“We Buy Houses” companies
Companies that buy homes directly from sellers for cash have been around for a long time. They typically promise quick, all-cash offers and ultra-fast closings, some in as few as seven days. They tend to target properties in need of updates and repairs, and work with sellers who are more concerned with the need to move ASAP with no responsibilities than with price. They visit the property to assess how much they need to invest to flip it and turn a profit, then offer an as-is sale price with no added commission. This can be a good solution for some sellers… check out weighing the pros and cons of “Selling Your House for Cash” to see if this might be a good solution for you and your situation. I have had several clients have a good experience working with Homestead Road, for example.
iBuyer companies
iBuyer companies also work directly with sellers, offer all-cash and can close in a matter of days to a few weeks… but use automated valuation models (or AVMs) to make a near-instant offer on your home and provide a mostly online home sale experience. But unlike more traditional “We Buy Houses for Cash” companies, iBuyers tend to look for homes in better condition and offer much closer to market value, typically in the 90% range… and usually charge fees between 5% and 13% for their services.
Problems with the iBuyer business model
Opendoor is considered the nation’s pioneering iBuying company, launched in 2014 with the goal of using technology to make home buying and selling simple, instant and hassle-free. They replaced real estate agents with automated algorithms based on local market data to make a cash offer within hours, allowing sellers to avoid home preparation and months of uncertainty over the outcome.
The intent was to be a game changer… they expected sellers to flock to this quick and frictionless way to sell a home, enabled by technology. The simplified cost structure and higher volume were to make up for a lower profit margin.
The thought was that iBuying would render real estate agents extinct, much like what happened with travel agents. But houses are not the same as airline tickets. The iBuyer model attempted to turn a single-family home into a commodity with low differentiation. Only problem is, houses are not like airline tickets… every house is different on many different levels, which algorithms simply cannot fully take into account.
It worked well in the beginning and other iBuyer companies like Zillow, Offerpad (not in Minnesota) and Redfin joined Opendoor in the iBuyer market. Zillow had 3% of the iBuyer market share in 2018 and agressively increased to 35% of the iBuyer market share in 2021. I had a client contact them and another iBuyer in 2021… only to be told they couldn’t make my clients an offer. Those sellers came back to me and did a traditional sale that pended in 3 days.
What is happening now
- In November 2021 Zillow shut down their iBuyer business, citing the inability to properly forecast home prices and balance sheet volatility
- In November 2022 Redfin closed its iBuyer business, faced with the downward shift in the housing market in response to higher interest rates
- In December 2022 both OpenDoor and Offerpad, the 2nd largest iBuyer, were down by 93%
- Falling real estate prices in 2023 do not bode well for iBuyers
- High leverage ratios and rising interest rates are projected to make this business model too high risk
- Opendoor’s stock price plummeted 90% in December 2022 and its co-founder stepped down as CEO
Opendoor is still listing properties they purchased as iBuyers. I have clients who recently came to an agreement on an OpenDoor listing… only to learn Opendoor didn’t really know much about the property after the inspection uncovered many issues. Cutting out the middleman can mean cutting out knowledge about the true condition and value of a property. The fierce competition the last couple years when many buyers waived inspections was likely a big help to iBuyer companies!
It is hard to know what will happen in the iBuyer arena in 2023, but iBuyer companies are reportedly taking on significantly fewer purchases and making less-enticing offers to sellers. My buyers said they would never consider another Opendoor property.
Opendoor and Offerpad are both trying new strategies…
- Offerpad is testing a new program “My Way” that enables home buyers to renovate prior to moving in and rolling the costs into their mortgage (Offerpad is not in the Minneapolis market)
- Opendoor is testing a new program “Opendoor Exclusives” that allows potential buyers to instantly self tour off-market homes in a 14-day window before they hit the MLS (remember that iBuyers market directly to consumers and own their own listings)… aiming for 30% of its total business by the end of 2023
The iBuyer model had a tight profit margin that worked when prices were escalating and volume was high. But now that interest rates are escalating, prices are moderating and sales volume is dropping it is becoming less tenable.
They attempted to turn the single-family home into a tradeable asset like a barrel of oil with little to no human interaction. Only problem is, houses are not commodities… every house is different, which algorithms simply cannot take fully into account. Buyers and sellers recognize that, and evidence proves that there are more people using agents now than ever before.
Sharlene Hensrud, RE/MAX Results – shensrud@homesmsp.com
More info:
- iBuying on the Brink – where does the controversial homebuying model go from here
- Which iBuyer could stage a recovery in 2023?
- The 2023 housing market – a real estate reckoning is at hand
- The broken promise of the iBuyer
- Q&A: Death of iBuying and other Proptech movements for 2023
- Opendoor: what is an iBuyer
- 6 of the Top We Buy Houses for Cash Companies in Minneapolis
