Over the past few years, a tremendous amount of coverage regarding a new type of home selling product, iBuying, has consumed the real estate market. iBuying (think: Opendoor, Perch and Zillow) is being touted as the home seller’s dream by fulfilling their immediate needs, but at the expense of taking a HIT on the price of their home. These new services prey on the anxieties and fears of home sellers.
Basically, iBuying is a service that allows home sellers to sell their home at a below-market price for the benefit of selling within a matter of days. Once the home is sold to a company that provides iBuying services, they encourage sellers into buying another home that they own at market price. As a result, home sellers feel good in the time saved, but at the expense of the seller’s equity being undercut. iBuyers have to offer less than below market value because the financial stack given from venture capital firms is used to acquire these homes at a cheaper price so iBuyers can make their financial spread on such debt.
The iBuying business model is an exciting yet dangerous one for Opendoor, Perch and Zillow. If the economy changes for the worse and there’s a downturn in the real estate market, then iBuying will quickly induce negative equity across many homes on their balance sheets. They may find themselves as landlords renting out their properties rather than selling them at a loss.
Sellers and buyers need a solution that doesn’t take their hard-earned equity and allows them to reinvest their equity in their next property. What all homeowners need is a company that protects sellers and matches them with buyers without having to pay high fees. That’s where Richr comes in. Richr aims to make home selling and buying free, without having to pay commission fees to real estate agents or service fees to iBuyer companies. Similar to Robinhood’s commission-free stock trading. Richr’s first service gives sellers maximum marketing exposure by listing on the real estate’s main database, the MLS, at no cost. By providing free MLS listings, Richr gives sellers access to market value offers.
Here are some more specifics on the iBuying process.
Why is iBuying attractive to some home sellers? iBuying allows homeowners to sell fast without the need for real estate agents. By removing uncertainty from the selling side of the transaction, home sellers remove the anxiety that home selling can create when owners want to move, and move fast.
Is this really a new way of selling? No. Even though iBuying companies will deny it, the iBuying process is merely a home-flipping business model that has existed for years. What makes this type of business unusual, is the consequential contraction of commission. Home flipping through iBuying removes commissions from the selling side, and, if an iBuying company finds a buyer without agent representation, the transaction becomes commissionless and broker-free. Real estate agents see this as a threat to their income because iBuying is essentially a “for sale by owner” product.
Real estate agents’ income thrives off the commissions from the selling and buying of properties. Opendoor has an interesting approach because it uses technology to allow buyers to enter homes without the need for an agent. Removing the agent from the buyers’ side closes the commission-free loop and makes it more profitable for Opendoor’s iBuyer business model. This eradicates brokers’ commissions.
If Opendoor is a threat to Zillow, then Zillow is a threat to all real estate agents. In a reactive tactic to Opendoor’s growth, Zillow is placing a lot of financial resources into its own iBuying program, “Zillow Offer.” Zillow now sees this type of home buying as a replacement, within five years, to its premier agent business model. By placing “Zillow Offer” as the premier option for home selling, with its agent network retreating to the fall-back position, Zillow appears to acknowledge that the historical system of broker representation is broken. Zillow has effectively established its own for-sale-by-owner product for millions of its’ monthly customers. Zillow tries to differenitate it’s product from the for-sale-by-owner model in its FAQ’s, but if it walk and talks like a duck…
Is the i-buying home flipping model right for every seller? Certainly not. These iBuying companies need to make a profit, so real estate commissions are now replaced with service fees, and for a profit to be realized, homeowners have to take a HIT on the selling price. The HIT on sale price will be too much for the majority of sellers.
So what is the future of real estate? A recent Harris Poll Survey found that 74 percent of Americans would like there to be alternatives to traditional real estate agents; 82 percent agreed that new technology makes it easier for home sellers to market their own home instead of working with a real estate agent. I believe the future of real estate will depend on for sale by owner software that will match sellers with buyers at fair market value, without the payment of commissions. Soon companies will provide software that allows a home seller and buyer to freely connect, negotiate and buy homes without the need for full service real estate agents. This shift does not mean the end of real estate agents. Instead, agents will have to offer better value on an on-demand basis. A marriage of technology and service among real estate agents will allow home sellers or buyers to use an agent while still operating as a for sale by owner. The rise of a la carte services in the real estate industry will allow agents to provide instant value while being rated for their services. Similar to the rating system you find with ride-hailing companies.
The Takeway. If homeowners are willing to take a reduction in price, then the desire to sell fast makes it more attractive to sell to an iBuying service compared to using a traditional real estate agent, thereby validating the iBuyer model. Travelers used to visit their travel agent to book their vacations, and eventually, these travel agents were replaced by software. We are now seeing this in the real estate industry. The race to zero commissions has begun, and all of the discount brokerages and iBuying companies can’t figure out how to provide maximum value without keeping their client’s equity. The future of real estate will be provided by software companies that give the same tools available to real estate agents and turns them over to the consumer. After all, who wants to lose their equity to iBuying service fees, below market sales, or real estate agent commissions?