Beating the instant buyer
Being so close to Halloween, I thought I’d write the scariest article for real estate investors and real estate agents that I could think of. IBuyers are the zombies that devour your opportunities. They are killing growth and killing dreams !!
Let’s start with what an iBuyer is and what they do, and what we, as agents and investors, must do to adjust to this new standard. The iBuyer is an instant buyer. They use technology to value the property and determine a bargain price instantly. The property owner will call the business and have a cash offer on your home the same day. This sounds great to the seller and scary to the brokers and investors, but let’s dig in a bit. Of the large iBuying companies, all will require an inspection after hiring a home to determine what repairs are needed. From there, they require repairs to be made or change the bid price. The offer is always below market value and there are usually fees involved with the process. Fees vary from iBuyer to iBuyer and from market to market, but tend to be between 6% and 10%. The three biggest iBuyers are Opendoor, Offerpad, and Zillow. Redfin has also hit the market.
So what do real estate agents do?
It seems that iBuyers and agents can work closely together, and the rise of this trend will really help agents adapt and take advantage. Here are two ways:
Referral rate: Most iBuyers will pay a referral fee. According to the Opendoor website, they want to pay agents a 1% fee if they bring in a client. They also claim that once the home is sold, the agent will keep the buyer. According to the website, 87% of buyers prefer to use an agent when shopping, so they won’t actually buy a home from an iBuyer. There are several agents who will work with buyers and they will get three or even four offers from iBuyers. They will work with the buyer through inspections and present all offers to the seller. The seller can decide whether to work with an iBuyer or not. If they do, the agent will get your referral fee without much of the work that a typical listing entails. These are one-way agents who advertise “guaranteed deals” in their marketing.
Listings: Zillow has been in the lead generation business for years. They produce thousands of leads that they refer to agents to collect fees. This is your main income generator. Now that they are entering the iBuying space, they are also generating sales leads from sellers. From what I’ve read, Zillow only buys about 2% of the deals it makes. With every offer made, they collect a significant amount of data from the seller. Because they collect so much data, the barrier to working with Zillow is quite high, which means that these are higher quality leads who can now sell to agents or recommend them for a fee. I know many agents who would be happy to pay a lot for leads like these.
IBuyers are not yet a real threat to agents. In Phoenix, which is the most established market for iBuying, less than 6% of homes are sold with this strategy. That number is closer to 0.4% nationally.
And the investors?
I think iBuying is a bigger threat to investors than to brokers. One of the biggest advantages investors have or have had was their ability to make quick decisions and close houses quickly. IBuyers are taking advantage of this competitive advantage in a big way. However, there are two advantages investors have.
Highest price: Creative investors can pay a much higher price. Now if you look at a strictly cash offer, investors may have a hard time competing, but what if the investor plans to hold the property for a longer term? They can usually finance those properties with favorable financing, allowing them to pay more than what iBuyer would pay with their fees. But it goes beyond that. Investors can also get creative and make offers to homeowners that involve payments over time, which increases what they can afford for the home and can have huge benefits for the seller. What if the seller does not need or does not want to take all the cash out of the house and would prefer a higher monthly income or return than what they would get at the bank?
True Fix and Flips: There was a time when investors could easily find repair and exchange opportunities where houses didn’t need a lot of work. They could fix the house in a month for less than $ 20K and sell it for a big profit. The market has already made these transactions difficult, but iBuyers will take advantage of these opportunities even more. The opportunities that iBuyers will not take advantage of are the main rehabilitations. All the great iBuyers want homes in good condition. In fact, their business model is to require repairs or reduce their price based on repairs. And they won’t touch homes that need too much work. Those are the houses that fixes and fins should go to. If the house needs a lot of work, one strategy may be to encourage the seller to get an offer from an iBuyer so that he can reinforce that he will need to work with someone who is willing to take on the job. According to the Opendoor website, they don’t compete with flippers. They have a fee-based model and they don’t want houses that need major repairs. It says so directly on its website!
Also, as a flipper, if you can find a way to add additional value, you can increase your bid, giving you the ability to pay more than an iBuyer. An example of this is if you can add square footage, a garage, or an accessory dwelling unit. These are things that an iBuyer would never consider in their evaluation.
Although iBuyers are absolutely a threat, you can see that the threat can be managed and it can even help you grow your business. There are many things to be scared of during Halloween, but iBuyers shouldn’t be one of them.