It should be challenging for iBuyers in a seller’s market, but they’re paying more. It could be a business strategy: Accept lower profits to assure long-term success.
PASADENA, Calif. – Defying predictions that the iBuying concept wouldn’t work in an intense seller’s market, this new breed of homebuyers has ramped up property acquisitions to record levels.
“iBuyers,” short for “instant buyers,” mostly stopped buying homes in mid-2020 as COVID-19 injected uncertainty into the housing market. Now, iBuyers have come back strong. They’re wooing home sellers by making aggressive offers and cutting fees.
As a result, the three biggest iBuyers – Opendoor, Offerpad and Zillow Offers – hit new highs for buying activity during the second quarter of 2021, according to research by Mike DelPrete, a scholar-in-residence at the University of Colorado.
“For anyone concerned that the iBuyer model wouldn’t be popular in a seller’s market, the evidence shows that it is resonating with consumers more than ever, and market conditions are in fact fueling its growth,” DelPrete says.
DelPrete himself was among the skeptics. With many homes attracting multiple offers, the thinking was sellers would have no trouble finding buyers – and the iBuyer pitch would fall flat.
iBuyers pay aggressive prices
Part of the reason iBuyers are finding so many takers: They’re paying a premium (as if home sellers needed any more good news in an era of super-low inventory and record-high prices).
The four major iBuyers – Opendoor, Offerpad, Zillow Offers and RedfinNow – made bids that averaged 104.1% of market value during the first half of the year, according to research by Zavvie, a real estate technology company that works with brokerages to help sellers compare offers from iBuyers. That’s up from 97.6% of market value last year.
“iBuyers are paying way over market prices for homes now to buy more of them,” DelPrete says. “Why? I think a big part of it is Opendoor is a public company and needs to demonstrate strong revenue growth.”
How iBuying works
iBuyers position themselves as a fast way to sell. Homeowners avoid the hassle of painting and staging their homes. Sellers need not clean and clear out for showings. iBuyers give a cash offer, and the seller can pick a closing date. The iBuyers then spruce up the homes and quickly put them on the market for sale.
While the companies are paying full price for homes, they had been collecting fees that ranged as high as 12% of the sale price. The average commission for a traditional real estate sale, by contrast, is a fraction of that.
However, iBuyers have been reducing fees so that they’re more competitive with traditional transactions. According to Zavvie, iBuyers’ average service fees dropped from 7.2% in 2020 to 5.1% by mid-2021.
The average concession charged for home repairs fell from 3.6% to 1.9%. In other words, the average hit for selling to an iBuyer is now just 7%, down from nearly 11% last year. Those fee cuts bring iBuyers’ fees in line with traditional sales.
Soaring home prices also have played in iBuyers’ favor. Many homeowners can’t close on another place until they retrieve the equity from their current home, and iBuyers promise fast, predictable sales.
“With supply constrained and demand so high, certainty becomes everything,” says Kerry Melcher, Opendoor’s head of real estate.
The pitch seems to be working. Zillow Offers reported that it bought a record 3,805 homes in the second quarter of 2021. That was more than twice its first-quarter volume.
“I confess to being quite excited by how well Zillow Offers is doing in such a hot seller’s market,” Zillow Group Chief Executive Rich Barton told Wall Street analysts in early August.
The pitch appealed to Texas home seller Kenneth Powell. When he decided to sell his family’s house in a Dallas suburb this spring, Powell considered listing the starter home with a real estate agent. After Powell learned he’d get an identical price and pay similar fees by selling to an iBuyer, he chose that path.
Opendoor promised to close quickly – and with no caveats. “I know what a financing contingency is and what an inspection contingency is, and the whole can of worms that can open,” says Powell, a mortgage loan officer. “Even with good preapprovals and good prequalifications, there’s still a risk that it can fall through.”
By selling to Opendoor, Powell says, he netted the same amount he would have gotten through a traditional sale, but without the hassle of marketing the home, and without the uncertainty of an offer falling apart.
“It was extremely convenient for us,” Powell says. “We didn’t have to list our home. We didn’t have to rent a storage unit for our stuff.”
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