The New Real Estate Disruptors

The New Real Estate Disruptors | Ken McElroy Image

There’s a new disruptor that has entered the real estate market, the iBuyer. An iBuyer is a real estate company that will buy your home, make some cosmetic repairs, and then sell it. Opendoor, Offerpad, and Zillow offers are just a few of the iBuyers who are changing the way home buying and selling works. Right now, iBuyers have just gotten their foot in the market, but it could be the tip of the iceberg.

iBuyers are have been growing in popularity ever since Opendoor first started iBuying in 2013, when it launched itself as a place where homeowners could sell their homes without hiring a listing agent. Using Opendoor allowed sellers to sidestep the whole process of open houses and negotiating with potential buyers. Sellers could just accept Opendoor’s offer and then start getting ready to move. More recently, other companies like Zillow Offer, Knock, and Offerpad have entered the arena.

How it works is that a seller will go to an iBuyer’s website, enter their address and fill out a questionnaire about their home. After that, they receive an offer within 24 hours, which is based mainly on neighborhood comps. If the seller likes their offer, the next step is that the iBuyer sends an inspector to go over the property. The seller can still back out of the offer until after the final walkthrough. The closing period is typically 60 days or less, and can even be as quick as one week.

Currently, iBuyers are only operating in some markets, and their preference is for newer homes. The iBuyer business model is driven by fast and easy flips, with a focus on recently built houses or condos priced between $100,000 and $500,000.

For sellers, the advantages of working with an iBuyer are:

  • You don’t need to do home showings.
  • You don’t need to make any repairs and can sell your house as is.
  • iBuyers are cash buyers. You don’t need to worry about any financing or appraisal contingencies.
  • You’re able to pick a closing date that works for you.

Having said that, there are some drawbacks to consider:

  • iBuyers offer you slightly below market value for your house.
  • There are higher fees and closing costs, anywhere from 6 to 12 percent, well above a traditional agent’s commission, which is typically 5 percent.
  • You can’t negotiate on the price. It’s a take it or leave it proposition.

In 2020, the popularity of iBuyers took a dip., the four big iBuyers snapped up 0.9 percent of all homes sold in the United States in the third quarter of 2019. But by the third quarter of 2020, when real estate prices were growing in leaps and bounds, that share dropped to just 0.2 percent. So what happened?

Very likely, sellers realized that the convenience of iBuyers meant they had to sit out the bidding wars that were happening all around them. When you work with an iBuyer, you get one offer and that’s that. In the slower-paced housing market of 2019, sellers were willing to accept less for the certainty of a quick sale. Now, though, many homeowners want the multiple offers you get in a traditional sale. iBuyers still offer the advantage of paying homeowners all cash for their house. But in a seller’s market, that may be the only major enticement iBuyers can offer.

Despite the dip in popularity of iBuyers, they are determined to stick around, even if that means losing money in the process. That’s right: iBuyers are currently operating at a huge loss. Zillow Offer and Opendoor, the two largest iBuyers, have each released statistics that they turn a gross profit of about $17,000 per house, but that figure doesn’t factor in the cost of its employees, overhead, and advertising and marketing. Zillow Offer spent $266 million for overhead expenses in 2020 alone. When the cost of operations is factored in, Zillow Offer and Opendoor are operating at a huge loss, to the tune of tens of thousands of dollars per house.

Zillow and Opendoor lost a combined total of $607 million in 2020. In the fourth quarter of 2020, Open Door was operating at a net loss of over $100,000 per home. So why are Zillow, Opendoor, and all of the iBuyers staying in the game when they’re taking such huge losses? For now, the reason is simply because they can afford to. These are well-funded billion-dollar companies committed to playing the long game. In the meantime, Zillow and its competitors will likely rely on upselling its customers mortgages in order to become profitable. Ultimately, these iBuyers are trying to get through this period because they see major disruption on the other side of it. They are betting on being able to do enough volume business to eventually get into the black. The CEO of Knock has said that by 2029, he projects that half of all residential sales will be handled by iBuyers. While that may seem unlikely right now, it can be ruled out entirely either.