IBuyers: A Threat to Agents?
As defined by Realtor.com, “iBuyers are companies that have the financial means to buy homes in cash. To formulate an offer, iBuyers typically rely on similar properties in your local real estate market, or “comps,” much as a real estate agent would in order to formulate a listing price on a home (or an offer).” After the home has changed hands from the original owner to the “iBuyer”, minor renovation work is typically done to increase the resale price and the property is listed on the MLS (Multiple Listing Service). It is important to note that iBuyers often hire third-party agents to move these houses, however, some may have their own team - a distinction that is usually noted in the description.
iBuying is an umbrella term that refers to a few different types of instant offers: (1) traditional iBuying, (2) trade-in, and (3) bridge financing. To begin, traditional iBuying is usually used for sellers who need to sell their house quickly (cash offer within a day or two), whereas trade-in is for sellers who want to buy and sell at the same time but struggle to manage this (the iBuyer makes a cash offer for a new home, and if accepted, will sell your old house and transfer the new house to your name when your old home sells - while covering costs to prep your prior home for sale).
Lastly, bridge financing is for sellers who are buying and selling at the same time but are focused on maximizing profits (if your offer is accepted, you lease the home from the iBuyer, and list your prior home with a traditional agent. If your home does not sell within a fixed period, the iBuyer will buy it at a price stipulated in your original agreement - thus ending your lease).
While the option you choose ultimately depends on your current situation, the advantages (speed, convenience, flexibility, and control) and disadvantages (lower profit and limited availability) are clear. When you consider the concept of “trading-in”, you might immediately think of cars; iBuying proposes extending this model to homes too. However, there will always be a market for individuals who have the resources to wait out a sale and to “test the market” for the best place.
Now that the basis of the concept has been outlined, one may wonder how and when iBuyers emerged. The short answer is that real estate transactions are known to be complex, lengthy and high-stress - and there was a rising need for a way to reinvent the process. An important distinction to be made is the difference between iBuyers (who buy homes in good condition at fair market value and make minor renovations) and flippers (who buy homes at discount prices and make significant renovations).
iBuyers use an Automated Valuation Model which is defined as “A service that uses mathematical or statistical modeling combined with databases of existing properties and transactions to calculate real estate values (Investopedia). On the other hand, traditional real estate uses Comparative Market Analysis which is defined “As an estimate of a home's value based on recently sold, similar properties in the immediate area. Real estate agents and brokers create CMA reports to help sellers set listing prices for their homes and, less commonly, to help buyers make competitive offers” (Investopedia).
The downfall is that no two homes are exactly the same and the proper adjustments must be made for said features, a task that computers are excellent at as they can peruse hundreds of comps instantly. What is harder to account for, however, are the “inflated” prices that certain markets have due to various factors such as bank payoffs. This is something that must be built into these models through thorough due diligence in order to allow for a more accurate valuation.
Although it is commonly believed that iBuyers will eventually replace all agents, this is actually far from the truth. For most iBuying firms, agents are a crucial part of the business in order to move their properties after renovations.
Whatever your belief may be, there is no sign of ibuying slowing down. There are three main ways that real estate firms drive revenues: (1) Brokerage Model - commissions from helping people buy and sell homes, (2) iBuyer Model - spread from directly buying then selling homes (3) Lead Model - revenue from selling leads to real estate pros.
For example, Redfin’s iBuyer business accounted for 9.3% of its revenue in 2018 and over 30% (30.8% to be exact) in 2019, while its core brokerage business accounted for $432.2 million in revenue (2018) and $523.5 (2019) (Housing Wire).
If nothing else, iBuying is an incredible way to connect with buyers and sellers who are incredibly serious about proceeding with a transaction due to the nature of the process - an offer is given to buy the home outright and a referral to an agent is promised if they do not like the offer.
Written by Jack Argiro
Edited by Jimei Shen, Alex Bates & Alexander Fleiss