owns Whole Foods, Ring, Zappos, Alexa, PillPack, Goodreads, IMDB, Audible, and a host of other companies.
Oh! And it still sells books.
Where does all this leave real estate investors?
The disruption Amazon brought to retail can function as an object lesson for real estate investors. After all, hindsight is 20/20 vision. And knowledge creates opportunities to make bold choices and create positive change.
First and foremost, iBuyers are focusing on the customer – the property seller. By doing this, by recognizing the problems inherent in being a property owner who isn’t in real estate as a profession, they have been able to create a better sale process.
As much as retailers wanted to believe, during the first decade after Amazon entered the retail space, that Amazon and online buying was just a fad, it didn’t go away. Instead, it grew.
So let’s be honest, iBuyers are not a fad. They aren’t going away – at least not until something better comes along. And they are already growing and obtaining enormous amounts of venture capital funding.
Preparing for and working with the reality of the ascent of iBuyers requires, first, not denying what is happening, and second, coming up with a long-term game plan for how to go forward.
So, how do we you plan to use the new disruption of iBuying as an opportunity to make our real estate investing businesses stronger, more effective, more profitable, more resilient, and more responsive to the things sellers are looking for?