By Ben Casselman and Conor Dougherty May 7, 2019 Modified for posting here.
In today’s on-demand digital world, buying and selling a home remains stubbornly, painfully analog unless you sell to a professional home buyer like your local “we buy houses” home buyer Rapid Home Deals. Most sales still begin with a real estate agent (and a 6 percent commission). Most still end in an office, with the two sides signing page after page of legalese.
Silicon Valley wants to change that. Tech companies have begun to nibble away at the edges of the residential real estate industry, offering virtual open houses, digital closings and other services. Now they are coming straight for the real estate transaction itself through “instant buying,” in which companies buy homes, perform some light maintenance and put them back on the market.
Who are the iBuyers?
Established companies like Zillow and venture-backed upstarts like Opendoor and Offerpad have raised billions of dollars on the promise that they can use sophisticated algorithms to predict the value of individual homes. They contend that those predictions, combined with old-fashioned economies of scale, will allow them to be far more efficient than local professional home buyers who live and work locally and know the market.
The companies and their backers say they are doing what tech is best at: bringing efficiency and convenience to a process not known for either. Silicon Valley has already upended the way we hail a cab and order takeout, they argue. Why not improve a transaction that even well-educated professionals find intimidating?
How does it work?
“You should be able to sell a home within a handful of clicks,” said Eric Wu, Opendoor’s chief executive.
But houses are not taxicabs. A bad Uber ride might set a user back $20 and make her late for a meeting. A house is the largest asset for most Americans and the most expensive purchase they will ever make.
At best, skeptics see instant buying, also known as “iBuying,” as an overhyped, capital-intensive business whose explosive growth will fizzle once investors tire of profit margins that Zillow itself calls “razor thin.” At worst, they worry that it could bring volatility and risk to an industry that has already brought down the American economy once this century.
Glenn Kelman, the chief executive of Redfin, the online brokerage firm, said there was a danger in pouring huge sums into buying up homes “without having a clear idea of how you’re going to make money on almost every single home.” If that happens, he said, “you’re just putting the housing markets, the capital markets, at some degree of risk.”
What is the impact on the market?
Instant buying is a small part of the market, but it is growing at breakneck speed. Zillow bought fewer than 700 homes in 2018; it expects to be buying 5,000 homes per month in three to five years. Opendoor, the first big iBuyer, bought more than 11,000 homes in 2018 and in the past year has raised more than $1 billion to step up its pace.
The companies typically aim to hold homes for 90 days or less before selling them, typically to an individual buyer. For the eventual owner, little changes about the process.
In Phoenix, instant buying accounts for 6 percent of all real estate transactions, according to Mike DelPrete, an industry analyst. And in a sign of how iBuying is reshaping the housing market, Mr. Kelman’s own company is getting into the game, buying homes in California, Colorado and Texas through a program it calls RedfinNow.
Even traditional brokerage firms like Keller Williams and Realogy, which owns Coldwell Banker, Century 21 and other brands, have announced plans for instant-buying programs. The trend is a threat to the brokers’ business model — but if it is going to happen regardless, they would rather get a piece of the action.
Who is their customer?
There have always been people who need to sell their homes quickly because of a lost job or a sudden move. But selling fast has come at a price, usually a steep discount. For the right seller, that trade-off might be worth it. We buy houses buyers know we best meet the needs of homeowners who need to sell fast or need to sell with no hassles.
When Dora Cagnetto decided to sell her townhouse in Phoenix this year, a real estate agent told her that she could get around $375,000 for it. Maybe $390,000. But she would have to replace the carpet and paint the walls. At 68 years old and recently retired, she thought it sounded like a lot of work.
Dora Cagnetto got an offer from Zillow for her townhouse without doing any work to fix it up. Her son thought they could have saved money getting it ready themselves, she said, “but to me it was like, I don’t want to do that.” Ms. Cagnetto figured that by letting Zillow do the repairs, she had gotten $10,000 to $15,000 less than she would have if she had paid for the repairs herself and sold the house through an agent. No repair work or open houses necessary. And she got paid cash.
Ms. Cagnetto estimated she effectively paid $10,000 to $15,000 for the privilege of turning over to Zillow the job of replacing the carpet and the bathroom countertops and doing other light repair work.
“My son, he’s like, ‘Well, oh, I could have done that,’ and maybe he would have saved a little money,” Ms. Cagnetto said. “But to me it was like, I don’t want to do that. I don’t want to hire somebody to do that, I don’t want to put carpeting in, I don’t want to paint these walls.” ( If this sounds like you call your local we buy houses buyer Rapid Home Deals 352-480-0955)
Will it work in Ocala and the surrounding area?
Whether iBuying works outside markets like Phoenix and Las Vegas is an open question. The model has yet to break into the Northeast, where the housing stock is older, the weather drives up maintenance costs and there are fewer of the kind of cookie-cutter subdivisions that the industry’s algorithms assess best. Prices are higher, too, making mistakes costlier for the companies.
Indeed, Mr. Wu’s vision of selling a house with a few taps on a smartphone remains far off. For now, algorithms help determine iBuyers’ preliminary bids, but those offers don’t become final until an inspector has had a look around. It still mostly falls on humans to determine whether a foundation is cracked or a kitchen needs remodeling. (That is why dealing with a local we buy houses buyer is simpler. You call we come out. No waiting for a company like Zillow to run the numbers and then make arrangements to get an inspector out to see your house.)
How they really make their money
Zillow essentially acknowledges that it doesn’t expect to make much money per home on its instant-offers program. Instead, it sees selling homes as a way to generate business for its mortgage-lending arm, which it developed after acquiring Mortgage Lenders of America last year, and for other services. It is the rough equivalent of the car dealership that sells cars at a loss but makes money by offering financing.
Zillow sees the instant-offers program as a way to generate business for its home-financing arm. “Where you are able to make money is through mortgage origination,” said Svenja Gudell, Zillow’s chief economist. “That’s why we own a mortgage company.”
The question no one can yet answer is what will happen to iBuyers — and iBuying — when the housing market inevitably cools, leaving companies holding thousands of homes that are worth less than they thought.
Mr. Kelman said a micro version of that situation played out late last year when rising interest rates led to a slowdown that iBuyers’ algorithms didn’t anticipate. Redfin sold homes at a loss; others held on, hoping for a rebound. The optimists proved right, and the market quickly rebounded. But Mr. Kelman said the experience was a warning sign.
“If rates had continued going up and the housing market had continued going down, it would have been a squeeze,” he said.
Zillow and Opendoor say their products could be even more valuable when the real estate market slows. The housing market often seizes up during periods of rapid change, as buyers and sellers struggle to agree on prices. Instant buyers, with their emotionless algorithms, could get the market moving again by accepting lower prices for houses held in inventory and thus setting benchmarks for other sellers. (Or dealing with local professional home buyers who have more ways to buy houses than just cash and can buy houses in any market.)
That disagreement highlights a tension at the center of the iBuying model. It aims to eliminate the frictions that slow down the real estate market: protracted negotiations, contingent offers, financing that falls apart before closing. But that very slowness contributes to real estate’s stability — it is hard to have a “flash crash” when it takes 90 days for a sale to clear escrow. And a large part of the United States economy, from the 30-year mortgage to the home-equity loan to the property taxes that fund school districts, is built on that stability.
“From a net-worth perspective, real estate is by far the biggest asset for most Americans, and historically that value has been very stable,” said Sam Khater, chief economist for the government-backed mortgage giant Freddie Mac.
That could be iBuying’s biggest challenge, Mr. DelPrete said. The process is unfamiliar, and sellers are reluctant to gamble with the biggest transaction of their lives.
“The biggest headwind to this getting mass traction is human psychology,” he said. “The bigger the potential downside, the more risk averse they are.”
If you know someone looking to sell their house fast in Ocala and the surrounding counties have them call 352-480-0955 or go to our web site RapidHomeDeals.com.