Buzzwords, the world has been suffering these terms for a long time! Everyone talks about ‘FinTechs’, being an ‘Entrepreneur’, or going on the ‘Keto Diet, just to name a few of 2018’s buzzwords. Society always seems to come up with a new buzzword that we all use, yet its much more hype than real substance. The real estate industry’s buzzword of 2018 has without a doubt been iBuyer.
The term iBuyer has been the talk of Wall St and the real estate industry over the last few months. Everyone is trying to get into this space; Zillow, OpenDoor, and even Coldwell Banker have been engaging with this buzzword. With all of this hoopla around iBuyer, let’s take a look and see what it’s all about.
What is iBuyer? (Hint it’s an algorithm)
At its core, it is a platform that uses an algorism to generate an offer on a property. The platform uses the algorithm to calculate the value of a home based on a variety of factors including location, size, potential work needed, and discounted cash flows to come up with a value for the property. This value is not the true market value of the home. It is a slightly discounted value that creates a profit margin for the buyer.
How does the Process work?
The process is relatively simple. A Seller would fill out a form about their home and provide details about the house. If the algorithm deems it a worthy property, the iBuyer would make an offer, conditional upon inspection. After which, a price reduction may be asked for. Alternatively, someone representing the Buyer can go inspect the property, take their findings to the platform and use it to make an unconditional offer on all things considered. Once the offer is made, the Seller can accept it, reject it, or counter it. Once a deal is finalized, the closing date of the deal can be done in a matter of days. Everyone likes a quick closing in real estate!
How does the Buyer benefit from iBuyer?
First and foremost, the majority of people that use iBuyer are the owners of the platform i.e. Open Door or Instant Offer on Zillow. These large platforms build the platform and algorithms in order to buy properties for a discount that they can resell for a profit in the future on their platforms. Typically, these “Buyers” are looking for properties that need repairs so they can add value through renovations. Sounds like the oldest business model in the book, buy low and sell high.
What are the Seller’s Benefits?
Seller have a lot of headaches when it comes selling their home the traditional way. They have to make sure their home is always showing ready with everything perfectly placed and staged to show your home in the best way. This standard of being showing ready is incredibly difficult, it’s something that most people struggle to keep up with. There are dishes, toys, iPad’s, books, bags, and whatever else you have all over the place (Yes, we all have messes in our homes). Add in the consistent upheaval of your schedule from Buyers wanting to see your place from 8 am to 8 pm 7 days a week, you have a nightmare on your hands. Not only do you have to clean up after your every single move, but you have to put your whole life on hold to let people into your home. I’m getting anxious just writing about it. In comes iBuyer to save the day! Get your home showing ready once, get a photographer to take amazing photos, and then your done. You can relax, have your own mess, and have your life back while you sell your home. In some cases, you don’t even have to do that. All you need to do is fill a form online and presto! Offer received.
iBuyers provide lighting speed offers with quick closing dates, which means you could sell your home faster. Imagine you’re on vacation, sitting on the beach. The ocean view is breathtaking, you can smell the salt of the water. As you’re enjoying the view with your favourite mocktail (who are we kidding, cocktail!), you get an email with an offer on your home. Wow, what a dream! iBuyer makes this a reality… at least the offer part. The vacation is probably not paid by iBuyer.
Do Sellers Really Win?
Most sellers aren’t inclined to accept a below market value offers (5% – 10%) plus a commission (4% – 6%). There would be a subsect of Seller that would take advantage of this i.e. in the case of a divorce, bankruptcy, or relocation. Otherwise, I don’t see Sellers, at large, accepting anything less than top dollar for their homes. For the iBuyer service providers, there is an unspoken risk to them. Most of these providers are technology companies, not construction companies. Their goal is to buy properties at below market value, do a minor or major renovation to the property and sell it on the market at a premium. Sounds pretty easy right? Wrong. Warren Buffet has said on multiple occasions, “Invest in what you know and understand.” With all due respect to these companies, their core competency is in building the technology of these platforms, not in the construction business or understanding the real estate market. My prediction is that these companies will struggle with controlling construction, have higher financing costs, and shrink their profit margins. Combine that with a peak in the real estate market, these companies could be holding massive losses on their books if they’re not careful. As most of these companies are publicly traded, you can expect to see lower than expected earnings and a drop in share price.
Down the line as these platforms and consumer behaviour evolves, I can see the consumer being able to make pricing decisions online with readily available, relevant, and accurate sales data (through platforms likes DigiRealty.com). I can also see everyday buyers making an offer online through these platforms with relative ease. All of this said, the one thing that won’t change is our fundamental human emotions. We all feel happiness, anger, sadness, and excitement. Those emotions will always play a roll in our lives. And when you walk into a home and see a little doggy door that reminds you of the house you grew up in, that emotional connection you have to that memory is what connects you to a home. Not an iBuyer platform.