Real Estate

With iBuyers, sellers pay a price for convenience

Is it worth the premium to unload a property hassle-free?

The iBuyer model may be new, but it appears to be catching on quick.

The market for iBuyers has exploded, growing by 25% every year for the last four years as big names like Zillow and Redfin get in on the game.

In fact, Zillow’s second quarter earnings released Wednesday revealed that nearly 40% of its $600 million quarterly revenue came from its iBuying business, Zillow Offers.

While not exactly profitable at the moment – the segment lost $71 million in Q2 – Zillow Offers saw demand last quarter that was “incredibly impressive,” according to CEO Rich Barton, with the company fielding requests for offers from 69,000 homeowners.

But what, exactly, do iBuyers bring to the table for home sellers? And, can this business model survive the housing market downturn so many are predicting?

That’s what Collateral Analytics sought to answer in a recent paper on the topic, which offered a deep dive into the strength of the iBuying concept.

First introduced in Phoenix by Opendoor in 2014, the iBuying concept offers home sellers the opportunity to sell and close on their home within days, hassle-free. The iBuyer then completes any necessary repairs and lists the home for sale.

“For motivated sellers who want a predictable sale date and need to move, perhaps a long distance from the current location, there is no question that iBuyers have provided a welcome alternative to traditional brokerage,” Collateral Analytics pointed out.

But all that convenience comes at a cost.

The paper dissected the math behind the model, estimating that sellers end up paying between 13% to 15% more when they work with an iBuyer. This covers a difference in fees that ranges from 2% to 5% greater than a traditional real estate agency, plus an allowance for repairs and another 3% to 5% to cover the iBuyer’s liquidity risks and carrying costs.

The paper also noted that the iBuying model makes these companies susceptible to a number of risks, including the need to safeguard vacant homes and the possibility that the automated valuation models they rely on will overvalue a property, resulting in a loss.

They could also face troubles if home prices decline.

“A downturn in home prices, not forecast by the iBuyer market analysts, could be devastating as they ramp up their business platforms, particularly if the cost of capital increases,” the paper stated. “At the same time, downturns are precisely when the most sellers would want this option.”

While Collateral Analytics lists several companies that are investing big in the iBuyer model – including Opendoor, OfferPad, Zillow Offers, Redfin, Realogy CataLIST, Perch and Keller Offers from Keller Williams – it also states that only the most efficient firms with enough capital and market share are likely to survive.

And of course, this all depends on how appealing the concept turns out to be, mainly, how many home sellers are willing to pay for convenience.

“For some sellers, needing to move or requiring quick extraction of equity, this is certainly worthwhile,” the paper stated, “but what percentage of the market will want this service remains to be seen.”

 

 

 

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