New Kids on the Block: Can Real Estate Tech Manage Homebuilder Spec?
Paradigm shifts in the homebuilding industry have been far and few until 2019. iBuyers are growing exponentially and homebuilders are exploring single family for rent to weather a pending market correction. Shifts enable creativity and part of being more creative is exploring strategic partnerships. Prior to the Great Recession, homebuilders utilized joint ventures to develop communities. Today, homebuilders continue to work together to understand the market, engender new product, and reach more consumers. While homebuilders continue to compete, they are connected locally—trading lot positions in communities to manage inventory or keep a pulse on market share.
Homebuilders have been able to align in certain conditions because the pain points they face are similar. For example, this year has marked a shift in the number of Millennials ready for homeownership. However, Millennials struggle with making a down payment and so builders are adding a rental component to their product mix. There are Millennials that can afford to purchase a home, and builders must accept the way these consumers purchase is another paradigm shift.
According to Clever Real Estate’s own Millennial survey:
- Approximately 79% of Millennial home buyers are buying for the first time. Because they’re new to the process, most (approximately 82%) are looking for helpful online tools and trustworthy real estate agents to guide them.
- When it comes to reaching Gen Y home buyers, mobile reigns supreme — 63% of Millennial respondents said their phone was their primary research tool.
- Zillow wins out as the most popular real estate search portal among millennials.
Millennials are turning to online search tools and platforms to purchase their dream home. They are not looking to cut agents out of the mix but rather use their local market expertise. With this generation set to be the largest consumers in the marketplace, builders need to acknowledge resources they are turning to especially as Zillow continues to grow Zillow Offers.
iBuyers are a natural fit for Millennials because of the convenience and transparency. Millennials want control in what can seem like a chaotic process and desire to streamline all aspects of homeownership including title and mortgage. What’s more is that iBuyers do not just cater to Millennials but a variety of consumers and can aid builders in closing contingent contracts while managing spec inventory more easily.
Real estate’s largest chicken and egg problem has been answering the questions to sell first? Or to buy first? Homeowners are looking forward to purchasing a new home but the concern of selling can be daunting. According to Zillow:
36 percent of homeowners said they either struggled to sell their homes within their desired price range or time frame. More than one third struggled to time the sale of their home with the purchase of their new home.
Homebuilders see this scenario play out often in contingent contracts that mostly lead to cancellations. iBuyers take the uncertainty out of the selling process, although concern does exist that new home buyers will not get the full value for their home. This myth can be debunked as iBuyers price homes to sell within a 60 to 90 day window adding a layer of convenience to the buyer. In addition to monitoring contingent contracts, homebuilders carefully try to manage spec inventory.
Homebuilders have largely stuck to traditional methods of business planning and selling. It is impossible to ignore the disruption in the resale market and important to understand how homebuilders can benefit from aligning themselves with iBuyers. Before the inception of a new community, homebuilders struggle to plan the correct mix of spec homes and build jobs monthly. The build-up of spec inventory can create a backlog that takes time and severe discounting to get through. In Dallas alone, spec homes—which Metrostudy notes as finished vacant inventory has increased to levels seen in the market in 2009.
Source: Metrostudy, 2019.
While demand for new homes remains high, a market correction is pending and a slow-down, even if minor, is on the horizon. For homebuilders working through backlog, spring selling season is imperative. Fortunately, in Dallas, most of the finished vacant inventory is in the $250,000 to $499,999 price point. Considering the stress of affordability in the market place, builders should be able to sell through these homes. Interestingly enough, Metrostudy has noticed an opportunity for builders to partner with iBuyers to sell through finished vacant inventory without necessarily having to take as steep discounts.
Source: Metrostudy, 2019.
So, how can tech help spec?
iBuyers can convert homebuilder leads that need to move immediately but may be struggling to sell their home. With high monthly cancellations sometimes due to contingent contracts, iBuyers can eliminate the hassle in owning two homes simultaneously while assisting builders in reducing cancellation rates and carrying costs. iBuyer partnerships have the ability to make moving through finished vacant inventory more manageable and mitigate cancellations. For spec inventory, iBuyers offers the following benefits:
- Reduce Carrying Costs: Homebuilder agents can convert leads faster by leveraging iBuyers to instantly close on customers’ existing homes and transition customers into spec homes immediately.
- Limit Concessions: iBuyers enable builders to sell more spec homes earlier in the cycle, eliminating the need to discount homes at the end of the fiscal year due to mounting pressures to sell the homes out of backlog.
For lessening cancellations and converting more potential leads, iBuyers benefit homebuilders through:
- Contingency Sales: iBuyers eliminate financial contingencies from homebuilders’ buyer funnel by providing clients a guaranteed option to close on their home. Homebuilders can increase their conversion rate and convert leads faster by leveraging iBuyers as a resource for their clients.
- Line up Transactions: Allow sellers to close at any time in the next 6 to 9 months, ensuring that customers can close on both spec inventory and build-job homes according to homebuilder timeframe. Time management helps ensure homes move according to targeted monthly absorption paces.
- Customer Satisfaction: Customers are given a hassle free option and experience by syncing up closing dates and avoiding overlapping housing costs. Further, homebuilder agents can convert more leads by suggesting iBuyers to new home buyers that want to move but may have difficulty selling.
Okay, but do all these iBuyers work the same?
No, all iBuyers have different transaction models and sweet spots they are trying to target. The chart below details some of the nuances.
While homebuilders are encouraged to meet with all iBuyers to find the best possible option for their customers, GenYration found Perch’s transaction model beneficial to the seller. Perch is an iBuyer headquartered in New York. The company was founded by Court Cunningham in 2017. Court was the previous CEO of Yodle. With heavy competition in the iBuyer space, Perch wants to differentiate by focusing on the pain points of dual trackers, homeowners looking to sell their home and buy a new one at the same time. An excellent customer experience is a key tenant of Perch’s sell philosophy and they focus on this by pairing customers with a Local Market Expert to guide them through the selling and buying process. Perch offers homeowners a guaranteed sale price for their current home to put toward their new home purchase. This allows customers to buy before they sell and make a strong offer that is not contingent on their home sale.
Perch is also aligned with the home seller on getting “top dollar” for their current home. Unlike other iBuyers, Perch pairs the certainty of a guaranteed sale price with the ability to list their home and receive market price. Perch maximizes seller proceeds by listing the seller’s home with the goal of getting them more than their guaranteed sale price. Once a customer goes under contract on a builder’s home, Perch lists their current home and markets it across traditional channels and to their database to find a qualified buyer. When the home sells, the seller receives all proceed above the guaranteed sale price, less Perch’s standard 6% fee. Because Perch knows that housing markets can be unpredictable, they offer a home sale guarantee. If a home listed by Perch does not sell before the new home is ready, the seller keeps their guaranteed sale price. Perch gives homeowners the freedom to secure their new home first without sacrificing top dollar for their current home, which is a large market differentiator in the iBuyer space. Continuing to explore iBuyer nuances is important in creating effective partnerships that can solve for contingent contracts and spec home management.
iBuyers are coming to the Texas market in full force and it will not be long before they become strong national players in residential real estate. Partnering with iBuyers allows homebuilders to better manage inventory and convert more leads. Innovation can be difficult to accept, however figuring out where values align can create everlasting partnerships that drive success and most importantly delight the customer.
For more information on iBuyers or if you are an iBuyer and would like to be featured, feel free to reach out to Maya Sachdeva (firstname.lastname@example.org).