IBuyers are companies like Opendoor and OfferPad which use pricing algorithms and other technology to make quick offers on homes, close in days, and then resell them.
These are not traditional home flippers seeking properties in disrepair to purchase at a steep discount. (Remember the yellow “We Buy Ugly Houses” signs?)
These are Wall Street-backed companies which have raised millions of dollars and are experiencing initial success with home sellers in their current markets.
How Do They Work?
We’ll use Opendoor as an example.
Sellers can go to Opendoor’s website and request a tentative bid on their property. The standard turnaround time for a bid is 24 hours.
The bid includes an offer price as well as service fees. The service fee starts at 6%, similar to the standard real estate commission, plus an additional fee which varies with the company’s assessment of the transaction’s riskiness. The average fee has been around 8% total.
If the seller decides to accept the bid, Opendoor then schedules a home inspection, completes the repairs, and deducts the repair costs from the seller’s net.
Sellers pick a closing date, which can range from 3 days to 60 days after bid acceptance.
Who Are iBuyer’s Customers?
Opendoor deals in single-family homes built after 1960, priced between $125,000 and $500,000. They currently have no interest in distressed properties, which require too much work, or in luxury properties, which are harder to value.
Their service appeals to sellers who place a premium on ease, convenience, and certainty. Receiving an almost instant cash offer while not having to prepare for listing and endure showings, would reduce a seller’s stress substantially. From a convenience standpoint, going with an iBuyer seems like a no-brainer.
But how much are sellers paying for convenience? In other words, how close to market value are iBuyer’s offer prices?
They claim their offers are at market value. OfferPad CEO, Jerry Coleman, says their goal is to “pay as much as we can for a home.” If this is true, then it seems the only additional cost for sellers is the “risk assessment” fee which is added on top of the commission.
A Few Thoughts To Consider From The Miller Group
Many experts in the real estate industry argue that iBuyers will struggle to find clients interested in their service. We think think they are wrong. If home owners could quickly sell their properties for cash, at market value, without the traditional hassles of selling, why wouldn’t they use an iBuyer company?
The question we have is whether the iBuyer models are sustainable. Buying up properties on a massive scale is capital-intensive and the risks are great. As long as home prices are increasing and interest rates remain low the risk is minimized. But what happens if the market turns and home prices fall or interest rates increase? iBuyer companies will have to figure out how to respond.
iBuyers are expanding their sources of revenue by developing their own lending service as well as their own title company. We think they are trying to streamline the real estate sales process so they can reduce costs and simplify the process for customers.
Will iBuyer Impact The Amelia Island Market?
Currently, there are no iBuyers in the northeast Florida market. However, it is only a matter of time before they open up shop around the First Coast.
iBuyers are only interested in properties for which they can accurately predict property values and which present little risk.
Even if they expand their pricing parameters, we do not think iBuyers will be interested in properties on the Plantation. There are too many risks involved like relatively high carrying costs and the Omni’s first right of refusal.
However, the expanding Yulee market might be an ideal spot for an iBuyer. We see an opportunity for iBuyers to partner with builders to purchase new construction homes. This would reduce a builder’s need to employee a sales team. It would also allow builders to secure a sales contract before they begin construction, thus reducing risk.
Even if iBuyers do not become active in our market, we could still see some indirect impacts. For example, it is important to consider the iBuyer impact on the housing market. Even though we aren’t sure how quickly iBuyers will react to supply and demand, we believe this movement could create artificial demand which would skew housing prices.
In markets where iBuyers have been active for more than a year, like Phoenix and Dallas, it is reported they are purchasing over 100 homes a month. Despite the size of these markets, buying and selling 1200 homes per market, per year, could have quite an impact on local real estate values.
Only time will tell whether these ventures will be successful. Our bet is they will be popular among buyers and sellers…at least in the short run.