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CEO’s Message: Are You Prepared to Deal with the iBuyer?

Jim Harrison: MLSListings Inc CEO and President

Jim Harrison
President and CEO, MLSListings

iBuying is the term recently coined to define real estate transactions in which homeowners bypass traditional listing and sales practices electing instead to sell their homes and receive both cash from a third party investor and an accelerated closing schedule.

Over the past few months, the iBuyer phenomenon has made significant advancements as organizations such as OpenDoor, Order Pad, Knock, the Zillow Group, and Redfin have all entered the iBuyer space, each with a slightly different approach.

It could be said that the iBuyer movement started years ago when at least one major real estate franchise announced to its selling clients “if the property doesn’t sell within a specified period of time we will purchase it.” For a number of reasons, including the seemingly inadequate amounts of the actual offers when received, this original model never really made an impact upon the marketplace.

History will probably reflect that the iBuyer movement began in earnest in 2014, with the creation of OpenDoor.com with the representations that it was an online home-selling service aimed at streamlining the sales process down to a few days. The iBuyer market began to really gain altitude and speed with the creation of OfferPad.com in early 2016, and Knock.com in mid-2016, with the promises that “we can sell a home in less than 6 weeks or we buy it ourselves at market value.”

By the end of 2016, iBuying was alive and well in a number major American real estate markets with Wall Street having pledged over one billion dollars of working capital to the cause.

If there were any remaining doubts about the validity of this new real estate marketing arrangement they clearly began to evaporate with the Zillow Group’s announcement in May of this year regarding the onset of its “Instant Offer” iBuying program. Finally, even the most stubborn doubts regarding the probable potential and impact of iBuying quickly became even dimmer when Redfin.com announced in June of this year that it was joining the movement with its “Redfin Now” program whose fees are resetting the existing standard at 7%.

iBuying has quickly become a relatively sophisticated process that takes advantage of a number of newly minted technologies. These technologies, however, are not the sole basis of its newfound success. The essence of iBuying is the process and philosophy through which iBuyers arrive at their offer price. The original iBuyer players essentially identified homes that didn’t sell on the open market owned by individuals who identified themselves as “motivated buyers” as distressed properties. The resulting transaction was treated on that basis.

In sharp contrast, the current iBuyer uses sophisticated technologies to determine the actual market value of the property and generates an offer based upon market value rather than distressed value. This simple shift of philosophy changes the whole game.

Another factor that few observers have articulated, for obvious diplomatic reasons, is that there is increased evidence that American real estate consumers are growing weary of both the traditional real estate agent and the traditional real estate transaction. In short, the value of not having to submit oneself to a traditional transaction now has been monetized. Based upon the current market statistics it would appear that such an escape is worth something in the nature of three to five percent. An increasing number of consumers appear to be willing to pay this premium to escape that experience.

A number of top industry analysts are suggesting that the iBuyer market share (especially with Redfin entering with a 7% fee) may quickly reach at least ten percent. Despite these predictions, a number of “pro status quo” analysts have taken the position that since this type of program hasn’t worked in the past that it will not work today.

Given the nature of the players already aggressively entering the iBuyer market segment, this may be a high-risk response. For one thing it totally ignores the fact that, as a group, few industry segments can match the levels of research and analysis that the likes of Wall Street, the Zillow Group, and the Redfin organization can bring to bear and even fewer can match the recent track records of these organizations. For the most part today’s iBuyers are not teenagers doing a start up in a garage.

When considering the potential impact of the iBuyer infused marketplace there are a number of criticisms that will not net helpful or useful answers. Avoid the following.

The suggestion that investor offers will not be generated based upon the best interests of the seller is almost childish. The assumption that the property or its owner will be treated by the investor as being distressed is simply not the case. The same comment might be made about offers made by buyers of any real estate. Real estate is a two-sided proposition and it is the process itself that will ensure that the interests of both are facilitated. There is no question that an investor’s offer will be fashioned in the best interest of the investor.

The suggestion that iBuyers incorporate incorrect valuations of the subject property is another through back to times of old. iBuyers can make whatever offers they want. An offer that is neither competitive nor reflective of market reality is sure to be rejected with the seller electing a traditional transaction. Again, the point is that sellers considering the iBuyer option are neither desperate nor without options, they just don’t want to go through the perceived hassle.

The suggestion that the fees and costs associated with the iBuyer will kill the deal is again nonsensical. If such is the case then the seller will reject the offer. The full market dynamic will control the deal.

Another argument offered up is that some market conditions will not be conducive to the iBuyer program. Of course not! If the negative experience that the seller wishes to avoid doesn’t exist in a particular marketplace then the iBuyer program will not be competitive.

These comments are not intended to celebrate, support, or criticize the iBuyer movement. The iBuyer concept will either survive or fail on the strength of its research regarding what today’s real estate consumer is looking for and the overall value of offer’s value proposition.

The above comments are intended to encourage our brokerage and subscriber communities to develop strategies and tactics to address the iBuyer movement. Simply declaring that iBuying is a stupid idea that didn’t work twenty years ago will not meet this challenge.

The MLSListings staff is in the process of evaluating the iBuyer movement to determine how it will impact the MLS and the marketplace and how MLSListings should respond. It would be most helpful if we knew how our subscriber and brokerage customers anticipate responding.

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