iBuyers - Just a new spin on an old idea
If you have followed the real estate industry at all over the last year or so most of the buzz has been around something called iBuyers, the latest “disruptor” model clamouring for a piece of the real estate pie.
If you are Canadian realtor you may not have heard of iBuyers as our neighbours to the south tend to be the testing grounds for these new models. According to OpenDoor “An iBuyer is a company that uses technology to make an offer on your home instantly. iBuyers represent a dramatic shift in the way people are buying and selling homes, offering in many cases, a simpler, more convenient alternative to a traditional home sale.”
Sounds fantastic, doesn’t it? This solves the age-old real estate dilemma, sell first or buy first? Now you have a certified offer on your home so you can happily go out and search for new homes in confidence and better yet be in a stronger negotiating position being able to make cash offers.
Hmmmm….. wait a second this sounds familiar?
Your house Sold Guaranteed or we buy it for Cash!
Let’s face it, rarely do we get to experience new industry-changing ideas and unfortunately, iBuyers just isn’t one of them, it’s simply a new spin on an old idea but on a much larger scale backed by venture capital.
Companies like OpenDoor and OfferPad who offer the iBuyer platform are in business for profit, they are accountable to shareholders and they are not doing this out of the goodness of their hearts. That “simpler, more convenient alternative” comes at a cost to the consumer. Below market offers and program user fees are just a few of the ways these companies move the needle in their favour, similar to those agents peddling the Guaranteed Sale Program. According to a recent study by Collateral Analytics, they concluded that selling to an iBuyer costs about 13 to 15 percent more than selling on the open market. That may be worth it for people who need to move as soon as possible, but for everyone else, it’s a risk to take into account.
I was at a conference in Vegas earlier this year listening to an expert on the topic and he mentioned that iBuyer companies only purchase about 2% of the properties that are submitted through their iBuyer platforms. Not a great stat if you are the consumer hoping to circumvent those pesky realtors in an effort to win the iBuyer lottery. But here’s where the real genius kicks in. These companies don’t make their money from flipping undervalued homes they pick up from their iBuyer platforms, that’s just their side hustle. The largest source of revenue for most of these companies is from selling leads back to realtors, and with the iBuyer platform, they finally solved the age-old realtor problem of getting sellers to self-identify.
Buyers are easy to find, they show up to open houses, they call on your ads/lawn signs, they attend information sessions but those elusive sellers were always difficult to track down until it was too late and the for sale sign was on the lawn. iBuyers now provides an opportunity for realtors to get their foot in the door before that for sales sign goes up. Somewhere buried in the fine print of these iBuyers terms and conditions page, you as the consumer, are authorizing them to sell your information to the highest bidder.
And here is where the real money is made… for a small fee of 30-35%, or a monthly subscription these companies will sell realtors the information of the potential sellers that didn’t meet the “requirements” to be eligible for an iBuyer offer.
Even traditional brokerages like Keller Williams are jumping on the bandwagon with Keller Williams introducing a partnership with OfferPad and Keller Offers to capitalize on sellers leads for their agents as well as the lucrative fees associated with iBuyers.
IBuyers use very complex algorithms to derive an “accurate” price for your home but to me there are just so many intangibles with real estate that a computer cannot account for. Things like neighbourhood conditions, the physical condition of the property, changing trends in home decor, market sentiment etc. In fact, the algorithms haven’t figured out all of these intricacies and this is why most of the iBuyer platforms have been rolled out in “homogeneous” cities like Phoenix with very little standard deviation from the median sale price and where the product is very consistent across neighbourhoods. If you operate in a city where neighbourhoods are a mix of condo, townhomes or single detached with large swings in median sale price from one neighbourhood to the next, you may not need to fear the robot buyers… yet.
These iBuyer companies generally stick to purchasing properties that are at or below the median for the neighbourhood and will avoid homes at the top end of the market or that have any unique features. It makes sense they want to ensure they put themselves in the best possible position to flip it down the road and buying unique homes or properties at the top of the market is just too risky for them.
This all sounds well and good in a sellers’ market that is continually rising but I think it will be interesting to see how this model weathers a downturn where an iBuyer company could be stuck with several hundred million dollars of vacant homes on their books with prices dropping.
So it really comes down to the convenience factor. If you need to sell and need to sell quick, sure an offer from an iBuyer might be a great option for you but keep in mind that you are paying for this convenience and it is highly likely that you could obtain a higher price if you took the property to the market through traditional methods. The good news for realtors is many of these iBuyer companies will pay a referral fee or full commission to agents that bring them potential properties and in most cases will list the property with the same agent once it's improved and ready to go back on market. In the states many agents are offering this as an option during their listing presentation if they know that the sellers need to move things quickly and need the certainty of an iBuyer offer.
To those of you that fear this is the beginning of the end and the rise of the machines is upon us, take a deep breath, there are still so many things a realtor brings to the table that no algorithm will ever be able to replicate.