Being so close to Halloween, I thought I would write the scariest article for real estate investors and real estate agents that I could think of. iBuyers are the zombies that devour your opportunities. They are killing growth and killing dreams!!
Let’s start with what an iBuyer is and what they do, and what we as agents and investors need to do to adjust to this new standard. The iBuyer is an instant buyer. They use technology to value the property and determine an offer price instantly. The property owner will call the company and have a cash offer on his house the same day. This sounds great to the seller and scary to brokers and investors, but let’s dig a little deeper. Of the large iBuying companies, all will require an inspection after hiring a home to determine what repairs are needed. From there, they require repairs to be made or change their offer price. The offer is always below market value and there are usually fees associated with the process. Fees vary from iBuyer to iBuyer and marketplace to marketplace, but tend to range from 6% to 10%. The three largest iBuyers are Opendoor, Offerpad, and Zillow. Redfin has also reached the market.
So what do real estate agents do?
It seems that iBuyers and agents can work closely together, and the rise of this trend will actually help agents adapt and take advantage. Here are two ways:
Referral rate: Most iBuyers will pay a referral fee. According to the Opendoor website, they want to pay agents a 1% fee if they bring in a customer. They also state that once the house is sold, the agent will get the buyer. According to the website, 87% of buyers prefer to use an agent when buying, so they won’t actually buy a home from an iBuyer. There are multiple agents who will work with buyers and get three or even four offers from iBuyers. They will work with the buyer through inspections and present all offers to the seller. The seller can then decide to work with an iBuyer or not. If they do, the agent will get their referral fee without much of the work that goes into a typical listing. These are one-way agents advertising “guaranteed deals” in their marketing.
listings: Zillow has been in the lead generation business for years. They produce thousands of leads who are referred to agents for a fee. This is your main income generator. Now that they are entering the iBuying space, they are also generating sales leads. From what I’ve read, Zillow only buys about 2% of the deals it does. With each offer made, they collect a significant amount of data from the seller. Because they collect so much data, the barrier to working with Zillow is quite high, meaning these are higher quality leads who can now sell to agents or refer them for a fee. I know many agents who would be happy to pay a lot for leads like these.
iBuyers are not a real threat to agents yet. In Phoenix, which is the most established market for iBuying, less than 6% of homes are sold using this strategy. That number is closer to 0.4% nationally.
What about investors?
I think iBuying is a bigger threat to investors than to agents. One of the biggest advantages investors have, or had, was their ability to make quick decisions and close houses quickly. iBuyers are capitalizing on this competitive advantage in a big way. There are, however, two advantages that investors have.
High price: Creative investors can pay a much higher price. Now, if you look at a strictly cash offer, investors may have a hard time competing, but what if the investor plans to hold the property for a longer term? They can usually finance those properties with favorable financing, which allows them to pay more than the iBuyer will pay with their fees. But it goes beyond that. Investors can also get creative and make offers to homeowners that involve payments over time, which increases what they can afford to pay for the home and can have huge returns for the seller. What if the seller doesn’t need or doesn’t want to take all the cash out of the house and prefers a higher monthly income or yield than they would get at the bank?
True Fix and Flips: There was a time when investors could easily find fix-up and flip opportunities where houses didn’t need a lot of work. They could fix up the house in a month for less than $20K and sell it for a huge profit. The market has already made these transactions difficult, but iBuyers will further reduce these opportunities. The opportunities that iBuyers will miss are major rehabs. All the great iBuyers want houses in good condition. In fact, their business model is to require repairs or lower their price based on repairs. And they won’t touch homes that need too much work. Those are the houses where the fixes and fins should go. If the house needs a lot of work, one strategy may be to encourage the seller to get an offer from an iBuyer so he can reinforce that he’ll need to work with someone willing to take the job. According to the Opendoor website, they do not compete with pinball machines. They have a fee-based model and they don’t want houses that need major repairs. It says so on their website!
Also, as a flipper, if you can find a way to add additional value, you can increase your bid, giving you the ability to pay more than an iBuyer. An example of this is if you can add square footage, a garage, or an accessory dwelling unit. These are things that an iBuyer would never consider in their evaluation.
Although iBuyers are absolutely a threat, you can see that the threat can be managed and can even help you grow your business. There are many things to be scared of during Halloween, but iBuyers shouldn’t be one of them.