iBuyers
As for the so-called iBuyers, they offer convenience and expediency, not economy. They buy low, sell high, AND charge the seller a fat fee for their service. Sure, it can be a legitimate alternative, but I suggest you do the math.
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Here is the iBuyer model as I understand it:
- Purchase non-marketed properties for less than fair market value.
- In return, offer the sellers convenience and expediency (no showings and expedited & flexible closings).
- Charge the sellers a six – seven percent service fee.
- Sell the properties at or above fair market value.
If they can net a five percent return on investment, that's not too shabby. But then, if they can use their funds to do this, say on average, three times a year, that's a 15% ROI.
At this point they are paying buyer's brokers. But surely, as they gain market share and confidence, they will drop this expense and may even pull out of the Multiple Listing Service (MLS) entirely. That would certainly be my goal. That's another 2 – 3 points per cycle to their ROI.
And similar to the MLS, what’s to stop the iBuyers from signing their own syndication deals with Zillow, Trulia, Realtor.com, even Craigslist, etc.? Thereby further reducing their dependence on the MLS.
And here's another question: If they withdraw from the MLS, what part of their business model would require a real estate license? My guess is they will drop that as well.
It seems to me that they have captured a niche of sellers who care less about representation and realizing the full fair market value for their property, and more about convenience and expediency. How long before they try to find a similar niche among buyers? The Opendoor website makes it look like they are moving in that direction. I think the younger crowd would eat that up like cannabis cupcakes. Think no-hassle pricing and all expenses included, or something to that effect. And they already have the inventory to offer potential buyers.
Now my view of the iBuyer business model may be somewhat cynical. But I fully acknowledge how popular this model has become. In 2019, Opendoor, the biggest iBuyer player, was the market leader in my county with over four percent of total listings sold.10 Evidently there is a sizable market for this model.
It should be noted that 2019 was a seller’s market with steadily rising prices. So a question I have is will the iBuyer model work with falling prices or in a buyer’s market? Only time will tell.
Now one final thought about iBuyers. Even if their business model will not work in different market environments, does their current success not tell us something about consumer attitudes towards our industry? For instance, sometimes the price the iBuyers pay is substantially below fair market value. And yet, people still sell to them. So I cannot help but ask: Do these sellers hold real estate brokers in such low regard that they are willing to take substantially less for their property in order to avoid dealing with brokers at all costs? I mean, is it really, only, a question of hassle and convenience?
I talk to brokers. And uniformly, they say that for sellers it is a question of buying another home without a sales contingency (because in this market, buyers just don’t have to accept them). And brokers add that many of the iBuyer sellers are in financial difficulty, and want a quick sale to avoid foreclosure. But clearly neither of these factors are true for all of these sales. I mean just look at the numbers.
So are brokers deluding themselves about what is going on? Are we witnessing a fundamental shift in market attitude? I think these questions are worth some consideration. I cannot help but wonder: Have we, as an industry, proven ourselves unworthy of these sellers?
Give this some thought as we continue.
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10. According to the Triangle Multiple Listing Service (TMLS), there were 21,470 closed residential sales in 2019 in Wake County, North Carolina. Of those, 906 were Opendoor listings. This figure popped to just under six percent in the first quarter of 2020. And of course, there are other iBuyers.