The Rise of the iBuyers And Their Impact
If you’re an active real estate investor trend follower, you’re probably well aware of a relatively new phenomenon in the industry – the iBuyer. Companies like OpenDoor and Zillow are attempting to shake up the traditional investment scene by offering homeowners an instant cash offer on their properties and allowing them to choose the closing date that works for them. Their “money upfront, hassle-free” business model is appealing to people who want to sell their home quickly, without having the inconvenience of dealing with people. No real estate agent. No contractors. No open houses. It’s home selling simplicity at its best. Be prepared Investors and Wholesalers! The iBuyers are coming to your market soon if they aren’t there already.
If you’re thinking that this is just a fad, and that it’s never going to catch on, the numbers say otherwise. Investors are pouring billions of dollars worth of seed funding into these ventures. Established iBuyers are aggressively expanding their footprint across the USA. Newer iBuyers are entering the market like Zillow Offers. There are even iBuyers specializing in multi-family units and vacant land. This is definitely a booming market, and one that should not go unnoticed by local real estate investors.
How will this impact local investors & wholesalers?
If you’re thinking that this is the beginning of the end, we’re here to tell you that there’s no need to panic. Although the explosive growth of the iBuyers cannot be disputed, industry predictions from Morgan Stanley state that by 2030 iBuyers will account for roughly 3-5% of the overall market. The US housing market is so huge (approximately 6 million homes sold in 2019) that, even with these entrants, there is still plenty of opportunity to be found.
Consider this. What makes iBuyers appealing to a certain segment of the market? The speed and ease of the sale. What drives these two factors? Technology. What’s missing from the equation? People.
Real estate is traditionally a people business. It’s built on the reputations of all parties and sealed with a symbolic handshake. Although technology plays an ever-increasingly important role, successful real estate investing is still very much a direct result of fostering those relationships. There will always be homeowners who would prefer to avoid dealing with the hassle of people and are willing to give up a significant portion of their potential sale to do so. That will never change, but the vast majority of homeowners should be reluctant to hand over tens of thousands of dollars to an iBuyer simply because they don’t want to conduct property showings. It doesn’t make financial sense for most sellers to deviate from the traditional model.
Another aspect for local investors to remain aware of is the strict criteria that iBuyer companies have for the homes they are willing to pay cash for. Only a tiny fraction of homeowners who ask for an offer will receive one. According to OpenDoor.com, Any sort of structural damage, mold, foundation issues, well or septic system, foreclosure, older homes, or even large lot size will usually preclude most iBuyers from making an offer. Buyers are essentially cherry-picking the easiest deals and leaving everything else. Local investors may have to adapt to this change in the environment, but the deals are still going to be there.
iBuyers in Battleground Markets
The major iBuyers tend to compete generally in the same housing markets. While they may not all be present in each major market there is usually some overlap involved. Phoenix is a hotbed of iBuyer activity, with all major competitors serving that market. Much of this has to do with the fact that the housing market in stable in Phoenix, with little variation in neighborhoods. The bane of any iBuyer is uniqueness or customization, so their proprietary algorithms are much more accurate at analyzing the market and predicting a quick turnaround on their investment. If you also consider that Phoenix was the first market to have iBuyers, then it’s understandable why it’s not difficult to sell the idea to the homeowners there. They are already familiar with the concept, and it’s simply another option they now have for putting their home on the market.
Florida is poised to make leaps and bounds in the iBuyer market. According to a study from Redfin (itself an established iBuyer) 3 markets in the state show promising growth. Jacksonville landed at No. 9 on the list of 18 iBuyer markets nation-wide, with 3% of home purchases in that city made by iBuyers. Orlando was No. 12 with 2% of sales going to iBuyers, while Tampa took No. 17 spot with a respectable 1.1%.
That same study also showed that on average, 3.1% of all homes sold in that 18 market survey were purchased by iBuyers. This is up from 1.6% for the same period the previous year, proving that the iBuyer phenomenon is not going away.
In general, iBuyer companies are focussing the majority of their efforts on the southern states, where real estate sales and prices are expected to outpace the rest of the nation.
Who Wins in an iBuyer World?
There’s no denying that the real estate landscape is changing rapidly. iBuyers are encroaching on the traditional real estate investor’s territory. Even major traditional real estate corporations such as Keller Williams have taken notice and are getting into the iBuyer game. With all this change, who ultimately wins in the end?
One of the unknowns in the iBuyer equation is how the companies will stand up to a real test such as a housing market downturn. These companies are all basically 5 years or less in age and have not been tested. No one knows for sure what will happen if they are suddenly faced with a large inventory of homes that they are unable to sell.
If you believe in competition, then the distressed seller is ultimately the winner with all of this. Competition is good, and the iBuyers have created a process that works for a certain type of homeowner, specifically the distressed seller. There is ample room for other players in the industry, smaller mom-and-pop investors, to thrive in these markets. Some may be forced to adapt more than others, but the smaller real estate investment firm is nimble and able to pivot when needed to take advantages of local opportunities that will be missed by an iBuyer working with an algorithm.
Wholesalers and local investors who traditionally have had near exclusive access to distressed property sellers may initially feel as though their livelihood is under attack. While it’s certainly more convenient for some sellers to bypass these investors with the click of a mouse, industrious wholesalers and local investors can continue to find great deals by focussing on what they do best – building lasting relationships and leveraging opportunities on the ground.