By Matthew Templeton
Managing Principal
KW Urban Dallas

Why is there so much movement in the iBuyer world?

First: What is an iBuyer?

An iBuyer is an institutional or business-based investor that uses automated valuation models (using data and algorithms to estimate value and trends over time) to make offers on properties in the market without actually having to have a huge workforce on the ground.

Who are these guys? Opendoor may be the one you’ve heard about the most. But also, Knock (a version of iBuying that gives you cash to buy the home you want before helping you sell yours), Offerpad, Coldwell Banker, Zillow Instant Offers (opened in Dallas on April 15), and coming in May to Texas, Keller Williams, according to Inman News this week.

How is this different than a traditional investor? In some ways, it’s not — individuals with bandit signs that say things like “we buy houses for cash” and companies like HomeVestors (“We Buy Ugly Houses”) with billboards have been models for decades.  

What’s different is that these institutional investors can buy properties at scale and their hope is to make money on the volume acquisition.  They claim to be purchasing at higher prices than a traditional investor (seemingly providing convenience for a slightly lesser price than retail).  The marketing pitch is slick. The idea behind it seems amazing — except that homes are not just data points. The fallout is yet to be determined.

Do iBuyers Make Financial Sense to Sellers?

In many cases, the convenience fee (the cost to sell at less than market value) is around 8 to 30 percent.  Even on the low side, it can mean $25,000 to $30,000 in bottom-line difference for the average home in the Dallas-Fort Worth area — and that for 20-60 days savings of market time.  That comes out to a $1,000/day convenience fee. Still worth it?

However, homeowners all over Dallas are eating up the slick marketing through Facebook, TV, billboards, and radio ads.  

And Wall Street, as well as venture capital, is noticing (hence the onslaught of iBuyers) especially in a hot market like Dallas where every new idea gets tested.

Opendoor got another round of funding last year to keep trying its model out. Wall Street and big money see this movement into the residential space as the next big frontier — this as data, analytics, and artificial intelligence change the way these institutional investors can make decisions from their offices.  They are salivating at the opportunities to deploy big chunks of capital into one of America’s most stable asset classes — at scale. Most of this institutional money is NOT yet in real estate. Most say that their portfolios are less than 3 percent in real estate despite being one of the largest (if not the largest) asset class in the United States.

Ironically, iBuyers have yet to create profitable business models. This is because they fall into the “technology disruption” game that is currently getting a pass on profit in lieu of building new business models, acquiring new data, and creating whole new industries. You can find out more about why technology disruptors struggle to attain profitability in my article The Profit Age vs. The Digital Age: A Reckoning For Real Estate.

Regardless of the potential liabilities and faults of iBuyers, many of the traditional real estate brokerages are responding aggressively.  The potential for iBuyers is definitely a future threat to traditional real estate models. And yet, overall, consumers continue to vote with their preferences (percentage wise there was an increase in home buyers and home sellers using a real estate agent in 2018, approximately 91 percent). This is likely because a real human with a fiduciary responsibility to help the homeowner get the most money in the shortest amount of time still matters to most of us.  

How quickly the way we buy and sell changes is going to depend heavily on the types of innovation that are continually released. I’d keep my eyes on Keller Williams, Zillow, Redfin, OpenDoor, and Compass as the battles unfold.

Matt Templeton is a Real Estate Agent Expansionist, Speaker, Brokerage Owner, and Real Estate Guru with Keller Williams that lives and works in Dallas. He coaches top business owners on business building, lead generation, time allocation, and technology. Reach him at [email protected].