Will 2022 be the year of the iBuyer?

iBuyers and iBuying have raised questions of marketplace fairness. Is it right to have well-funded mass purchasers competing in the real estate market with first-time buyers and those with limited means? Are iBuyers responsible for the lack of inventory and the mammoth price increases seen during the past two years?

What is an iBuyer?

At this time there are three major iBuyer companies: Redfin, Offerpad, and Opendoor.

“An iBuyer,” says Opendoor, “is a company that uses technology to make an offer on your home instantly. iBuyers represent a dramatic shift in the way people are buying and selling homes, offering in many cases, a simpler, more convenient alternative to a traditional home sale.

“How iBuyers operate varies,” Opendoor continued, “but the underlying idea is that a company estimates the value of your home and makes an offer. If you accept, they take on the burden of owning, marketing, and reselling the home. Depending on the service you choose, the benefit is the certainty of an all-cash offer and more control over when you move.”

In principle, iBuyers are similar to local investors who search for real estate and buy for cash but with several differences.

• iBuyers use artificial intelligence – automated valuation models (AVMs) – to identify and price properties. Technology allows iBuyers to whittle down huge numbers of properties to find top prospects.
• Compared with most other investors, iBuyers purchase in large numbers.
• Unlike most residential purchasers, iBuyers have cash and credit that allows them to make quick decisions and fund instant closings.

Are iBuyers unfair?

The idea of marketplace “fairness” always raises the question, fair to whom?

Sellers are not required to accept iBuyer offers, especially at a time when multiple bids are common in many markets.

For some sellers the idea of iBuyers can be attractive, for others not at all. On the “pro” side, an iBuyer can represent a quick sale without exposure to common marketplace risks. There are no worries about lender approvals or delayed closings, plus there’s little or no need for owners to fix up the property.

If you’re a seller seeking the highest possible price, more competitors are a good thing. Whether your purchaser buys one property per decade or 100 units per month doesn’t matter. What counts is whether at least one of the offers you receive is acceptable to you.

Alternatively, at the end of the day, iBuyer are purchasers. They’re not charities. Their goal is not to pay as much as possible. Their offers may not be what given sellers want and thus unacceptable.

For other purchasers, iBuyers are simply competitors – large, well-funded competitors that rely on data-driven information to identify markets and make individual offers. However, iBuyers are not especially different from other all-cash purchasers, and there are a lot of them. According to the National Association of Realtors (NAR), 24% of the existing home sales in November involved all-cash buyers.

Market Share

Some worry that iBuyers might dominate the marketplace with their ability to make volume purchases. However, the question of marketplace dominance is complicated. Large, well-funded, buyers have always had advantages, but the national real estate market is so huge that individual players are barely visible.

NAR says that in November, the seasonally-adjusted annual sales rate was 6.46 million units. In practice, sales are greater during the summer than in the winter, but in rough terms let’s say there’s an average of 1.6 million units per quarter.

And what about iBuyers? How did they do in the third quarter?

• Offerpad says it “sold a record 1,673 homes, up from 749 homes” a year earlier.
• Opendoor had “5,988 total homes sold, up 72% versus 2Q21.”
• RedfinNow – part of Redfin – sold 388 homes, up from 37 in the same period last year.

In the context of millions of annual sales nationwide, the iBuyer impact is virtually non-existent. In hyper-local markets, however, the story might be different – and even that’s not assured.

Not a mortal lock

Technology allows us to do many things, but it does not provide a sure and certain road to either success or profitability. Whether we’re talking about real estate, stocks or bonds, there’s always some risk that no amount of computerization can eliminate.

According to Rick Sharga, RealtyTrac’s Executive Vice President, “iBuying is hard to do well. In traditional fix-and-flip investing, major property improvements often generate much of the profit. On the other hand, iBuying is pretty much arbitrage – buy an asset for a lower value than you plan to sell it for. Margins are generally fairly slim, and it’s critical to get the math right when determining the purchase price and estimating repair and resale costs.”

Today we talk about three major iBuyers, but just a few months ago we surely would have looked at four. Zillow was a major iBuyer until the third quarter, when it announced the wind-down of its Zillow Offers program.

“Higher-than-anticipated conversion rates during Q3,” said the company, “resulted in the purchase of 9,680 homes, further pressuring our renovation and resale capacity constraints. This resulted in 3,032 homes sold in Q3, below our expectations. We also recorded a $304 million write-down on inventory owned at the end of Q3 as a result of unintentionally purchasing homes at higher prices than our current estimates of future selling prices. We ended the quarter with 9,790 homes in inventory and 8,172 homes under contract.”

“Fundamentally,” said Rich Barton, Zillow’s Co-Founder & Chief Executive Officer, “we have been unable to predict future pricing of homes to a level of accuracy that makes this a safe business to be in. We hadn’t modeled this kind of pricing market nor supply market to even be possible when we got the business going.”

Will iBuyers be part of 2022 and beyond? Sure. Given an end to a once-in-a-century pandemic, their results might be very much better. And although iBuyers may evolve into big players in several local markets, it seems unlikely that we will see a national arena dominated by such firms. The reason? The real estate market is just too big, has too many variables, and includes too many competitors.