Being so close to Halloween, I thought I would write the scariest article to real estate investors and Realtors that I could think of. iBuyers are the zombies eating away at your opportunities. They are murdering growth and killing dreams!!
Let’s start with what an iBuyer is and what they do, and what we as agents and investors should do to adjust to this new norm. The iBuyer is an instant buyer. They use technology to value property and determine an offer price instantly. The property owner would call up the company and will have a cash offer on their house the same day. This sounds great for the seller, and terrifying for agents and investors, but let’s dig in a little. Of the large iBuying companies, they all will require an inspection after they contract on a home to determine what repairs are needed. From there, they either require repairs to be made or they change their offer price. The offer always comes in below market value and there are typically fees involved with going through the process. The fees vary from iBuyer to iBuyer and market to market, but tend to be between 6% and 10%. The three largest iBuyers are Opendoor, Offerpad, and Zillow. Redfin has also hit the market.
So, what do real estate agents do?
It seems like iBuyers and agents can work closely together, and the increase in this trend will actually help the agents that adapt and take advantage. Here are two ways:
Referral Fees: Most iBuyers will pay a referral fee. According to the Opendoor website, they want to pay agents a 1% fee if they bring in a client. They also state that once the house sells, the agent will get the buyer. According to the website, 87% of buyers prefer to use an agent when they buy so they won’t actually buy a house from an iBuyer.
There are several agents that will work with buyers and get three or even four offers from iBuyers. They will work with the buyer through the inspections and present all the offers to the seller. The seller can then decide to work with an iBuyer or not. If they do, the agent will get their referral fee without much of the work that goes with a typical listing. This is one-way agents advertise, “guaranteed offers” in their marketing.
Listings: Zillow has been in the lead generation business for years. They produce thousands of buyers leads that they refer out to agents for fees. This is their primary revenue generator. Now entering the iBuying space, they are generating sellers leads as well. From what I have read, Zillow only buys about 2% of the offers it makes.
With each offer made, they collect a significant amount of data from the seller. Because they collect so much data, the barrier to work with Zillow is set pretty high, meaning these are higher quality leads that they can now sell to agents or refer out for a fee. I know many agents that would be happy to pay big for leads like these.
iBuyers are not yet a real threat to agents. In Phoenix, which is the most established market for iBuying, less than 6% of homes are sold with this strategy. That number is closer to 0.4% nationally.
What about Investors?
I believe iBuying is a bigger threat to investors than it is to agents. One of the biggest advantages investors have, or had, was their ability to make quick decisions and close on houses fast. iBuyers are cutting into this competitive advantage in a big way. There are, however, two advantages that investors have.
Higher Price: Creative investors can pay a much higher price. Now if you look at a strictly cash offer, investors may have a hard time competing, but what if the investor plans to hold the property for a longer term? They can typically finance those properties with favorable financing, which allows them to pay more than the iBuyer will with their fees. But it goes beyond that. Investors can also be creative and make offers to owners that involves payments over time, which increases what they can pay for the home, and can have huge benefits to the seller. What if the seller does not need or want all of the cash out of the home, and would prefer a monthly income or a higher return than they would get in the bank?
True Fix and Flips: There was a time investors could easily find fix and flip opportunities where the houses did not need much work. They could fix the house within a month for less than $20K and sell for big profits. The market has already made these transactions harder, but iBuyers will further cut into these opportunities. The opportunities the iBuyers won’t cut into are the major rehabs. All of the big iBuyers want homes in good condition. In fact, their business model is to require repairs, or lower their price based on repairs.
And, they won’t touch homes that need too much work. Those are the homes the fix and flippers should go after. If the house needs a lot of work, one strategy may be to encourage the seller to get an offer from an iBuyer so they can reinforce that they are going to need to work with someone willing to take on the job. According to the Opendoor website, they do not compete with flippers. They have a fee-based model and do not want homes that need major repairs. It says it right on their website!
Also, as a flipper, if you can find a way to add additional value, you can increase your offer, giving you the ability to pay more than an iBuyer. An example of this is if you can add square footage, a garage, or an accessory dwelling unit. These are things an iBuyer would never consider in their evaluation.
Although iBuyers are absolutely a threat, you can see that the threat can be managed and can even help you increase your business. There are plenty of things to be scared about during Halloween, but iBuyers should not be one of them.