iBuyers, offering convenience at a price, disrupt home sale market

Consumers have long been frustrated by the difficulty and uncertainty that go with buying and selling a home.

Whether it’s the balancing act of properly timing a home sale and a purchase, making even small repairs in advance of a sale, or simply raising the cash for a down payment, the process only adds to what can be a difficult transaction.

Now, a new breed of real estate technology companies is seeking to address these frustrations. They are known as iBuyers, and their goal is nothing less than to change the way people buy and sell homes.

For sellers, iBuyers offer the promise of easing everything from cleaning and staging a home, to showing it and hiring a broker, to waiting for appraisals and approvals before financing is secured.

For those purchasing homes, iBuyers help them better compete in bidding wars—especially in a surging market like today’s when all-cash offers are prized.

And for those looking to simultaneously buy and sell homes, iBuyers can eliminate the pressure of aligning closing dates so that cash from a sale can be used toward the purchase of the next home.

To be sure, this business model—buy for cash, fix and sell—has been around in some form for decades, albeit in limited fashion.

But in today’s surging market, a group of startups, fueled by the deep pockets of institutional investors and enabled by advanced algorithms hard to imagine even a decade ago, are looking to apply this model on a broad scale. Like anything, though, it comes with a price.

What are iBuyers?

The process is simple enough: iBuyers purchase homes directly from the owner almost instantly, fix them up and then sell them.

They eliminate the need to get an agent and to list, stage and show a home. Instead, sellers provide the iBuyer with details about the property—things like its age, condition and Zip code. The iBuyer uses algorithms to predict the home’s value, then presents the seller with a cash offer.

In return for the convenience, sellers typically receive a lower price than they could otherwise get, and the iBuyers charge a fee on top of that. But at the same time, the seller saves on a broker commission.

In most cases, iBuyers make light repairs on properties and list them on the open market or sell them to investors at a profit. The iBuyer model rests on the idea that sellers value convenience and are incentivized to agree to a lower price so they do not have to deal with the hassles of the traditional sales process.

While they operate on low margins, iBuyers have gained a competitive advantage by achieving scale and benefiting from the recent appreciation in real estate values. In addition, iBuyers have also developed new business models, including helping buyers make all-cash offers on their next home that they otherwise could not make. It all goes toward making the home purchasing process more convenient.

Market disruption

A recent report from Zillow analyzed sales activity among four of the largest iBuyers: Zillow Offers, Opendoor, RedfinNow and Offerpad. These four iBuyers purchased more than 15,000 homes in the second quarter, amounting to approximately 4% of total cash purchases in that time and up from 7,000 purchases in the first quarter.

The purchases by iBuyers are expected to exceed that total in the third quarter, with some moderation in likely in the fourth quarter. Zillow recently said it had halted its purchases through Zillow Offers for at least the rest of the year. Zillow’s announcement comes as real estate companies are grappling with shortages of raw materials and labor, making repairs more difficult.

The increases in iBuyer purchases in the second quarter are a significant shift from a year earlier, when those purchases fell to fewer than 900 amid the shock of the pandemic. The recent increases illustrate that even in a market that favors sellers, those sellers welcome the convenience offered by iBuyers.

One reason is that sellers are still managing to receive over-market prices for their homes. According to a recent report from the real estate technology company zavvie, iBuyers paid an average of 104.1% of market value in the first half of the year, an increase from 2020, when offers from iBuyers averaged 97.6%.

Continuing innovation

iBuyers are not only changing the sales process, but they are also continuing to develop new products.

In March, Opendoor revealed its cash-backed offer program, in which it will back buyers’ offers on their next home with cash—even if those buyers don’t have enough cash after the sale of the home they are selling to the iBuyer.

This approach allows buyers to present the certainty of an all-cash offer, free of financing, appraisal and home sale contingencies.

Other startup companies have followed with similar models, which include purchasing the property on behalf of the buyer or providing money to the buyers to make all-cash offers, giving the buyer time to obtain financing.

There are some added costs to the buyer that start at 1% of the purchase price of the home, but the buyer can build these costs into the offer. In addition to the fees charged to the buyer, iBuyers profit from the commission paid by the seller, replacing the buyer’s agent.

While iBuyers do not account for a significant portion of home purchases, they are growing at a rapid pace as they offer simpler financing to those looking to buy or sell a home.

According to PitchBook, investment in real estate technology companies as of Sept. 30 reached $37.9 billion, a 76% increase over the $21.5 billion invested in all of 2020. While not all of this investment is going to iBuyers, the significant increase shows that the home buying process is ripe for disruption.

The takeaway

While supply and labor challenges are restraining the residential real estate market, iBuyers are expected to continue growing as these challenges ease and as they disrupt the traditional buying and selling of a home.