The iBuyer business model wasn’t made for a slowing RE market. iBuyers still in business seem to complete fewer purchases and make less enticing offers.

CHICAGO – Tech firms offering instant cash to home sellers touted simpler, quicker transactions. But the model is floundering in the housing downturn.

When iBuyers emerged a few years ago, they made bold promises to revolutionize the homebuying and selling process with instant cash offers and a pick-your-closing-date transaction model. But many of these iBuyers are facing setbacks amid a slowing housing market. Some are pulling back and pivoting their business – or even shutting down.

Redfin shuttered its iBuying arm, RedfinNow, in November, while Opendoor, the largest iBuyer, announced $1 billion in losses in the third quarter and FlyHomes reduced its workforce by nearly 40%. Zillow Offers, another giant in the iBuyer space, closed in 2021. Redfin CEO Glenn Kelman says his company’s move was a “strategic decision” to refocus on its core real estate business.

The iBuyers that remain in the market reportedly are taking on significantly fewer purchases and making less-enticing offers to sellers.

“The iBuyer model remains unproven,” says Kurt Carlton, president and co-founder of New Western, a company that buys and sells properties for home flippers and investors. “It may return with some real utility, but I don’t think the recent overabundance of cash in the venture capital markets was a healthy dynamic for these models. They certainly didn’t seem to provide the urgency and do-or-die grit that often drives real innovation. Now the capital markets have shifted to a ‘profits over promises’ expectation, and many of the iBuyers have found themselves running out of time.”

“The purest iBuyers are essentially pivoting to become more like listing agents,” Carlton says, “showing just how challenging it is to disrupt the current industry standard.”

An instant reaction?

Despite promises to disrupt the industry, iBuyers accounted for a small number of transactions: 1% of sellers sold their home through an iBuyer in the past year, according to National Association of Realtors® data. However, some markets saw more activity than others, such as Phoenix, where iBuying accounted for nearly 10% of sales, according to data from Parcl Labs, a company that tracks iBuyer activity.

Parcl’s research finds that iBuyers in the Phoenix area currently hold about $1 billion in housing inventory, says Jason Lewris, co-founder of Parcl Labs. As the market slows, iBuyers are slashing prices by more than 2% every two weeks to unload properties quickly.

“As more pressure builds for iBuyers to exit their positions, they will likely become more aggressive in their pricing,” Lewris says. “This will continue a downward spiral until prices reach a point where demand enters to stabilize it.”

Many iBuyers also are reducing their purchases. Opendoor reportedly scaled back its homebuying activity by 45% in the third quarter compared to a year earlier and shut down its mortgage business. The company announced layoffs of 18% of its workforce this fall, and CEO and co-founder Eric Wu said this month that he plans to step down.

Offerpad, another iBuyer, said it slowed the pace of its purchases by 33% in the third quarter compared to a year prior. Nevertheless, “despite the current market volatility, I firmly believe technology-enabled solutions that simplify the homeownership experience will define the future of real estate,” Offerpad CEO and chairman Brian Bair said in a statement.

Refocus, restrategize

Still, some iBuyers are expanding into other areas while slowing or halting home purchases. Offerpad is beta testing its “My Way” program, which enables homebuyers to renovate prior to moving in and roll the costs into their mortgage.

Opendoor is investing in a new program, Opendoor Exclusives, a marketplace for buyers to view off-market homes on a first-come, first-served basis. (Opendoor skirts MLS rules for off-market listings because the company owns its listings.) Homeowners who sell with Opendoor can either request an instant offer or list on Opendoor Exclusives for 14 days to generate buyer interest. Opendoor aims for 30% of its total business to come through the Exclusives marketplace by the end of 2023.

“This is a big shift in their model,” says Mike DelPrete, a real estate technology strategist who authored The 2022 iBuyer Report. “The proposition of iBuying has always been about speed, certainty and simplicity.” But speed is at risk with Opendoor Exclusives, DelPrete notes, because it doesn’t use the instant offer model. “And it’s less simple. It’s more complex to explain and understand than just pressing a ‘sell’ button.”

Will other iBuyers choose to innovate or retreat from the market? Tech startups like New Western are focusing on niche markets, like managing fix-and-flip properties.

“When others are retreating, we’re advancing,” Carlton says, adding that there are 15 million vacant homes in the U.S. that could be rehabbed and returned to the marketplace to help address inventory shortages.

“I’m hoping this more challenging funding environment will drive real innovation to improve the homebuying and selling experience,” Carlton says. “The current market is challenging, and I think the old saying holds true that ‘necessity is the mother of invention.’ It’s hard to tell if iBuying will fade into a niche alternative or evolve into a different approach that proves viable.”

© 2022 National Association of Realtors® (NAR)

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Author: kerrys