A new, highly disruptive home-selling option known as iBuyers (instant buyers) has clearly emerged:
- Home sellers are excited.
- Real estate agents are nervous.
- Venture capitalists have been investing heavily.
- Experienced real estate executives are becoming less skeptical as more and more $$$ pours in.
Offerpad, Opendoor, Zillow, Perch, Keller Williams, Redfin, Knock, and cataList Properties (Coldwell Banker) have now cumulatively raised billions of dollars to buy homes directly from homeowners who want to avoid the hassles of selling their home the old-fashioned way. The traditional home-selling process can be particularly stressful when a home buyer has a home to sell and also has to:
- Buy with a contingency, needing the proceeds from their current home to purchase the new home
- Move twice if they sell their current home before they buy the new home and are unable to lease their current residence back from the new owner
- Pay two mortgages if they own two homes for a while
In this episode of our podcast, Dean Wehrli interviews Offerpad co-founder Jerry Coleman to understand why this new business has emerged so quickly.
Empowering the Consumer
As with so many disruptors, the companies are using technology to empower the consumer to take control. iBuyers make it easy to sell your home: spend a few minutes online to provide details on the home and images, receive an offer within 24 hours, and choose your closing date. This won’t appeal to every consumer, but clearly it appeals to many, particularly those who place a premium on their time or stress.
Why Would a Consumer Opt Not to Obtain the Maximum Price?
Jerry reports that Offerpad’s success has not just been with the tech savvy or financially elite. Many of their clients are people who have sold homes before and remember the pains they went through: open houses, contingency sales, buyers falling out of escrow, etc. They also likely paid 6%+/- of the proceeds to the agents and are thus comfortable with paying up to 8%+/- to ibuyers to ease the process and provide surety of closing.
After participating in more than 100,000 housing transactions over their careers, Jerry (who co-founded what became Invitation Homes) and his partner, CEO and co-founder Brian Bair, saw an opportunity to combine their acquisition experience with new technology. Offerpad has built algorithms to estimate home value and also relies on employees who know the local neighborhoods. The data to build these algorithms was not readily available 10 years ago. Jerry describes the process as roughly 90% science and 10% art. Offerpad knows that every home is different. Team members who know the neighborhoods make a big difference in getting the valuation right.
How Does This Threaten Real Estate Agents?
Think of Offerpad as a real estate agent. It is licensed as a real estate agent in all 14 MSAs where they do business. Home sellers can sell their home to Offerpad, with Offerpad keeping the equivalent of both the buyer and seller commission as well as an additional fee. Then, Offerpad lists the home on their own behalf, “keeping” the seller commission and paying a buyer commission if necessary.
With Offerpad purchasing the home and then turning around and selling it, each home transacts twice. There is likely to be no commission to an outside agent on the first transaction. The second transaction will likely involve some buyer broker commissions, with Offerpad keeping the seller’s commission as part of their fee and paying the buyer’s commission if there is a buyer representative. With Offerpad able to borrow much of the proceeds to purchase the home, the return on equity invested can be quite high when all goes well.
Will total commissions reduce over time? It is too early to tell. Total commissions might even go up as more homeowners transact now that they know the process will be easier. However, real estate agents who don’t offer an option for the homeowner to sell directly for “all cash” will likely lose market share. This is why many real estate agencies are now trying to enter the iBuyer space. Jerry believes there will always be room for the “value add” real estate agents.
Home Builders Love iBuyers
Home builders love the fact that iBuyers will remove the contingency from a prospective new home sale. 10 of the top 15 builders work with Offerpad, which can be flexible on the closing date. They also offer the seller a “free local move.” Dean notes how this “smooths out the process.” According to Jerry, 9 of 10 customers who have used Offerpad would use them again and refer them to their friends and family.
Which Markets and Price Points?
iBuyers need local scale and find it easier to execute when the homes are in a price range with a lot of volume and comparable transactions. Offerpad has a hundred markets on their expansion list.
A Suprisingly Competitive Business
While this podcast features Offerpad, we are not endorsing one iBuyer over another. We have also had the CEOs of Zillow and Opendoor keynote at our conferences, and we are working with several others as they grow their business. Market risk is clearly something they consider, and all of our clients have contingency plans in case the market softens. We can envision a future where most home sellers can quickly obtain several credible offers for their home and transact painlessly.
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