Don’t fear the iBuyer: How to compete against and cooperate with a growing trend

by Maris Callahan

Real estate agents have a new tool in their proverbial toolboxes and it’s captured the attention of the industry insiders nationwide. By buying houses directly from homeowners, completing any necessary maintenance or repairs, and relisting the homes for sale, real estate companies known as iBuyers have gained traction recently — along with market share.

Some of the most recognizable iBuyer brands, including Opendoor, Offerpad, Zillow Offers and Keller Offers, use advanced algorithms to determine home values and make instant cash offers. In many cases, iBuyers represent a simpler, more convenient alternative to a traditional home sale, and real estate agents are quickly learning the benefits and challenges of working with iBuyers on both the buy and sell side of a real estate transaction.

“On our team, the motto is ‘Be a student first,’” said Kris Lindahl, Minneapolis-based broker-owner of Kris Lindahl Real Estate, who became a Zillow Offers partner in May 2019. “We are always listening and trying to understand what the consumer wants. We look at other verticals in other industries to see how consumers are making decisions.”

Today’s consumer makes decisions quickly and values the convenience of choices at their fingertips. With millennial buyers now comprising the most active demographics of homebuyers for the sixth consecutive year, according to research from the National Association of Realtors’ Home Buyers and Sellers Generational Trends Report, it’s more important than ever for real estate brokers to explore new and innovative ways to serve clients.

“For decades, real estate agents only had one solution listing homes for sale,” said Tyler Hixson, director of real estate partnerships and strategy for San Francisco-based iBuyer Opendoor. “Now, sellers have tons of unique situations and life circumstances, and one solution will never work to solve a complex problem in any facet of life.”

Meet the players in the iBuyer game

There are a number of real estate businesses using iBuyers to make the process of buying and selling homes quicker and easier for consumers.

Although each one operates differently, the common thread is that automated valuation model (AVM) technology is used to assess the value of a specific property and provide the home seller with a cash offer within a relatively short time period — usually a few days. iBuyers assume the risk and responsibility that comes with a home sale, and they generally complete maintenance and renovation tasks prior to listing the home for sale on the open market.

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Opendoor executives characterize the entity as a full-service real estate company, noting it operates with a brokerage license in 20 markets nationwide. Since its launch in 2014, Opendoor has worked with more than 55,000 customers and has paid more than $50 million in commissions and referral fees to other brokerages. Using a proprietary in-house AVM system, Opendoor charges around a commission fee of around 7 percent.

“Our fee averages between 6 and 7 percent across our markets,” said Hixson. “But it can be lower or higher based on how long we estimate it will take to sell your home.”

Although Opendoor came to this particular niche first, real estate mega-brand Zillow was hot on its heels. “We were not first to market, but we are quickly catching up to be a large player in the [iBuyer] space,” said Matt Hendricks, director of broker relations at Zillow Group. “[iBuyers] allow consumers to have choice, convenience, certainty and the ability to make magic happen at the push of a button.”

One major difference is that Zillow Offers engages brokerage partners in each of the markets where it operates, rather than functioning as a brokerage directly. While Opendoor lists and markets its own inventory, Zillow Offers engages a screened and trained local broker partner to list a home on the MLS.

Homeowners in participating markets can request a cash offer from Zillow by providing their address and answering some questions about their home. A ZiIlow employee goes out to evaluate the condition of the home, review repairs and discuss costs, and select a closing date. The process to sell through Zillow Offers begins with the seller submitting facts and photographs of their home. Within 48 hours, they receive a preliminary cash offer.

Hendricks noted that one reason the company was able to scale this slice of the business so quickly is the fact that consumers are already aware of their valuation product. “If they want to sell on their own, they can request a Zestimate. If they want to hire an agent, they can search our database of premier agents in their community. If they are in a region where Zillow Offers is operating, they can click on a button that says, ‘Sell to Zillow,’” he said. “We have the brand and experience that drives confidence in consumers, and we provide a gamut of options.”

Traditional brokerages are also getting into the game. Keller Williams, in particular, is charging hard into the iBuyer market, having launched its Keller Offers platform in May in the Dallas-Fort Worth market, and pursuing industry partnership opportunities to scale quickly.

In August 2019, Keller Offers announced a partnership with iBuyer company Offerpad. Through the program, Keller Offers will scale to 12 Offerpad U.S. markets by the end of 2019. With Keller Offers, consumers have a Keller Williams real estate agent serving them as a trusted advocate and working in their best interests while selling their home.

“We feel very passionately that the consumer needs an advocate in their corner with all the changes going on in the industry right now,” said Gayln Ziegler, director of operations at Keller Offers. “With Keller Offers, we will offer the convenience and simplicity that’s inherent with instant offers and a fiduciary within the process.”

Companies including Knock, Offerpad and RedfinNow are touting a variety of additional benefits to consumers who sell their homes to iBuyers. These include home trade-in, prepaid moving expenses, and 30-minute inspections, respectively, all in pursuit of a seamless and convenient experience.

What iBuyers mean for the buyer’s agent

Despite all of these consumer-facing benefits, real estate agents and brokerages are still skeptical about how iBuyers will help them add value to their clients.

Hixson said he hears and understands the trepidation from mainline voices and brands in real estate, and added that there is one thing that they do not plan to remove from a real estate transaction: the real estate agent. “Real estate is such a human experience and relationship-driven industry,” said Hixson. “We spend a lot of time on agent outreach and engagement, developing positive working relationships in the markets where we operate.”

Part of building strong relationships includes providing a consistently high-quality experience for homebuyers — and their agents. And actually, it all starts well before the buyer even sees the home, when the iBuyer purchases the home from the seller.

Once a home seller receives an offer from the iBuyer, the property is assessed and inspected. Hixson said that at Opendoor, inspectors look for the standard repairs that would come up in a more traditional home inspection. The seller can choose to do the repairs themselves or defer to Opendoor’s network of preferred vendors, the cost of which is deducted from the initial offer price. The home seller selects a closing date, and after a final walk-through, Opendoor assumes ownership of the property.

At this time, Opendoor will complete any deferred maintenance or repairs, such as painting, installing new carpet and updating landscaping. Homes are listed on the MLS and marketed locally to prospective homebuyers using a multichannel strategy that may include digital or traditional advertising.

“When we work with buyer agents, they appreciate that all of our properties have a consistent standard of quality, so you know what to expect,” Hixson said, adding that homes for sale by Opendoor are accessible for showings daily from 9 a.m. to 6 p.m. using smart entry technology.

This may all sound very familiar to agents, and Hendricks said this is intentional: “When a buyer’s agent shows one of our [Zillow-owned] houses, it is no different than another transaction, except that there are fewer unknowns and we have no emotional attachment to the home.”

Making space for listing agents

The argument can be made that iBuyers are bringing a wealth of new homes to the market, which can translate to increased opportunity for listing agents and buyer’s agents alike.

“On the agent side, we open more inventory, drive more transactions and ultimately raise awareness for consumer choice,” said Hendricks. “We give agents the ability to bring buyers to our homes, and we are ready, willing and able to sell great, move-in ready properties.”

Although the first iBuyers entering the space typically marketed and sold their own properties, there are an increasing number of ways that traditional listing agents are playing a role in iBuyer transactions.

Some consumers seek the convenience of selling with an iBuyer, but still want the emotional connection and security that comes with hiring a listing agent who is their full fiduciary.

“Some sellers really want a seamless situation,” said Laurie Reader, a broker-owner of Laurie Finkelstein Reader Real Estate in South Florida and Zillow Offers partner. “If you need to be somewhere in a month to start a new job, or if you have kids and pets that you don’t want to displace for showings, it is a fantastic option.”

Reader just teamed up with Zillow Offers in August 2019, and so far is impressed by the real estate mega-brand’s devotion to the consumer experience.

“As a real estate agent, I am very rooted in the community,” Reader said. “I am very client-centric. Zillow is intentional about how the buyer feels about the experience. A lot of [companies] are about selling leads and forget that there is a human being and a story behind every transaction.”

Reader said the initial feedback from her team’s partnership with Zillow Offers has been positive, and that her colleagues and clients alike have been receptive to having increased options.

“A lot of agents are afraid of iBuyers, but consumers just want options. Some will choose the traditional route of hiring a real estate agent, some will choose For Sale by Owner and some will decide to sell with an iBuyer,” said Reader. “It’s another lane for the consumer to choose, if it’s the right lane for them.”

While Zillow partners with agents, Opendoor’s interactions with the broker community are more limited. Still, Hixson acknowledged that real estate is an industry driven by human connection, and noted he is not afraid to fire himself from a real estate transaction and hire a local listing agent when the need arises. He described a situation in Phoenix where Opendoor purchased a home that had a custom German front door, so their standard smart lock system could not be installed on that property.

“We had a choice to either pull out the beautiful custom door to put in access or keep the beautiful feature and hire a local listing agent. I decided to hire another agent who had experience in the neighborhood selling that specific type of property,” said Hixson. “We provide one direct service, but we can’t provide all of the other things an agent provides.”

Is iBuying a profitable play?

In August, real estate data analysis firm T3 Sixty released its Real Estate Funding 2019 Q2 Highlights report, which examined the amount of capital being invested in residential technology for the first half of 2019. That number was $1.75 billion, which is already nearly the same amount that was invested throughout the entirety of 2018. But an even more interesting tidbit was that some 85 percent of that funding went to just four companies, all of whom are in the iBuyer space: Offerpad ($565 million), Knock ($400 million), Opendoor ($300 million) and Perch ($220 million). The researchers noted that this brings these four companies’ cumulative funding up to more than $3.1 billion to date.

But just because there’s a lot of money pouring into this sector doesn’t necessarily mean it’s a profitable one. Mike DelPrete, a real estate technology strategist dubbed by the industry as “the iBuyer whisperer,” has spent a lot of time researching this very question. He has stated that while companies like Zillow and Opendoor can and will invest large amounts of money to make the process of buying a house easier for consumers, it could be years before they turn a profit from such work, if ever.

Most of the iBuyer companies we spoke with for this story declined to share information about the profitability of their iBuying efforts. However, Hendricks did note that while Zillow’s ultimate goal is to turn a profit on each home it sells, the return-on-investment equation is not the same as the model one might use in house flipping, and that not every iBuyer transaction will be profitable.

“It is really about volume, opening inventory in a market and getting more transactions done,” he said, adding that their iBuyer work benefits seemingly unrelated elements of the company as well. “Zillow Offers drives other parts of our business, is great for lead generation and sends more transactions to agents. It drives other business lines as we grow and experiment.”

Are iBuyers here to stay?

While iBuyers aren’t in Chicago yet, they have successfully forged into the marketplace across the country and industry experts now foresee their continuing role in the real estate market. The question that many are now asking is, “How big is that role?”

Even strong advocates acknowledge that iBuyers are still playing at the fringes of the market. “While we believe the addressable market for iBuyers is in the single-digit percentages of the overall housing market, it will remain an important additional option for Keller Williams agents to be able to offer their sellers,” said Ziegler. “iBuying, or a version of it, has been around for a long time. While maybe not a major disruptive force, it is another option that sellers need to clearly understand.”

As artificial intelligence, digital marketing and the increasing consumer desire for on-demand products and services are shaping the real industry, many believe that iBuying will remain on the radar for the foreseeable future.

“iBuying will have a place in real estate,” said Hendricks. “Will it be dominant? Doubtful. But there is a niche that this is a perfect option for. As it grows with different companies in different markets, the best thing the industry can do is be aware and educated and provide choice for consumers.”

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