CYCLICAL REAL ESTATE MARKETS TESTING iBUYER STRATEGIES

Successful companies solve problems for people. Real estate companies solve problems that consumers may encounter in the business of buying or selling a home, traditionally a complicated and challenging experience. 

The concept of iBuying, providing sellers with an instant cash-sale opportunity was introduced into the real estate market in recent years as an alternative to traditional listing and selling of real property which often consumed months in the sales process. Market penetration of iBuyer transactions reflected a successful business model, essentially disrupting the status quo of the traditional real estate sales model.

However, historically low interest rates and unusually high demand have temporarily reduced iBuyer projected market share. The real estate market has always been subject to temporary cycles, and today’s low interest rates and high demand for housing, slowing the use of alternatives, serves as an example notwithstanding prior market acceptance of the iBuying alternative.

While the housing market has come roaring back during the pandemic, iBuying activity is not expected to resume its market growth until low interest rate-fueled supply and demand factors are corrected, likely to take place in mid-late 2021. In some geographic markets the share of iBuying activity finished 2020 at 50% less than that of 2019. Meanwhile, traditional sales for existing homes is running above last year's levels.

The iBuyer Business Model Defined

An iBuyer is a real estate company that uses algorithms and technology to buy and re-sell homes quickly. The "i" is for "instant." When selling a home to an iBuyer, a seller may receive a cash offer in as little as 24 hours; quick compared with the weeks or months it often takes to traditionally stage and repeatedly show a home.

Instead of listing a home with a real estate agent, waiting for offers, accepting showings, and going through a long escrow and often unnecessary closing costs, the iBuyer eliminates stress and anxiety by buying your home directly themselves…for cash. They hold, perform improvements and re-sell it themselves, getting it ready, listed, and sold to a traditional buyer.

The largest iBuyers are Opendoor, Zillow Offers and Offerpad. Of the leaders, Opendoor was earliest on the scene in 2014. Offerpad followed in 2015, and Zillow Offers launched in April 2018. Other iBuyers include Knock, Keller Offers from Keller Williams, Orchard (formerly Perch), and RealSure by Realogy and Home Partners of America. Redfin, a real estate brokerage that has its own instant offer service called RedfinNow, teamed up with Opendoor.

iBuyer’s generate profit by charging a fee for their services. Simplifying and speeding up the process for home buyers and sellers. The average iBuyer fee charged to a home seller is ranges from 6% to 12% with a weighted average of approximately 7.5% of the sale price, or roughly 1.5% more than the typical commission payed to a real estate broker. iBuyers also absorb holding costs, interest carry, origination and closing costs, Realtor fees, utilities, insurance, property improvements and costs associated with re-sale. 

Absorbing such costs into their fee structure has resulted in transactional losses that will be addressed by iBuyers through adjustments to their algorithms and by reducing costs related to originating a sale, transferring real property and closing the transaction.

iBuyer Market Factors

In 2019 the all-cash iBuyer market segment represented 7.9% of residential real estate transactions nationally, projected to increase to 10% in 2021 and up to 20% in three years. The real estate market has always been subject to temporary cycles. At this point early in the second quarter 2021 historically low interest rates and unusually high demand has temporarily reduced iBuyer projected market penetration.

 Mortgage rates traditionally fluctuate in tandem with the yield of domestic 10-year Treasury notes, which are largely affected by interest rates. If interest rates go down, mortgage rates will also go down. Lower mortgage rates increase demand with the result being higher prices. Low rates and increased demand, resulting in higher prices, have tended to keep iBuyers on the sidelines…keeping their powder dry to re-invigorate buying and subsequent re-selling.

Between the pandemic, low interest rates, short housing supply and increased demand; for the past 12 months iBuyers have suffered from not enough homes available to meet re-sale demand.

iBuyer Market Corrections

In a manner referred to as “Portfolio Balancing” iBuyers reduced inventory levels by 75% - 80% during the timeframe of historically low interest rates which overheated the real estate market and the global pandemic. 

In other words, they were frequently iSellers not iBuyers. Notwithstanding the need to rebuild inventory, iBuyers currently have fewer homes available to sell and therefore less potential for profit through the end of 2020. 

The good news for iBuyers, and their institutional investors, is that they possess tens of billions of capital waiting to be deployed to purchase new inventory. Plus, they have the following market factors playing in their favor:

• 2.9 million homeowners are currently in the Federal Government Covid 19 Forbearance & Foreclosure Program, which expires in mid-2021. And 10 million homeowners are currently past due on their mortgages. Currently, 5.4% of mortgage borrowers, or 2.9 million, are in active forbearance plans. In total, these mortgages are worth $584 billion in unpaid principal, according to data from Black Knight, a real estate data analytics company.
• Tens of millions of Americans may experience the the expiration of unemployment benefits, frequently associated with the 2020 Pandemic, in mid-late 2021. This loss of income may adversely affect the ability of many homeowners to remain current on mortgages...and can be anticipated to lead to hundreds of thousands of additional homes entering the market for sale. This additional "inventory" will increase supply thereby softening demand...and pricing in 2021.
• Hundreds of thousands of SFRs will serve as 2021 “supply” into targeted geographic markets, thereby easing artificially inflated pricing and rate-driven “demand” temporarily restraining the growth of the iBuyer market segment. Real estate investors take the “long view” particularly when cash is king and historically, a significant percentage of traditionally financed offers do not close.

According to Brian Bair, Chief Executive Officer of Offerpad “There is an argument to be made that we’re a buyer in a seller’s market, and that’s not really the best place to be”. But, Bair adds, Offerpad also is a seller in a seller’s market. iBuyers believe their approach still holds appeal…particularly for sellers who desire a sale and equity cash out, are experiencing an immediate need for cash, seeking a larger home, being job transferred, are unemployed, suffering ill health or navigating a divorce.

“Even in a hot seller’s market, there are headaches and uncertainty that come with prepping, marketing, listing and selling your home,” says Kerry Melcher, Opendoor’s head of sales and brokerage. â€œThere are significantly more steps involved, from identifying an agent, determining the right price, completing renovations and vacating the home for open houses.” Many traditional (multiple) offers-to-purchase do not close based on the mortgage lender’s LTV and related loan-metric requirements, during a “seller’s market”.

Though the housing market is booming as a result of historically low interest rates, conditions are uncertain in states where coronavirus infection rates remain unstable. Opendoor was slow to re-enter some markets, buying and selling in only seven markets in recent months before anticipating reopening in all 21 markets this coming summer. 

“A lot of it has to do with the capital risk iBuyers want to take on. In March and April, they didn’t want to take on more capital risk,” said Homelight’s Sridharan. “Then after that, iBuyers and investors tiptoed back into the market.”

“It’s totally about risk management,” said a senior representative of RedfinNOW, “being able to forecast a future sale, make a purchase at the right value and be able to resell it in 30, 60 or 90 days — you have to manage risk.”

Instead of risking entering a booming but unpredictable market, most iBuyers will accept losses through the end of the year and generally do not expect to return to pre-pandemic revenue levels until the end of 2021.

The Long View

As an author of business plans and strategic initiatives primarily serving real estate industry growth-stage businesses, I have traditionally focused "risk avoidance" based on client executive team's industry knowledge, capitalization, customer benefits of their proposed offering, sufficient sales & marketing talent, product-launch strategies and appropriately developed implementation tactics. 

Naturally, I have also presented an interpretation of trend analysis, positioning, supply chain issues, logistics, labor capability, workflow matters, customer acceptance, competitive challenges and in some cases re-positioning and re-branding. A well-prepared SWOT Analysis is a basic and effective tool in aggregating and presenting basic strengths, weaknesses, opportunities and threats.

In recent years, I introduced to my client evaluations important risk considerations, such as political turmoil, legal & legislative considerations, regulatory restrictions, social acceptance, environmental factors and military intervention. In the case of real estate I closely evaluate trends, supply and demand, the impact of the general domestic economic health, marketplace liquidity, employment levels, disposable income, monetary policy, interest rate fluctuations, lifestyle and alternatives to proposed product offerings. 

Notwithstanding, history has demonstrated that essentially every aspect of investing in, buying and selling real estate is highly cyclical in nature...and temporary.

In the case of real estate, "cyclical" is real when market factors are particularly susceptible to both the "down-market “and the “up-market”. One truism experienced throughout history, is that what goes up, comes down…and what goes down will go up as confidence and market factors change.

1. Experts believe that astute real estate iBuyers are observing market conditions...sitting on the sidelines...waiting for demand, pricing and projected transaction volume to satisfy their strategic market goals. 
2. In the case of iBuyers, most industry experts believe that they will benefit from a market correcting from “overheated” status, measured by any number of economic factors; and because they have the capital to wait for a stable-market opportunity to buy greater numbers of real estate assets in better geographic markets at better pricing. 
3. Often referred to as “keeping their powder dry” iBuyers armed with tens of billions of capital are essentially waiting for stabilization in the overheated supply/demand and pricing of today's real estate market, in order to increase acquisition of asset portfolios in coming quarters.
4. In the meantime, real estate iBuyers are considered by many as remaining on the buy-side sidelines, thoughtfully balancing their asset inventory, so as not to be too heavy into newly purchased assets. This allows them to proceed in generating working capital from an inventory of market-based, premium-priced current assets-for-sale.
5. In other words, real estate iBuyers are “balancing” their asset portfolios, preparing for a strategy of buying at advantageous pricing which supports projected profit margins. This while preserving capital during the period of time that provides for the re-sale of previously acquired assets (inventory) into a stable market that maximizes asset value. 
6. Today’s unstable and cyclical real estate market, brought on by artificially low interest rates and the catastrophic global pandemic, will result in the well-capitalized iBuyers accelerating both buying and selling in timeframes of their own choosing. This choosing is clearly tied to the correction of an overheated real estate market, a resolution of the pandemic's spread and eradication, and the return to normal buy, sell and investment ROI opportunities.
7. Well-capitalized real estate iBuyers will be uniquely positioned to dramatically grow by balancing both buy-side and sell-side strategies as today's overheated market cycle eases in future quarters.
8. Many industry real estate vendors are well positioned to serve the real estate iBuyers market in both down-market and up-market by virtue a focus on astute iBuyers, iSellers” and self-financed iLenders executing aforementioned real estate portfolio balancing strategies.
9. Temporarily overheated cyclical markets will experience correction, and the primary drivers of reduced transaction volume and inflated asset value will result in a consolidation of iBuyer participants. In other words the well-capitalized iBuyers, scaling back their operations during today’s overheated market, are positioned to preserve capital for future asset purchases as the real estate market stabilizes. 
10. Notwithstanding current market instability, it is self-evident that in both cyclical and generational downturns in the real estate market being experienced today, the well-capitalized strong will survive and a consolidation of market participants will take place. 

There is little risk to the future of the real estate iBuyer market as an entrepreneurial business model. Values and transaction volume will recover as iBuyers carefully balance their acquisitions, iSelling and future self-financed iLending.

• With that said, algorithm-based iBuyers must be true to their “PropTech” entrepreneurial and disruptive entry into the status quo of the real estate industry, and focus on reducing transactional costs for consumers by utilizing products and services that represent alternatives to the status quo.
• The iBuyer business model is outstanding, and although a consolidation of participants will take place, the concept is solid, and the strong will increase their market share to make up for the reduction of competitors as stability returns in future quarters. 

The iBuyer business model will survive today’s overheated and pandemic-plagued real estate market. There has indeed been a reduction in transaction volume and for some iBuyers it temporarily exceeds 50%. However, this is clearly a result of iBuyers properly tightening their belts…protecting their capital…while market corrections in supply, demand and pricing are approached.

Sprink serves iBuyers, iSellers and iLenders as Managing Director of iTitleTransfer, LLC with Business Plans, Marketing Strategies, Sales Initiatives and Strategic Alliances.

Sprink can be contacted at tsprink@iTitleTransfer.com and 866-494-3727