In January I was at Inman in New York. Unlike most people there, I was less interested in the content of the sessions than I was in harassing the technology companies in Start-up Alley and on the trade floor. There was one session on the program, that I made sure I didn’t miss. It was a panel of large US real estate groups talking about their adoption of a sales model that was originally designed to disrupt the traditional real estate agent. It’s likely, the same panel (or any panel of agencies) 12 months ago would have been cursing the very existence of the disruptive “iBuyer”model. So, what has happened?
If you are not familiar with iBuyers, the “i” stands for instant. The iBuyer model is to make a cash offer to a seller for their property within hours of completing an online questionnaire. If the seller accepts the offer, they can choose to settle in as little as 2 days.
Founded only a few years ago, Opendoor were the original iBuyer, however there are now a half dozen stand-alone iBuyers in the US. There are another ten in the UK and Europe and one in Australia.
Opendoor has raised over US 1 billion in venture capital, has bank debt facilities of a reported US 2 billion and a valuation of US 3.75 billion. They are growing rapidly and now deploy in excess of US 100 million a month to purchase and improve homes in 19 US cities. In Phoenix, one of their early cities, they sold somewhere in the range of 3500-4000 homes in the 12 months to August 2018. This represents about 4% of the market, up 1.5% on the prior 12 months.
Born as technology first companies, iBuyers are far from your traditional agency model. Yes, agencies are increasingly investing in software and technology. However, investment in street frontage, fit-outs, branding and retention of leading agents dwarfs the technology spend.
The iBuyer is investing almost exclusively in technology and systems that enable them to value, acquire, repair, renovate (largely cosmetic), stage and ‘flip’ residential property. Quickly!
Whilst an agency will argue they are putting relationship at the centre of their value proposition, the iBuyer would unashamedly put certainty and speed at the centre of their proposition.
In addition to certainty and speed, the vendor does not take on the hassle of coordinating and managing repairs, listing, staging, weekend open home and follow-up showings. They avoid the protracted negotiations and the ‘conditional’ contract.
Depending on the country and the particular iBuyer’s model, they may be cheaper or more expensive than a local agent. Opendoor promote on their site that their average ‘Service Charge’ (7.2%) is at the bottom end of the traditional home sale average cost (7-10%).
If you are reading this through the lens of an Australian market, note that in the US commissions are generally paid by both buyer and seller (~3% each) and are much higher than Australia (~2-3% paid by seller).
Cost shouldn’t be looked at in isolation though – the outcome (sale price) is more important to most sellers. With the clock running on debt facilities to finance the property and the risk of downward market movement, days on market wields the whip for the iBuyer. They need to sell quickly, so it follows that they will sacrifice some upside.
Ultimately, I think the well-known local sales agent with a solid marketing campaign and good negation skills will get a better sales price than the iBuyer. The billion-dollar question though is how many will be willing to trade-off the potential upside to have speed, certainty and their Saturday mornings?
To throw the proverbial spanner in the works, some iBuyer models will share some of the ‘upside’ with the vendor. The upside is the difference between the price the iBuyer buys at and the price the iBuyer sells at.
Clearly the iBuyer model challenges the traditional sales model, so back to my original question, what has happened? There are now real estate companies in the US establishing their own iBuyer models.
Why? Personally, I don’t think the answer is that they “like” the model – in fact, I think they really hate it. Firstly, it not only challenges but undermines the mantra “own the relationship, own the sale” that all agencies espouse in some form or another. Secondly, it undermines the immeasurable investment in the IP and resources (people, agencies, infrastructure) of building these real estate groups.
The ‘why’ is that iBuyers have achieved tremendous traction. What happened is that the model has been validated. People, in their thousands, are selling homes through iBuyers.
It is too early to determine whether the business model is sustainable. In the meantime, several US real estate groups have some version (at least committed to, if not yet operational) of an iBuyer model. This includes industry heavy weights such as Keller Williams, Redfin and Realogy – the owner of brands such as Coldwell Banker, Century 21, Better Homes and Gardens Real Estate and Sotherbys International.
These groups have acknowledged that there is a segment of the market that will choose certainty, speed and lack of ‘daily life disruption’ over relationship and potentially maximised upside. They are offering their own version – marketed as ‘cash offer’ or similar – as an alternative service proposition to their ‘full service’ offering. How this will work is too early to tell – the majority are very early stage in the establishment of their programs.
It is a positive response though – taking up the fight to retain hard fought market share from the upstart disruptors.
In case you are an agent reading this and having your own Henny Penny ‘the sky is falling’ moment, rest assured the model is a long way from eating your proverbial lunch.
There are very specific markets that iBuyers are targeting and even more specific property criteria to be met. For Opendoor and their US competitors, the property must be post 1960’s, within one of their service areas, in the valuation range of $100k – $500k, is not pre-fab, is a lot size no bigger than .5 of an acre, etc, etc. A picture should be forming of suburban, mortgage belt, high volume property areas with relatively architecturally-similar homes.
Their operating model is highly dependent on minimising days on market and exposure to negative market movements so property and city/suburb criteria will remain critical in honing valuation accuracy to ensure sales velocity.
So, friend or foe? If you are an agency operating in a market attractive to the iBuyer model and do not have a program, they will certainly be a formidable foe – whether now or in the future.
Given the substantial cash and debt requirements, it is not feasible for your typical suburban agency to operate an iBuyer model on any sort of scale. What can be learnt though from the early success and how should agencies challenge their own thinking? Agencies should consider;
People appear willing to accept less of a price for speed and certainty.
The unshakeable belief that ‘relationship is everything’ to all people isn’t a reality.
Disruptive businesses generally come with a much more cost-effective solution, this isn’t the case with the iBuyer. How can this be leveraged?
Some final thoughts for the very relaxed agent reading this because your market doesn’t in any way resemble the one described. The large iBuyers are well funded, learning quickly and refining their models constantly. Given enough capital to survive periods of unprofitability, the iBuyer will be coming to a suburb near you.