Imagine everything you need to do to buy a new home. If you already own a property, you’ll probably need a broker to sell it. You may also need a broker to find you a new place. You’ll need a mortgage lender to finance the purchase. You’ll have to buy title insurance and home insurance, and then find a moving company to haul all your stuff to the new digs.
Now imagine being able to get all of these services from one company. And better yet, imagine that this company will coordinate the timing of each stage of the transaction so that moving from one place to another becomes virtually seamless. Several real estate tech companies are racing to make this dream a reality.
Has tech-world “disruption” finally come for the cumbersome process of buying and selling a home? Algorithm-driven home-flipping companies like Opendoor, along with strategic shifts by major companies like Zillow and consolidations across the industry, seem to say yes.
“A lot of people are out there trying to build this end-to-end consumer ecosystem where consumers can do everything in one space,” said academic and real estate tech consultant Mike DelPrete. “You look at the leaders in the field doing that, like Opendoor, it’s just about reducing that friction in the whole process.”
How algorithm-powered home flippers called “iBuyers” are shaping real estate
One of the most inconvenient aspects of buying a new home—and offloading the old one—is lining up move-out and move-in dates. Typically, people need to sell their old place before buying the new one because they simply need the money from their existing home to pay for the new one. But doing so can result in a gap between moving dates, requiring temporary housing.
In the last five years, multiple venture capital-funded tech startups—the most notable of which are Opendoor and Offerpad—have launched with the goal of solving this pain point in the homebuying process.
They work like this: These companies, dubbed “iBuyers,” make cash offers for your current home at an algorithmically determined “fair market price,” allowing you to take the money, buy your next home, and move out at whatever date works best for you. The transaction closes in a matter of days.
The companies then clean and fix up your old house and sell it on the open market, collecting a fee from the seller. And because the price at which iBuyers buy the house is usually not the maximum the house would fetch if it was sold traditionally, they likely make a small gain on the sale price.
iBuyers resist being labeled “home flippers” because of the negative connotation (the practice has been shown to diminish cities’ affordable housing stock). And as real estate consultant Victor Lund notes, the service iBuyers provide boils down to a financing instrument. The companies essentially extend a line of credit to a homebuyer using the existing property as the collateral. Customers then use that line of credit to buy a home.
“That’s how a mortgage brokerage works today,” Lund said. “It’s just being marketed differently.”
The key difference is that iBuyers don’t collect on the loan through monthly mortgage payments or by selling the loan. Instead, they collect on the loan after the move-out by liquidating the collateral—the old house—for more than they paid for it.
Other startups have popped up with their own spin on the process.
Atlanta-based Knock, for example, buys you a new house and then sells your old house on the open market. They call it a trade-in program. This allows a seller to let homebuyers bid up the price of the home like they usually would and thus collect the full value on their existing house; Opendoor’s and Offerpad’s offers typically represent a minor discount on the house’s full, open-market value.
Charlotte-based startup Ribbon also buys your new home for you, and you can move in and pay rent until your old house sells.
As the concept becomes more mainstream, more variations on iBuying are likely to follow.
A drop in the real estate ocean, but is the tide turning?
With glossy marketing, aggressive PR campaigns, and billions in VC cash to burn, iBuyers have been expanding steadily. Since launching in 2014, Opendoor has spread to 20 major real estate markets in the United States. Offerpad entered its 13th and 14th markets—San Antonio and Austin—just this week.
Still, iBuyer transactions currently represent a tiny fraction of all home sales; Curbed sources estimated that roughly 5 percent of sales in the markets where they operate were completed through iBuyers. Opendoor, the largest of the iBuyer companies, flipped 10,130 homes in 2018, according to ATTOM Data Solutions, a real estate data provider. There were 5.3 million existing home sales in 2018 and 622,000 new home sales.
Traditional realtors have, of course, started fielding questions from home sellers wanting to know more about Opendoor and Offerpad. Traditional realtors argue that going through iBuyers risks leaving a significant amount of money on the table, compared to letting potential buyers bid up the price through realtors.
Moreover, the half-decade-old iBuyer business model has not yet had a chance to prove that it can weather a shift in the housing market, much less a downturn, as home prices and sales have steadily risen with an economy rebounding since the 2008 financial crisis.
But that may be changing. Since the summer of 2018, home price appreciation has slowed dramatically, particularly on the West Coast, and home sales—both new and existing—have tumbled along with it. With wages rising considerably slower than home prices over the last 10 years, the latter appears to have plateaued. That’s a problem if your business model is selling homes for slightly more than you paid for them.
Even just shifts in the housing market could pose a challenge for iBuyers. The value of iBuyers is in expediting the home sale process. If the average number of days homes stay on the market shrinks considerably, there’s less need for an expedited sale. Conversely, if homes start taking longer to sell, iBuyers have to hold onto houses longer, and that results in more they have to pay in taxes, homeowners association fees, and other holding costs.
Despite their relatively small operating volume and the uncertainty around their business model, iBuyers have raised so much money and attracted enough attention that some of the biggest players in real estate have begun feeling compelled or forced to follow suit.
Listings giant Zillow launched a home-flipping service called Zillow Offers in April 2018, and Redfin began testing Redfin Now in June 2017. Zillow has been more aggressive and now operates Zillow Offers in eight markets. Redfin has been more cautious, currently operating only in Orange County, San Diego, the Inland Empire region of Southern California, and most recently Dallas.