iBuyers - what are they and how do they make money?

I read a Forbes Article recently that said..."The Halt Of Billion-Dollar Real Estate Businesses; iBuyers Suspended"

I think every agent I know breathed a sign of relief. Others went so far as to say "Ha, Ha, Ha - good riddance".

iBuyers are companies that are trying to revolutionize the real estate market so that buying and selling a home is easier. OpenDoor, OfferPad, Zillow Mortgage and RedFinNow are just somee of the iBuyers. These companies are trying to revolutionize real estate like auto dealers did decades ago. Instead of selling a car myself, I take it to the local auto dealer. They make you an offer on the spot and I walk away with cash or I trade it in for another car. It's seamless and painless usually. That's what the iBuyers hope to do with real estate. Painless and quick sale of your home.

Lets admit it, real estate is cumbersome and a complex transaction. I am going to get a lot of Realtors mad at me for saying this.

It's full of real estate jargon; escrow, financing contingency, inspection period, Closing Disclosures, Conditional Approval, SPDS, Agency Disclosure, Dual Agency, blah, blah, blah. There are also so many variables that a seller and their agent has no control over; market conditions, are the buyer's prequalified or preapproved, will the buyers back out at the last minute, should I make plans to move or not, will the buyers cancel after the inspection period, will lenders change their guidelines at the last minute, can I even get buyers into my house with the COVID-19 pandemic?

Sellers don't have a 100% certainty that a house will close on the contract date.

And, why does it take so long to close on a house after contract acceptance? 10 day inspection period, financing period, opaque lending guidelines.

If a buyer wants to buy and the seller wants to sell, why can't I just get my money after an inspection period and move on with my life. Why so much uncertainity and complexity?

Even if I wan to sell a car to a buyer directly, it's an easy process. Buyer makes an offer, I accept the offer, they give me a cashiers check, I sign over the property and it's done. And, a car is an expensive item to sell.

This is what iBuyers are trying to fix; the cumbersome and long home selling process.

When you sell to an auto dealer vs direct to the buyer, you give up a little bit of the profit for the convenience of being able to walk away with cash in your hands. The same happens with selling your home to an iBuyer.

iBuyer's charge a service fee of 9%-11%. Instead of offering a 9-11% lower price, they charge a convenience fee that is a credit from the seller to the iBuyer. So, if you sell a home for $300,000 to an iBuyer, you're really selling it for $270,000 roughly. They charge the convenience fee instead of asking for a lower sales price so that the appraisal doesn't get hurt when they resell the property. They also perform an inspection and then can come back asking for additional price reduction due to needed repairs.

After purchase, they paint the house, install new carpet and perform minimal repairs in order to get the house back on the market to resell. They are in essence house flippers. They don't want to hold on to the house for an extended amount of time. The follow a rigorous formula on what they need to sell the house and when they want it off their books.

Right now, iBuyers have stopped buying homes due to the negative market conditions. Since iBuyers buy and then try to resell the home quickly for a profit they probably won't increase or decrease the real estate inventory in the long term. In the short term, they may dump their inventory on the market which would increase the # of listings.

iBuyers will probably be out of the market of buying homes for a while because a depreciating real estate market hurts their business. This will make sellers have to wait a bit longer to sell their homes.

Some iBuyer's may not survive:

The iBuyer has inventory of homes they need to sell off so I'm sure they are focusing on selling their existing inventory of homes instead of buying anymore homes. Most of these companies have also laid off a substantial # of their employees. Since their whole business is being able to buy and sell real estate quickly and make a small profit, economic times like today are very difficult for them. The biggest concern for them may be a cash liquidity crunch.

Just like you and me, they have homes to take care of; Landscaping to maintain, houses to cool, monthly pool service, monthly cleaning and financing of the homes they carry. Just like you and me but but their homes are sitting vacant. They also have overhead and staff to pay for. Expensive Data Scientist, in house sales agents, programmers and beautiful offices. This is a cash drain on them and right now, they can't raise VC money due to tight equity markets. Most of the iBuyers have never made a profit nor do they have cash reserves sitting in the bank to weather a storm like this. When access to VC capital dries up, it puts them in a very tough position.

Looking at all of the iBuyers, Zillow (ZillowOffers) is probably in the best financial situation. Even though it was a late entry, they have a diversified revenue stream from their Zillow marketing website that still generates cash. They aren't immune to a downturn but better than the other iBuyer's in my opinion. Some could argue that Redfin (RedfinNow) is also better situated but they are a large national brokerage and their revenue has also been directly hit with the real estate market downturn. They may be just a little bit better than the other iBuyers...OpenDoor, Knock OfferPad...

Let me know if you agree or disagree with this article. And, let me know what you think.

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