iBuyers are Here to Stay: How Tech has Adopted an Old Transaction Model and is Making it Better
“We Buy Ugly Houses” is a familiar slogan seen on lawn signs lining trafficked street corners. Ken D’ Angelo launched HomeVestors in 1989 and began franchising the organization in 1997. The premise of the company is to purchase homes in need of repair or homes that were a tough sell for a cash offer. The HomeVestors franchisee is given the option to sell or rent the home after rehabilitation. HomeVestors purchases a home at 40% to 50% below market value and typically holds it for six months maximum. Into the Great Recession, the company went after financially-distressed homeowners facing foreclosure that needed a quick sale and has since adopted this practice into the mainstream business plan. In fact, HomeVestor purchased its 85,000th home in 2017. A proprietary software system dictates the return on renovation costs and determines the cash offering for a home. HomeVestors is a market pioneer and continues to grow rapidly. It is easy to call them the original iBuyer, however stark differences exist in acquisition and branding.
According to Forbes, an iBuyer is a company that will make a cash offer for your home based on a proprietary valuation model. If the buyer accepts the offer, the buyer may close on the home in as little as a few days. The iBuyer may do minor repairs on the home before relisting on their own market place. Several large companies have emerged out of the technology sector as iBuyers. These companies include Open Door, Offerpad, Knock, Amne, Zillow Instant Offers, and Perch (to name a few). These companies have taken an old approach and enhanced it, since they noticed a demand for convenience in selling a home. David Hicks, current CEO of HomeVestors, concedes:
“We are similar to an iBuyer model, but we’re buying homes that model wouldn’t buy. Some 80 percent of the homes we buy are built before 1980, are under 1,400 sq. ft. and have significant repair issues,” says Hicks. “People that sell to us are eager to arrange a quick transaction for cash but are not in possession of an asset [like one that] iBuyer would consider. We Buy Ugly Houses® franchises provide a needed service to sellers while also bringing the progress of real estate development to communities around the country.”
The acquisition model for iBuyers varies drastically from HomeVestors. Opendoor purchases homes that are well-maintained and primed to sell while HomeVestors purchases foreclosures. iBuyers are not franchised, they have a national operation supported by regional offices across the country. More market entrances are anticipated into 2019. iBuyers are incredibly well-funded and backed by strong investors on Wall Street and in Silicon Valley. The funding sets them apart from home flippers or billboards promising “a great cash offer” for your home. The negative connotation, such as low cash offers, that has been associated with “We Buy Ugly Homes” is not the same approach iBuyers take. According to Inman, notable differences between iBuyers and HomeVestors are below:
So, who exactly are these iBuyers?
Opendoor is the most prominent player with Knock rising in the ranks. Opendoor raised a whopping $400 million dollars in funding in May of 2018 bringing its total funding to $1 billion dollars. These numbers do not take into account its debt financing (also in the billion plus dollar range) which enables the company to purchase and hold homes. Knock comes in second having recently raised $400 million dollars as of last month. Offerpad has also raised $150 million dollars in both debt and equity. Perch is not far behind in the fundraising effort. Strong funding has allowed for quick market entrance and creating valuation tools that utilize sophisticated data to offer cash offer in line with market pricing. With the astonishing growth of Opendoor, Knock, Offerpad, and Perch—Zillow made the decision to enter into the fray. In 2017, Redfin launched RedfinNow and Keller Williams launched Offerdepot. iBuyer market share has increased drastically in the past year—Opendoor told Inman:
“…that it alone is currently doing more than 2,000 deals per month, including both buying and selling. It has served “more than 27,000 customers” since launching, the company told Inman in an email.”
iBuyers are currently operating in the markets below:
To whom do iBuyers appeal?
Although iBuyers would like to take on all home sales within their predetermined “sweet spots”, specific customers prove to be better targets. iBuyers are acquiring homes between $100,000 to $500,000 and target buyers that are more inclined to move quickly such as veterans, empty-nesters, or relocation buyers and… the ubiquitous Millennial buyer. Gen Y values transparent transactions and minimal negotiation. This aversion of negotiation is due to the renter and convenience mentality—instant access without a tedious process. Easier ways to sell a home appeal to this consumer segment.
What are iBuyer concerns?
Reservations regarding realtor relationships, receiving a competitive offer, and iBuyers positioning in a softening market exist. However, most claims are mitigated when considering Opendoor has worked with agents to grow its practice. Agents can take on more volume due to a shorter transaction period. Although they are paid less per transaction, the ability to have higher volume makes the payout worth the partnership. Perch co-founder, Phil Degisi, has also said:
“I don’t see [Perch] replacing real estate agents,” he said. “I think what we’re doing is we’re increasing liquidity for homeowners, which is ultimately a good thing… If we’re doing our job right, we’re able to increase the number of transactions that are happening, which is only a good thing for brokers.”
Since so many iBuyers exist, aggregator services for iBuyer offers are beginning to emerge. These aggregators place the power into the customers’ hands as they have the ability to choose the best offer for their situation. Lastly, iBuyers have a highly adaptive model that allows them to work with the cyclicality of real estate. In a softening market, sellers find it easier to sell to iBuyers instead of a traditional transaction. The iBuying model does not work for everyone, however the significant growth of new market players in the real estate industry can no longer go unnoticed.
Stay tuned for next month’s post—GenYration will talk to a company working in the iBuyer space and going against the grain.
For any questions or topics you would like to see covered feel free to reach out to firstname.lastname@example.org.
To read the comprehensive Inman report regarding iBuyers: https://www.inman.com/2018/12/10/the-essential-guide-to-ibuyers/.