Real Estate

Coronavirus pandemic exposes weaknesses of iBuyer model

Where are the disruptors who promised to make home-buying and selling easy?

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The $1.6 trillion real estate industry is a tempting target for disruptors. Hundreds of companies have developed thousands of solutions to automate different parts of the process, making the experience better and faster in many ways. But these are mostly incremental improvements — streamlining valuations or verifications, or creating mobile ways to apply for a loan. All worthy endeavors, but not truly disruptive.

That’s because it’s really hard to disrupt something so local, so regulated and so consequential in people’s lives. Something like ride-sharing is a breeze in comparison. 

One of the most recent efforts to overhaul the business of residential real estate is iBuying, spearheaded by Opendoor. What iBuyers provide, first and foremost, is certainty. Instead of listing their homes with an agent and hoping for the best, sellers can input property information and get an instant cash offer within 24 hours. If a seller accepts that offer, they can skip making repairs and choose their closing date. 

In 2014, Opendoor launched its iBuying service in Phoenix, which features a number of very similar homes, making the valuation of those homes easier to calculate. Opendoor makes money through service fees and by fixing and flipping the homes it buys. The company makes sure it can sell at a good price by doing an inspection once the seller accepts its offer, and then deducting any needed repairs from the seller’s profit. 

With instant offers, Opendoor delivered a radically different experience in home selling, and other companies took notice. OfferPad launched in 2015, Knock in 2016, and Redfin began instant offers in 2017. Zillow, the granddaddy of real estate apps, was initially slow to respond to this existential threat, but eventually joined the fray in 2018 with Zillow Offers. Some iBuyers have teamed up with traditional real estate brokerages, while other companies, including Knock, Homeward and RealSure, help people trade-in their houses. 

Are iBuyers the disruption the market needs? We may know soon enough. The main criticism of the iBuying model is that it will only ever be effective for a very limited number of houses, and only during certain economic cycles. In the midst of an unprecedented global pandemic, iBuyers are suffering along with every other business type.

The first cracks in the iBuying model appeared as cities and states started putting large sections of the country on lock-down in late March.

Redfin was the first to pause iBuying on March 18, citing the uncertainty of the market. “With whole cities shutting down nearly all commerce, no one can say what a fair price is right now, so we’re not making any instant offers. We expect to be making instant offers again soon, but only when the market becomes more predictable,” Redfin CEO Glenn Kelman said. “Our discipline today is the discipline we’ve always had, and that we’ve always said we would have.”

Opendoor followed soon after. “Like the rest of the world, we have been closely monitoring the escalation of COVID-19 over the last few weeks,” a spokesperson for Opendoor said. “We’ve been heartened by stories of resilience and support in this unprecedented time, and we’re mindful of the impact this crisis has had on the communities we serve and the teammates we work with across the country. Our priority is the safety and well-being of our customers, employees and the general public.”

Zillow initially announced it would stop its iBuying in California only, but extended that pause nationwide on March 23. It also put on hold its plans to expand Zillow Offers to more markets.

“Our top priority is ensuring the safety and health of our employees, customers, and partners. Given the concerns for public safety and rapid developments by governments that restrict local real estate activities, we determined it was prudent to pause our home buying to preserve our capital,” said Rich Barton, Zillow Group CEO and cofounder.

“We plan to restore Zillow Offers full operations once health concerns pass and local health orders are lifted. In the meantime, we are working to support our customers and partners in these uncertain times when home has never been more important.”

Notably, beyond just pausing their acquisitions of new homes during this time, both Opendoor and Zillow —the two largest iBuying companies — canceled contracts and offers of sellers already in the process. Homeowners who were only days or weeks away from closing the sale had the rug pulled out from under them. Instead of the seamless process iBuying promised, these homeowners had to start from scratch to sell their homes, even if they had already closed on another one. 

The situation not only caused a PR nightmare for the two companies, it also demonstrated some of the weaknesses in the iBuying business model. As the government relaxed appraisal and verification standards, many real estate and mortgage companies found new ways to help consumers buy and sell homes, whether it was using drive-by appraisals or virtual home showings or remote closings

Ryan Lundquist, a certified residential appraiser who has been appraising in the Sacramento, California, area for 17 years, is still finding ways to do appraisals in a locked-down area. When a drive-by appraisal is not sufficient, he is asking homeowners to give him the visual information he needs. 

“You can get a tremendous amount of information from owners through Facetime or Google Duo,” Lundquist said. He recently got on Facetime with an owner as they walked through their house, instructing him what to focus on in every room. Lundquist was able to take screenshots as needed, including underneath the kitchen sink, or capturing the condition of floors. 

For other clients, he has them take copious amounts of photos. “I tell them, ‘Please be trigger happy when taking photos.’ They send them to a dropbox where I can download and then I follow up on anything that’s not clear.” Lundquist uses the photos and video to get a clear understanding of the layout of the house, as well as deferred maintenance and upgrades.  

That information is helpful when looking at houses individually, but what about valuing real estate in the middle of a truly unprecedented event? From the iBuyers point of view, generating accurate property values is impossible in such an uncertain market. Lundquist has another perspective.

“The most important question is: Are buyers still pulling the trigger?” Lundquist said. “You can see that in pending contracts and listings. It’s critical to look at sales, but sales only tell us what the market used to be like, not what is current right now.”

“Getting a value in a market where there is so much uncertainty requires more analysis and conversation,” he continued. “Algorithms are going to lag in some instances, for instance, if the offer puts too much weight on sales. Algorithms can’t have conversations with other real estate professionals or homeowners.”

The housing market changes every day, but Lundquist said that as of last week, 41.5% of listings were still getting multiple offers. That is down from a very competitive time in February when 53% of all contracts had multiple offers, but still surprising if you thought real estate activity would come to a screeching halt during the pandemic. 

This echoes what HousingWire Columnist Mary Frances Coleman, owner of Spot On Strategic, found when she analyzed the Arizona Regional Multiple Listing Service this week.

“As of Monday, there were 1,180 new listings taken within the past 72 hours. During that same time period, 417 new offers were accepted but continuing to accept back-up offers, 63 additional offers were accepted with a contingency, and 678 properties went straight to pending sale.” She also reported that out of 17,545 listings, 6,759 were pending.

Coleman noted that during this same 72-hour period, 159 listings canceled, 196 went temporarily off the market, and 77 went into a “delayed” listing status. Still, in certain markets there is still an appetite for buying homes, and many real estate and mortgage companies are rallying to make those transactions happen.

If traditional companies can innovate their way through this, where are the disruptors? Wouldn’t these companies, whose business is based largely on automated valuations, provide the perfect solution to a nation ordered to stay at home?

Only if their real goal is to buy and sell houses.

In the case of iBuyers, each company has a slightly different business model and goal. Mike DelPrete, a global real estate tech strategist, and a scholar-in-residence at the University of Colorado Boulder, contends that Zillow’s goal with its iBuying arm, Zillow Offers, is the same as it is for the larger company: getting to the buyer first. 

“iBuying is not about buying and selling houses. That’s part of the iBuying model, but it’s not what iBuying is really about,” DelPrete said in an interview with HousingWire. “What it’s really about is capturing customers early in the lifecycle — getting them at the top of the funnel. It’s about getting consumers really early in the process and then they can kind of control them through that transaction. That can be mortgages, that can be putting them in touch with real estate agents, it could be buying and selling their home, or helping them find a new home — anything.”

Zillow Offers experienced incredible growth in 2019, but it wasn’t profitable. As the Motley Fool reported: “In Q4 2019, the homes segment accounted for 64% of total revenue. But the segment’s adjusted EBITDA loss of $82.5 million nearly wiped out the IMT segment’s adjusted EBITDA of $87.7 million. When you include the interest expense of $9.3 million, the loss increases to $91.8 million. Some of the loss is timing-related, but selling and renovation costs are the big drivers.”

Still, judging the success of disruptors requires a different lens, and an understanding of what the real goal is. Uber launched in 2009 and no one doubts it has disrupted transportation. However, it has yet to make a profit and lost $8.5 billion in 2019 alone, despite going public.  

For Zillow, instant offers is part of its overall strategy to capture the customer early and provide everything they need relating to where they live. In fact, the cost of buying and holding properties could make Zillow Offers most profitable when sellers input their data and decide not to take Zillow’s offer. The company still gets what it really wants: information.

For Opendoor and other iBuyers that make money primarily by selling homes, the chaos from the COVID-19 pandemic will be harder to overcome.

“This is a downturn like no other,” DelPrete said. “Part of an iBuyer’s response to a market slowdown or recession was geographic hedging — not all markets would be affected at the same time. Well, guess what: all markets are being affected at the same time. This will stress test the iBuyer business model like nothing else. Holding inventory and absorbing any price depreciation will be the big challenges over the next six months.”

But as they grapple with how to protect their businesses during this turbulent time, iBuyers, along with every other company, would do well to remember that consumers have long memories, especially in such a frightening environment. As Mark Cuban, owner of the Dallas Mavericks and Shark Tank host, said in a recent interview on CNBC, how companies treat their employees and consumers now will “define their brand for a decade.” Getting to the consumer first only benefits you if you make a good impression.

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