Wall Street Getting Bullish on “iBuyer” Platforms, Claiming Sales Boosts, Lower Commissions: Be Very Afraid

You know what we are talking about: new companies (called “Platforms”)  like Opendoor and now OfferPad (co-founded by a former top producing realtor!) are being embraced by Wall Street as a way to “drive Americans to move more frequently, resulting in more home sales.” Stimulating interest in real estate. Glory be, sounds like the pre-crash days. Inman’s Teke Wiggans got his hands on an internal report from an investment banking firm called Evercore ISI. The research report, created for investors looking to maximize return for institutional investors, is fairly bullish on what they have dubbed the “iBuyer” platform. 

Such companies, which the report terms “iBuyers,” use new technology to make quick offers on homes and close in days. They could also chip into real estate commissions and help homebuilders move their inventory faster, the authors wrote.

The report underscores growing enthusiasm for iBuyers on Wall Street. Institutional investors are funding iBuyers or setting up their own, and their interest in the business model helps explain why Zillow Group created Zillow Instant Offers, which is essentially a marketplace for iBuyers.

The group is encouraging investors to familiarize themselves with this new business model, saying these iBuyers are likely to garner increased attention over the next few years.

“If successful, these iBuyers could improve liquidity in the housing market by reducing friction costs, and drive increased housing turnover (existing home sales).”

Which, they claim, will lead to real estate economic nirvana for remodeling, moving, etc. Great for everyone, in fact, except the mortgage broker and Realtor.

That would have “important implications for Realtors, remodeling demand, and even homebuilders,” the report said.

No kidding. I think this trend, if it continues, will result in more corporate ownership of homes, more leasing, and higher rent prices. And as an investor, I’m not biting.

I love the internet, and I love technology. But sometimes, do you get the feeling that we are almost pushing the artificiality of this so-called perfect marriage: buying homes on line?

Wall Street says online brokerages are not cutting it now; consumers still want boots-on-the-ground agents, who, you know, understand that the part of San Antonio east of San Pedro is different from the neighborhoods west. Take Park Lane here in Dallas: east, whoa, not great. West, can I even afford to drive by?

How to make selling a home more efficient? That’s the trillion dollar question. The perfect iBuyer will:

  • send quick “tentative bids” on request

  • conduct an inspection and provide “binding, all-cash offers” within a few days

  • close at a seller’s convenience, anywhere from two to 60 days

  • charge a service fee that ranges from 6 to 13 percent.

IBuyers “provide convenience, speed and certainty to the seller, and charge a fee that is often equal to or less than what the seller would incur through a traditional sales process.”

But sellers will pay for that speed by discounting their home more. Which you could do on the open market anyhow. Of course, if you lower the price but sell faster, you are saving months of carry. 

“Unlike a typical investor who submits ‘lowball’ bids in an attempt to buy an asset below market, iBuyers strive to have their home bids be as accurate as possible, and generate profit from the service fee they charge,” the authors say.

Service fee or commission, what’s the difference?

 

Opendoor’s average service fee is 7.5 percent, Offerpad’s ranges between 8 to 9 percent.

It’s the guarantee of having a sale that would justify those fees and a quick, smooth transaction. The typical Opendoor seller prefers to close in 32 days, compared to an average home sale process of 80 to 90 days. Remember, the companies are buying these homes up, there is no approval waiting time from the bank.

So the sellers save two or more months of mortgage payment and maintenance, and property taxes.

“In essence, therefore, the iBuyer’s fee can be thought of as replacing a number of costs that the homeseller would otherwise need to incur,” the report contends.

So how well are the iBuyer companies faring? Twenty to 30 percent of the offers are being accepted, according to the report.

Opendoor accounts for nearly 2 percent of Phoenix’s existing home sales, no figures were given on Dallas sales.  

IBuyers fancy themselves as the Home Depot of real estate sales, boosting sales because it will just be so darn easy. Which will, in turn, boost remodelling, renovation, and overall make consumers move more: hello movers, landscapers, furniture stores, Ikea.

This would essentially make housing a more liquid asset class, and lead homeowners to move more frequently. If iBuyers had 10 percent of the market and led the average homeowner to move once more than they do now, iBuyers would boost existing home sales by 40 percent, according to the report.

 

While the report portrays iBuyers as an attractive alternative to real estate agents, cheaper and more convenient, the authors do not believe iBuyers will kill the brokerage commission on the sell side. But iBuyers could enjoy the process so much that, down the road, they just sell their home themselves, thus eliminating the agent. Example: Opendoor’s trade-in program under which homeowners “who sell to Opendoor can buy a home from Opendoor and receive a discount of up to 3 percent — in essence, pocketing the typical buyer’s agent commission.”

 

(Note: “$300mm” should be “$320mm” and “homes sold” should be “homes bought and sold.”)

Note that Opendoor is piloting a program with a home builder, Lennar, in Las Vegas, and Offerpad is working with Zillow which itself just launched it’s own iBuy program, Instant Offers.

The iBuyer model, the report says, is like manna for home builders who resent paying agents a full 3% commission just for walking a client in the door.