Homeownership Part 2 - iBuyer Companies - Steps for a Better Home Buying Experience

This article includes an introduction to iBuyers, market terms, thoughts on the current housing downturn, and the closing of Redfin’s iBuying business.

I’ve included a table of contents for those wanting to jump around (be like Kris Kross and jump around):

Table of Contents

Defined Terms

Benefits

Company List

Home Buying Scenarios

Determine if iBuying is Right For You

RedfinNow Closes Shop

Current Market

Exploring Options

Additional Resources

Defined Terms

The market contains two main iBuying business models, each targeting the other side of the home buying transaction, both with the same end-goal; to create an end-to-end digital solution for the process of buying and selling a home.

iBuyers

New brokerages that buy houses directly from homeowners who want to?sell.?They are on-demand, market makers of homes providing instant liquidity to?home sellers, who receive sale proceeds in as little as 5 days.

Characteristics:

• They shine in a down market, when consumers need cash the most.
• They are fully exposed to real estate market risk, as they are tasked with selling the house in the open market after they buy your home.?
• They take no consumer credit risk.
• They work with sell only scenarios.
• They don’t allow home price negotiations, since they buy directly.

Power Buyers

New brokerages that first buy the home that consumers want to?buy.?They empower home buyers with more competitive, all-cash-offers, and buy-before-you-sell products. They underwrite and enter into a contract with consumers who buy in the end (credit / execution risk). After the contract is executed with the end user, they buy the home with all cash, and subsequently sell it to the consumer.?

Characteristics:

• They shine in an up market with more competitive options, and provide convenience in all markets.
• They take no market risk, as they don’t sell the home in the open market.
• They take consumer credit and execution risk; less risky.?
• They work with buy only, and buy and sell scenarios.
• They allow price negotiation. For buy and sell scenarios, both your new and current homes are negotiable.?

Products:

• All-cash offers — An offer with 100% cash that doesn’t include your own mortgage (at first). It removes uncertainty for the seller by eliminating the financing contingency. This product works great in an up market when there are multiple bidders, less so in a down market.
• Buy-before-you-sell — Allows home buyers to buy a new home before selling their current home. It lessens the stress by creating an overlap that allows for an orderly transition.

Types of Power Buyers:

• Buyers — They buy your home themselves, and are recorded on the deed of trust as the owner. The home buyer moves in at their convenience, then buys the home for the same, pre-negotiated price.?
• Loan Providers — They provide short-term loans to the home buyer (at first). They are not recorded on the deed of trust as an owner. The short-term loan is provided before the home is sold, which allows the end buyer (you) to make an all-cash offer.
• Platform offering — These companies allow a platform for traditional brokers to execute the all-cash offer and buy-before-you-sell products

Broker Commission?- It’s widely known that the vintage real estate commission model is 6%, paid by the home seller and distributed evenly between the buyer and seller’s agent. It hasn’t changed in 100 years. This model has been under pressure since availability of real estate information exploded in the mid 2000s (Trulia/Zillow).

• Note — While iBuyers will continue to put downward pressure on broker commissions, the industry is still scaling. This means that right now, commissions paid by using the new iBuyer model will not be materially different from traditional brokerage. Opendoor is leading the way with a 5% fee to sellers.

We put iBuyers and power buyers in the same market because they have the same end-goal; to create an end-to-end all-in-one ecommerce solution.

As housing continues its downward slide, there will be some from both camps that will join forces in merger and acquisition transactions.

2023 is the year of the great proptech consolidation.

Benefits

Let’s summarize the 4 main benefits:

• Receive proceeds of the sale of your home in as little as 5-10 days. If you don’t want to hassle with staging or upgrading your home, or are in a cash crunch, sell to an iBuyer and have comfort knowing you can convert your equity to cash quickly.
• 100% all-cash offers provide more competitive bids with no financing contingency, increasing the chance of you securing your dream home.
• Have overlapping access to your existing and new homes in order to move at your own pace.
• Technology driven end-to-end ecommerce solution that will drastically reduce stress from the current antiquated process.?
• Future Benefit: With scale, iBuyers can drive down the 6% broker commission model.

Company List

Below is a chart of the main iBuyer companies. It’s not all-encompassing, as there are regional players focusing on small sub-markets with slight variations of the main model defined above (ie Catapult in Northern California).

Home Buying Scenarios

Homeowners are in three general situations, which I provide guidance for below:

Sell Only?

iBuyers —?If you are only selling a home, start with?Opendoor, or?Offerpad. They make markets in homes, buy directly, and are the reason the industry was formed. Power buyers are worth exploring if the iBuyers are not in your neighborhood yet, but power buyers don’t buy directly, they help you list your home like a traditional broker, and provide a guarantee to buy it themselves at a discount if your house isn’t sold with-in a specific time period (~90 days).

• Opendoor / Offerpad — Opendoor has as much of a technology background as Offerpad has a real estate background. While they come from opposite ends of the spectrum, they are the Uber/Lyft of the market.

Buy Only?

Power buyers —?If you are a first-time home buyer, this is for you. Power buyers are best-fit because they can make your offer more competitive by eliminating the financing contingency, and allow overlap to move at your leisure.

• While?Opendoor?and?Offerpad?began as pure iBuyers, they are just as much power buyers.?Flyhomes?is great in the west, Knock?is in the east.

Buy and Sell?

Power buyers —?Power buyers execute the buy-and-sell scenario the best. They were created for this very reason; to provide convenience, peace-of-mind, and a better chance of getting your first home.?

• Opendoor,?Offepad,?Flyhomes,?Knock

Determine if iBuying is right for you

iBuying doesn’t make sense in some situations. Let’s take a look, based on the four main benefits above:

• If you can provide an all-cash-offer yourself, a power-buyer becomes less valuable.
• If you can overlap access to your current home and new home yourself, a power-buyer is less valuable.
• If you don’t have or need a mortgage on your current or new home, the all-in-one, end-to-end ecommerce technology solution is less valuable.
• If you are only selling and don’t need to tap equity fast, the traditional route could fetch a higher home value, and makes an iBuyer less valuable (you can still get a free home estimate from an iBuyer as a baseline).

RedfinNow - RedFin’s iBuying Arm

It would be untransparent of me not to address the current market, and what happened to RedFin’s iBuying business — RedfinNow.

RedfinNow shut down on Nov 7, 2022. Per the company’s 10-Q, it was a “strategic decision to focus resources on the core business”. RedfinNow comprised 50% of RedFin’s revenue.?

In other words, Redfin shut down the business it entered five-years ago as a follower, when the market was already formed and the players crowded. Like Zillow (which shut down iBuying last 2021), Redfin entered the market with one foot on the company dock, one on the iBuying boat, trying to take advantage of this new business. This approach proved unnimble compared with the speedboats Opendoor and Offerpad had crafted, and who were unchained from any other business. iBuying has a different risk profile than brokering residential homes (Redfin’s core business). It’s like a dinghy ride in the pacific ocean; exposed to the elements of the guaranteed cyclical nature of real estate. While Redfin tried to capitalize on the new market, they and Zillow proved that the pricing algorithm is critical. Redfin didn’t have enough time to create a viable algorithm to price homes, let alone weather the fastest housing turnaround in 40 years (worse than the financial crisis). All the profit RedfinNow generated over the past five years could very well be wiped out in one fell swoop.

Current Market - Rates up, housing down

Since mortgage rates have doubled in the past six months, you can now afford half the house with the same monthly payment. Thrilling isn’t it? The Fed is on an interest rate tear, mortgage rates are ripping the ceiling, housing is spinning downward, the inflation high is sight unseen, and the equity markets have lost ~35% in 2022.?

In the macro environment, mortgage rates and the housing market have always been emotionally attached, each at the other end of the same teeter totter. Mortgage rates have increased quickly causing the same downward velocity on the housing market. It’s inevitable, without one’s demise, the other doesn’t win. They don’t equally influence the other, housing is the little sister depending on the big brother to make the teeter totter a fun game. In the same way, the federal reserve controls interest rates to keep inflation in check. Same fun game, different teeter totter, both on the same macroeconomic playground.

Because of this, one might look at $OPEN’s stock price and ask whether it's trustworthy, viable, and here for the long-run. My answer — Opendoor was created for this very moment. Consumers need cash the most during down-turns. Rain or shine, Opendoor is here to make an offer, close the transaction and send proceeds in as little as five days. It’s the first down-turn in Opendoor’s history, and one this intense not seen in 40 years. I dive into the company’s history and brain power in?part 3

This should not affect your decision as a consumer to explore these companies. Regardless of where the housing market stands, over 6mm housing units; 2 trillion in aggregate home values will be bought or sold in any given year (see NAR website?for more details). And that figure almost always increases, every year.??

Exploring Options

Now that we’ve defined terms, introduced the companies, and addressed the current market, let’s provide steps for you to begin your exploration to determine if the new style is a fit for your own journey.

1. Determine if you plan to buy, sell, or buy and sell
2. Make a list of iBuyers that fit your situation.?
3. Determine which iBuyers serve your geographical area. Unfortunately not every county in the US is covered by one of these companies. Fingers crossed yours is, or maybe there is a local operator who can offer you some of the iBuyer benefits.
4. Call for a free consultation. Tell them your situation and let them take you down the yellow-brick road. There are no bad questions, and they will sincerely appreciate talking with you. You can get a free estimate for a home sale, and free home inspection (most times). It will at least provide a baseline of value, if not a great start to the home buying journey.?

I’ve talked with executives at most companies. I’ve discussed strategy and corporate debt solutions based on financials, corporate governance, and quality of management. I can personally vouch for all of them.

I wish you the best of luck in your exploration!

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