In the real estate industry, brokers and lenders have long controlled access to almost every part of the buying and selling process. But that may be changing.
Companies known as iBuyers — the “i” stands for “instant” — are using algorithms to set home prices, muscling in on conventional brokers and promising an end to packed house tours and bidding wars. And iLenders are using technology to simplify the mortgage application process, giving buyers a leg up in an overheated market. By working directly with consumers, and eliminating banks and brokers, these companies offer a faster, more streamlined approach to buying and selling homes.
As anyone who has experienced a traditional real estate deal will appreciate, these instant transactions can be quick and less complex. But there are drawbacks: In a seller’s market, some homeowners may be leaving cash on the table by dealing with iBuyers. And those wary of tech or looking for a personal touch may find the experience wanting.
So how do you decide if this route is the right one for you? Read on.
What is iBuying?
Essentially, iBuyers are institutional house flippers: companies that use algorithms to estimate a home’s value and then buy it directly from the owner for cash.
On average, iBuyers offer 0.22% less than fair market value for a home and charge the seller slightly higher fees, about 1.3% more than a conventional listing agent would. The trade-off is a faster transaction — the process takes days rather than weeks, as there are no extended escrow periods — and fewer of the hurdles that give sellers headaches, such as open houses and multiple showings with strangers.
Opendoor, Offerpad and other major iBuyers generally list the homes that they buy on their websites, and sometimes also with multiple listing services, so buyers working with real estate agents can find them. Once a home is acquired by an iBuyer, it can be turned around and sold like any other property.
Of course, this is still a small sector of the market. In September, iBuying accounted for about 1% of all home sales in the United States, although in certain metro areas the number was as high as 6%.
And for some major players, the boom has already gone bust. Zillow’s iBuying arm — until recently, the nation’s second-largest iBuying operation — imploded last month, and the company is now shuttering its algorithmic home sales division and laying off one-quarter of its workforce, while offloading thousands of houses acquired through iBuying but not yet flipped. But other companies — including Opendoor, the largest and best-known iBuyer, as well as Offerpad and RedfinNow — are still expanding.
In the weeks since Zillow’s abrupt exit from the iBuying space, there has been debate over just how transformative the practice will be for the real estate industry, which thrives on personal networking.
Glenn Kelman, CEO of Redfin, said that he resists most of the generalizations: “I hate the narrative that iBuying is the future of real estate, or the narrative that iBuying is a fraud.”
Redfin recently announced its third-quarter financial results, which included significant increases in overall revenue and in profit from real estate services, including RedfinNow. Still, the iBuying division represents only about 1% of the company’s sales.
“It’s a new way to liquidate a house,” Kelman said, “and a tiny fraction of customers are going to buy or sell a house that way.”
IBuying has been influential enough, though, that many sellers are curious about it — even professional home flippers.
Tim Gordon, a real estate investor in Southern California, found himself with a few too many properties on his hands last spring when he was preparing for his upcoming wedding. One particular property, on the eastern fringes of San Diego County, was frustrating him, so he decided to try his luck with RedfinNow, Zillow and Opendoor. To his surprise, RedfinNow offered him $670,000 — some $70,000 more than the best offer he had previously received — and he hadn’t even finished renovating.
“I just took the money and ran,” Gordon said.
What is iLending?
The counterpart to iBuyers are iLenders, fully digital mortgage brokers such as Better.com and Accept.inc. These companies can approve buyers for a mortgage at any hour of the day or night, and many offer programs that will provide the entire purchase price for a house upfront, so that anyone approved for a loan can become an all-cash buyer. In a market where the average first-time buyer tours 15 homes and makes at least five offers, according to a recent report from Opendoor, these services offer a significant advantage.
Sandra Costanzo is one of those first-time buyers. In August, while she was going through a divorce, she had six weeks to find a place to live in Philadelphia for herself and her two children. “I knew nothing about getting a mortgage, or even where to start,” said Costanzo, a language teacher who is originally from Spain. “So I went online.”
Knowing she had about $70,000 for a down payment, she did a Google search for mortgage companies and was preapproved for a mortgage by Better.com. She decided to use the company’s brokerage, Better Real Estate, for her home search, and found a four-bedroom, 1.5-bathroom house with a sprawling oak tree in the backyard, in a good school district.
But then Costanzo began hearing stories about how competitive the housing market is and worried about bidding against all-cash buyers. She was reassured when her broker told her that Better.com could buy the home for her, paying the full price upfront, through an iLending program started this summer called Better Cash Offer.
Most homeowners carrying a mortgage don’t have the liquidity to buy a home in cash before selling their current home, and that made this year’s market — in which 25% of offers were all cash, at the peak of the market — especially cutthroat.
“What’s actually happening is Better Real Estate makes the offer on their behalf,” said Paul Tyger, a purchase manager at Better.com. “It’s a particularly acute need right now. The mortgage itself hasn’t evolved since, like, the 1900s. But we think that in the future, every transaction will be all cash.”
Better.com bought the home, and within three weeks, Costanzo had bought it back, with $17,000 down. Without an iLender, she said, she would have had to settle for a rental, and the options available to her were few. “I looked at so many apartments, and they were so depressing,” she said. “I was able to do everything at night, while at home.”
Better.com makes this service available only to customers who use both its in-house brokerage and mortgage services, and it doesn’t charge fees. The company likely doesn’t need to, said Clelia Warburg Peters, former president of Warburg Realty, who is now what is known as a proptech investor. The risk margins are low, she said, because the customer is already approved for a mortgage, and the benefits — increasing the company’s customer base — offer a payoff.
Multiple other fintech (for financial technology) lenders, including Accept.inc and UpEquity, also offer services that make cash offers on a buyer’s behalf. There are no added fees for sellers or buyers; iLenders front the cash up to a preapproved amount and make money off mortgage and title costs.
Buying before you sell
Just to keep things interesting, there’s a third category to be aware of: companies such as Knock, Orchard, Homeward and Flyhomes, which bridge the gap between buying and lending.
These companies are neither iBuyers nor iLenders, but a hybrid. They use the value of buyers’ current homes to make cash offers on new homes, so buyers can avoid making bids contingent on the sale of their current homes. As anyone who has made an offer with such a contingency knows, those offers are more likely to be rejected — especially when there are other offers and the market is hot.
But some of these services charge additional fees, just like conventional brokerages.
“Folks should take a really careful eye to look at the fees,” said Greg Schwartz, a former Zillow executive who is now the CEO of Tomo, a digital lender that he co-founded this past summer. “Some of them are offensive and unnecessary. And that’s your savings.”
Why iBuying isn’t for everyone
Conventional brokerages are watching iBuyers closely, and some are responding by rolling out their own versions of the service. Keller Williams, for example, has Keller Offers. And there are websites such as QuickBuy that allow brokers to offer clients services that mimic those of iBuying.
But while iBuying has flourished in big cities, especially across the Sun Belt, it has yet to gain a foothold in smaller towns, particularly among more affluent buyers.
Glen Pizzolorusso, a broker with Compass in southern Connecticut, said that his clients — most of whom are buying and selling in the $700,000 to $1 million range — remain uninterested.
“Let’s not beat around the bush,” he said. “Companies that advertise these programs are for-profit companies and therefore need to make a profit. If they buy your house at current market value, there is no margin for profit. If you need cash quick, then by all means, give your house away to one of these iBuying companies.”
Even as technology continues to disrupt the status quo, it’s unlikely that multimillion-dollar homes will become regular iBuyer fixtures anytime soon, investors say.
“It’s important to remember that brokerages are not a behemoth,” said Peters, the proptech investor, who noted that marketing a luxury property requires an entirely different skill set from that needed to sell a middle-class home — one that is much more case-specific.
So “luxury brokerages should not be worried about iBuying,” she said, as “iBuying is functionally irrelevant for any home over a million dollars.”
But because iBuying is still young — Opendoor, the first iBuyer, didn’t come onto the scene until 2014 — there is no crystal ball.
“It does make the process of selling a home much easier for many homeowners,” said Deeksha Gupta, an assistant professor of finance at the Tepper School of Business at Carnegie Mellon University in Pittsburgh. “And iBuyers serve a real need in the housing market, so I don’t see them going away. But it’s really hard to predict where the market is going.”