In strong home seller’s market, iBuyers find fewer takers

1

At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Here’s an explanation for

A year ago, a new breed of homebuyer appeared poised to reshape the way homeowners in Sun Belt suburbs sold their properties. Then came the coronavirus pandemic and the hottest seller’s market in years, and homeowners returned to the old way of selling.

iBuyers,” short for “instant buyers,” had been making a splash in some areas. During one three-month period in 2019, iBuyers snapped up nearly 7 percent of all homes sold in the Raleigh-Durham region of North Carolina, and more than 5 percent of all transactions in Phoenix.

However, the companies stopped buying in the spring as COVID-19 injected new uncertainty into the housing market. Now, the four major iBuyers — Opendoor, Offerpad, Zillow Offers and Redfin Now — are back in business, but consumers no longer seem so keen, especially in a market where homes are selling fast and the offers roll in as soon as the for-sale sign hits the front yard.

The numbers tell the story: In the third quarter of 2019, the four big iBuyers snapped up 0.9 percent of all homes sold in the United States, according to research by Redfin. By the third quarter of 2020, that share had plunged to just 0.2 percent.

The sharp decline in activity raises questions about the iBuyers’ business model. “The value proposition doesn’t work in a seller’s market,” says Rick Sharga, executive vice president of RealtyTrac, a real estate information company.

iBuyers’ pitch focuses on a quick and easy sale. The companies promise to close on the seller’s schedule, letting sellers unlock their home equity and focus on buying their next property.

But real estate experts say the iBuyers’ appeal fades in a hot seller’s market like today’s. In much of the U.S., inventories of homes for sale are at historic lows and buyer demand is high — meaning iBuyers are competing with traditional buyers.

Steep fees for convenience

The iBuyers position themselves as a fast way to sell. Homeowners avoid the hassle of painting, cleaning and clearing out for every showing. While the companies typically pay market price for homes, iBuyers also collect fees ranging from 6 percent to 12 percent of the sale price. The average commission for a traditional real estate sale is 5 percent.

In the slower-paced housing market of 2019, more sellers were willing to accept less for the certainty of a quick sale. Now, though, many seem to prefer the cheaper cost of a traditional sale.

“Why sell to an iBuyer when you can list on the open market, get multiple offers, not feel like you’re leaving money on the table, and sell in a matter of days?” asks Mike DelPrete, a University of Colorado professor who studies iBuyers. “The customer proposition for an iBuyer is super low at the moment. Consumers can make more money and sell just as fast on the open market.”

Origin of iBuyers

As the Internet reshaped many aspects of American commerce, the process of selling a home changed little. The first iBuyer, Opendoor, aimed to change that.

Opendoor launched in 2014 as a venture-backed startup and touted itself as “a modern way to sell.” Homeowners no longer had to hire a listing agent (and pay their commission), spruce up their homes, host open houses and negotiate with buyers. They simply could accept Opendoor’s offer.

The new business model was successful enough that others jumped in, including Offerpad, real estate technology firm Zillow and real estate brokerage Redfin.

iBuyers gained the most traction in such Sun Belt cities as Atlanta, Charlotte and Phoenix. The upstarts focus on a narrow slice of the market, typically recently built houses and condos priced at $100,000 to $500,000.

Sticking to cookie-cutter properties means the iBuyers have a better chance at accurately valuing homes. And by buying homes that need only cosmetic repairs, iBuyers boost the odds of reselling within 90 days.

The iBuyers were on their way to proving that Americans did indeed want another way to sell when the coronavirus pandemic hit. All of the major iBuyers stopped buying homes in the spring.

They resumed purchasing in 2020, but the pace has remained far below 2019 levels, even in a housing boom characterized by record home prices.

‘A buyer in a seller’s market’

Before the coronavirus crisis, skeptics raised questions about what would happen to iBuyers should home prices fall. The companies aim to flip properties in three months.

After the COVID-19 pandemic, a different challenge arose: What happens if a hot market makes selling a suburban home fast and easy?

“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,” acknowledges Brian Bair, chief executive of Offerpad.

But, Bair adds, Offerpad also is a seller in a seller’s market. The iBuyers say their approach still holds appeal — particularly for sellers who are juggling transactions and need to buy another home in an intensely competitive market.

“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. “There are significantly more steps involved, from identifying an agent, determining the right price, completing renovations and vacating the home for open houses.”

As the iBuyers ramp up their buying again, they’re responding to shifts in the market. For instance, the companies had targeted three-bedroom homes as the most marketable type of property. Now, though, there’s demand for bigger homes.

“The value of a four-bedroom home over a three-bedroom home is more today than it was six or eight months ago,” says Offerpad’s Bair.

What home sellers can do

If you’re selling, it makes sense to get a bid from an iBuyer. The offers are nonbinding.

In some cases, the iBuyers make generous offers — perhaps too generous. In one example, Zillow Offers in September paid $407,000 for a three-bedroom house in South Florida.

Zillow Offers put the house on the market a few weeks later for $423,900.

After three price cuts, the house remains on the market for $399,900. In this case, Zillow Offers is willing to accept less than it paid four months ago.

The iBuyers aren’t an option for all sellers. The companies haven’t been active in such cities as New York, Chicago and Boston, and iBuyers tend to avoid older homes, properties that need extensive renovations and unique homes that are difficult to value.

Learn more: