iBuyers, short for “instant buyers,” are companies that use technology and data analysis to make fast cash offers on homes, usually at a discount. The concept of iBuyers first emerged in the early 2010s as a response to the traditional home selling process, which can be lengthy, complicated, and expensive.
One of the first iBuyers was a company called OpenDoor, which was founded in 2014 in Phoenix, Arizona. OpenDoor used proprietary algorithms and market data to determine the fair market value of homes and make instant cash offers to homeowners. The company quickly gained popularity and expanded to several other markets, including Las Vegas, Dallas, and Atlanta.
Other iBuyers soon emerged, including Zillow Offers, Redfin Now, and Offerpad. These companies all used similar technology and business models, but each had its own unique approach. For example, Zillow Offers relied heavily on its vast database of real estate information to make quick and accurate offers, while Redfin Now focused on providing a more personalized customer experience.
There are both potential benefits and drawbacks to the growth of iBuyers in the real estate market. Here are a few of each:
Benefits of iBuyers:
- Speed: iBuyers can provide a quick and convenient way for homeowners to sell their properties, often closing the sale within days.
- Transparency: iBuyers typically offer transparent pricing, based on data analysis and algorithms, which can help homeowners make informed decisions about selling their properties.
- Certainty: iBuyers provide a guaranteed sale, which can eliminate the uncertainty and risk associated with traditional home sales.
Drawbacks of iBuyers:
- Cost: iBuyers typically charge higher fees than traditional real estate agents, which can reduce the amount of money that homeowners receive from the sale of their properties.
- Limited availability: iBuyers are currently only available in a limited number of markets, which can limit the options available to homeowners. There are also concerns about the potential for market manipulation and the impact of iBuyers on traditional real estate agents.
- Accuracy of pricing: There are concerns about the accuracy of the data analysis and algorithms used by iBuyers to determine the value of properties, which could result in homeowners receiving less money than they might be able to get through a traditional real estate sale.
Despite the initial success of iBuyers, there were concerns about the long-term viability of their business models. Critics argued that the companies were overvaluing properties and offering too low of prices, leading to a potential loss of equity for homeowners. Additionally,
Despite these concerns, iBuyers continued to grow and expand throughout the 2010s. The rise of iBuyers has been driven by a combination of technological innovation and changing consumer preferences. Today’s homeowners are increasingly looking for fast and hassle-free ways to sell their homes, and iBuyers offer an alternative to the traditional real estate sales process.
Quick to Offer, Quick to Back Out
The COVID-19 pandemic had a significant impact on the iBuyer market, as many companies were forced to suspend operations and adjust their business models in response to the economic uncertainty. Some companies, such as Redfin Now, suspended their iBuyer programs altogether, while others, like Zillow Offers, continued to operate but with stricter safety measures in place.
RedFin was the first to pause iBuying in March of 2020. At the time the decision was made, RedFin CEO stated, “with whole cities shutting down nearly all commerce, no one can say what a fair price is right now, so we’re not making any instant offers. We expect to be making instant offers again soon, but only when the market becomes more predictable.” OpenDoor followed soon thereafter, while Zillow Offers merely paused on expanding their offerings to more markets.
The pandemic caused significant disruption to the real estate market, leading to uncertainty about the future of the housing market and the overall economy. As a result, some iBuyers were hesitant to continue with purchases they had already committed to, and some even suspended their home-buying programs altogether.
Additionally, the pandemic led to restrictions on in-person home tours and other real estate activities, which made it more challenging for iBuyers to conduct the necessary inspections and evaluations of properties. These challenges also contributed to some cancellations of orders.
Perhaps the most disheartening story that came out during this time, according to the Phoenix Business Journal, was that of people who were banking on the closing of a transaction through the iBuyer programs, only to have the proverbial rug pulled out from under them sometimes days before the closing. Instead of the seamless process iBuying promised, these homeowners had to start from scratch on buying or selling their homes, even if they had already closed on another one.
It’s important to note that not all iBuyers canceled orders during the pandemic, and some were able to adjust their business models and continue operating successfully. At the core of the issue, however, is that it appears the iBuyer business model may not bring the level of certainty that was originally promised when these disrupters first appeared in the marketplace.
A Closer Look into the history of the “Zillow Offers” iBuyer Program
Zillow is an American online real estate company that was founded in 2006. Initially, Zillow was primarily focused on providing information on real estate properties and prices. However, in the mid-2010’s, Zillow had expanded its business to include buying and selling homes directly through its iBuyer program, Zillow Offers.
Zillow’s iBuyer program was launched in 2018 and was initially designed to streamline the home buying and selling process for homeowners. Through this program, Zillow made cash offers to homeowners who wanted to sell their homes quickly and easily. Zillow then renovated and sold the homes on the open market, typically within a few months.
While Zillow’s iBuyer program was convenient for some homeowners, there were criticisms of the program’s impact on homebuyers. One of the main concerns was that Zillow’s aggressive buying and selling practices could have artificially inflated housing prices, making it more difficult for first-time homebuyers to enter the market.
Additionally, Zillow’s quick purchasing process often involved making offers below market value, which can be attractive to homeowners who wanted to sell quickly but could have hurt those who needed to sell at market value to pay off debts or relocate.
Another criticism of Zillow’s iBuyer program is that it created a conflict of interest for Zillow, which is both a real estate company and a home seller. Also considered by some as a “non-arm’s length purchase”, Zillow’s interests may not have always aligned with those of the homebuyer, which could result in buyers paying more than they otherwise would for a property.
The end of Zillow Offers
On November 2, 2021, Zillow announced it was shuttering the iBuyer program altogether, citing valuation problems with their homebuying model, which was centered around their “Zestimate” valuation algorithm. The resulting overbidding on properties resulted in thousands of properties that were worth less that what Zillow paid. Over $400 million was lost in the 3rd quarter of 2021 alone, which wiped away any profit the company made in the entire year prior.
Many homebuyers who were still in contract with Zillow at the time of the closing found themselves scrambling to put their homes back on the market to try to sell quickly, as they were already under contract on another home. At the time of the shutdown, Zillow still had 9,970 homes in inventory, and ended up with a per-home sold loss of $80,771.
The Future of the iBuyer Program
Even though Zillow has exited the iBuyer program, there appears to be plenty of runway for companies like Opendoor to keep building their services, and they now have even more areas in the country in which to do so. As more consumers shift to tech-driven solutions, coupled with a growing fear over an economic recession, the ability to sell their home quickly may be enough of a draw to use an iBuyer over an established real estate agent.
However, iBuying isn’t for everyone. Not all homes would qualify for sale, even if the home is in an area where iBuyers offer their services. Many homeowners without time or financial pressures are more hesitant about the risk of vetting a newer company and service, They’ll be tasked with looking for hidden fees, transparency concerns and other critical questions about tech startups.
In addition, the issue some clients run into with the iBuying model is that sellers are barely making a profit or still losing money while home prices are increasing. Simultaneously, iBuyers are hoping to sell these homes quickly – but generating data to accomplish profits at scale is still a tough proposition even for advanced algorithms.
The benefit of the traditional home buying and selling model, including the role of a trusted appraiser, is good service and accurate and appropriate pricing. Appraisals assure the buyer and seller are getting their money’s worth and help them mitigate risk. At the end of the day, it is incredibly difficult for an iBuyer to replace the level of personal service and trust that can be found in using a local real estate agent who has deep ties and understanding of the community.
Overall, iBuyer programs are still a relatively new and rapidly evolving trend in the real estate market. While they offer some potential benefits to homeowners, there are also potential drawbacks that need to be carefully considered. As the technology and business models of iBuyers continue to develop, it remains to be seen how they will impact the real estate market over the long term.
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