In recent years, companies like Opendoor and Offerpad have flocked the streets of many American cities with their inviting signs, allowing interested buyers almost instant access.
These companies are what people in the real estate industry refer to as an iBuyer. Their promise is maximum convenience, a fair offer, and as much flexibility as their customers need.
This article will take an in-depth look into what an iBuyer is, how transacting with an iBuyer works, how these businesses make money, and more.
What Is An iBuyer?
An iBuyer (short for Instant Buyer) is a real estate company that uses technology to make almost immediate cash offers for homes.
In a traditional home sale, property owners would often transact with real estate agents who manage the process on the owner’s behalf. Once the sales process is complete, the agent will receive a fee for facilitating the transaction (paid by the seller).
Dealing with an iBuyer, on the other end, does often not entail any human involvement whatsoever. Instead, the cash offers are provided 24 to 48 hours after entering the required information about the home on sale.
Since iBuyers operate online, they can utilize their platform to list the homes they buy on their website and app (if available). With thousands (and sometimes millions) of monthly visitors, this often greatly increases the likelihood and speed with which the iBuyer can make a sale.
To maximize profits, iBuyers tend to invest in properties that have a large pool of comparable data points. Common property characteristics are:
- Single-family homes in suburban areas
- Built in the 1960s or later
- Valued between $125,000 and $500,000
- No major damages
Consequently, an iBuyer would stay away from investing in distressed as well as luxury properties. Furthermore, traditionally expensive markets like New York or San Francisco, are often neglected as well.
Compared to traditional home flippers, iBuyers tend to focus on properties that only require a minimal effort of renovation. This approach minimizes unforeseen additional costs and reduces the amount of work and coordination required (while, again, increasing the speed at which the home can be sold).
The operational speed may furthermore be beneficial to the seller him-/herself. In some instances, property owners may simply be required to sell off their homes before a certain deadline – the iBuyer may provide the necessary convenience and speed to achieve just that.
How Does The iBuying Process Work?
For home sellers, the iBuying process is fairly straightforward. The first step is to visit the website of the iBuyer they prefer to transact with.
Next, they will have to enter information about the property they intend to sell. Common data points include the size and age of the home, location, as well as the extras (e.g. pool or kitchen) it comes with.
In some instances, iBuyers require pictures and videos of the property to validate the information entered.
After all the information is provided, iBuyers utilize a set of algorithms to calculate what they believe is an efficient offer.
Apart from the data provided by property owners, iBuyers also take into account information from previous sales made on their platform as well as data from public databases.
Furthermore, iBuyers do not invest in distressed or luxury properties. This is because these types of properties are often harder to value. Therefore, iBuyers often focus on single-family homes since there is a mountain of data points available to evaluate them.
Then, after normally waiting between 24 to 48 hours, sellers will receive a non-negotiable offer on their property. In a few instances, the offer may be adjusted after an in-person evaluation by an employee or partnering service.
Once sellers accept the offer, they have the flexibility to choose their move-out date. Some iBuyers even offer relocation services in case the property owner intends to move into a new home.
How Do iBuyers Make Money?
While iBuying companies take advantage of technology, the way they make money isn’t necessarily much different compared to traditional real estate firms.
In that sense, the technology stack only acts as an accelerant to speed up the buying and sales process, which (in theory) leads to greater efficiencies and thus lower operating costs.
Let’s take a closer look at some of the revenue streams that an iBuyer utilizes.
One commonality between an iBuyer and a real estate agent is that both parties charge a sales commission to the property owner.
According to NREP, iBuyers are actually able to charge higher fees compared to traditional a realtor. The average real estate agent charges a commission of 5 percent while iBuyers tend to command anywhere between 7 to 7.5 percent, on average.
The reason being is that iBuyers often promise higher convenience, such as flexible move-out dates or relocation services.
Apart from seller fees, iBuyers generate a portion of their revenue from the profits they make when flipping homes.
According to a study conducted by Collateral Analytics, selling to an iBuyer yields a lower selling price of anywhere between 13 percent to 15 percent. MarketWatch supports these findings, stating that sellers transacting with iBuyers can expect 11 percent lower earnings compared to traditional agents.
But what might be a poor option for the seller only means greater profit margins for the iBuyer. To maximize velocity, iBuyers often only hold homes for a maximum period of 90 days. Depending on the cash in the bank, they can potentially afford to hold properties for an extended amount of time.
Another contributing factor to the increased profit margins is the technology-enabled sales process. Users can download the company’s mobile app and access the house for inspection at any time they like – simply by unlocking it with a code provided in the app.
In some instances, interested buyers can have a real estate agent accompany the inspection via a video conference. This allows the iBuyer to minimize expenses (since the agent does not need to drive up to the property or even be present at all), which further contributes to increased profit margins.
As previously mentioned, some iBuyers offer ancillary services to speed up the sales process. These may include:
- Moving services
… and many more. The iBuyer consequently gets compensated in exchange for these services. Offerpad, for instance, offers a free moving service within a 50-mile radius while charging sellers for anything above.
Some iBuyers, like San Francisco-based Opendoor, are now able to issue home loans to any interested buyer that qualifies.
Just like any traditional mortgage company, they can offer fixed-rate mortgages with terms ranging from 5 to years. Furthermore, borrowers have the ability to refinance their loans.
To lure in customers, the mortgages are often issued without any additional processing fees. Instead, borrowers only have to pay the interest that was agreed upon. Consequently, the iBuyer makes money via the interest that it charges on a monthly basis.
In some instances, iBuyers might engage in a process called whole loan sales. The lender would thereby bundle its loans into a package that is then purchased by an institutional buyer, such as insurances or pension funds.
These institutional buyers pay an upfront premium to the iBuyer in exchange for the future cash flow that is originated via these loans.
Some iBuyers do not possess the necessary capital to run their own services or provide homebuyers and -sellers with mortgages.
Instead, they refer their users to other companies that can provide these services. In exchange for directing users to another company (and thus helping them to get more business), iBuyers are compensated with a referral fee.
Compensation may be based on a per-lead or -sale basis, depending on the type of agreement that was made between the iBuyer and service.
Pros And Cons Of The iBuyer Model
Advantages Of The iBuyer Model
Higher velocity. In theory, although not yet materialized, an iBuyer should have greater profit margins due to lower acquisition and operational cost as well as the ability to sell the homes on their platform (i.e. greater reach).
Increased valuations. The advantage of being a tech-enabled company is that it allows founders to oftentimes command higher valuations for their businesses. Zillow currently trades at a 5x revenue multiple while Redfin and Opendoor are valued 4x higher than their annual revenues.
The primary advantage of higher valuations is that it allows shareholders to give up less during an equity round or take on lower risk during a debt financing round. And the more capital is available to them, the easier it becomes to scale the business.
Disadvantages Of The iBuyer Model
Capital intensive. The iBuyer model is, first and foremost, a very expensive business to operate. Zillow, which launched its iBuying division (called Offers) in 2019, spent $1.3 on acquiring properties for that same year.
Apart from the cost of acquiring homes, iBuyers often have to invest heavily in human capital, both on the real estate as well as the engineering side.
Competitive. iBuyers do not only compete against each other but have to split their leads between other brokerages and independent real estate agents. In the end, selling a home is (and always will be) a people’s business and some sellers would simply prefer having a human fully focused on their needs.
Market variety. While an iBuyer might use algorithms to try and value a property, it has to rely on human judgment to a certain extent. That’s because each market (or even city district) might have its own set of characteristics that positively or negatively contribute to the asking price.
Limited Addressable Market. As previously stated, the premise of an iBuyer is to focus on properties with an abundance of data, namely single-family homes between $100,000 to $500,000 in (predominantly) mid-market locations.
This means luxury or distressed properties are oftentimes out of reach. According to Redfin, the average American luxury property sold for $825,000. Even with a conservative agent commission of 5 percent, this would yield revenues of $41,250. Add on the thousands of luxury properties sold each year, and you got yourself a market that’s worth billions – and not being accessed by iBuyers.
Biggest iBuyer Companies In The United States
There is a breadth of startups as well as publicly listed companies providing iBuying services. Let’s look at the biggest players in this segment.
Opendoor was founded in 2014 by Eric Wu (CEO), Ian Wong, Justin Ross, and Keith Rabois. The firm has raised over $1.5 billion while being valued at $4.8 billion. It’s set to go public with SPAC somewhere in 2020.
Apart from buying up homes, sellers can furthermore advertise their properties on Opendoor’s website as well as apply for a mortgage (issued by Opendoor Home Loans LLC).
Opendoor makes money by charging a fee sales fee (between 6 to 14 percent), the profit of selling homes on its platform, as well as interest on mortgages the company issues.
Zillow (Instant Offers)
Zillow, which was founded in 2005, initially started out as a real estate database, which allowed users to assess how much a given home is worth.
For the longest time, Zillow remained an online listing platform, but eventually decided to pursue the iBuying model in 2019.
Branded as Zillow Offers, its iBuyer segment has generated $1.37 billion in annual revenue for 2019. That same year, Zillow was responsible for 4,313 home sales, which had an average sales price of $316,000.
Apart from being an iBuyer, Zillow makes money via software tools used by real estate agents as well as referral fees from loans it facilitates.
Founded in 2015 and headquartered in Phoenix, Arizona, Offerpad is the second-largest pure-play iBuyer (trailing right behind after Opendoor) in the United States. The company has raised more than $975 million in equity and debt capital to date.
Offerpad does not charge property owners will any sales fees. Instead, it applies a service fee, which ranges anywhere from 6 to 10 percent. The service fee is used to cover the cost inquired during the purchasing process, such as the real estate agent’s salary. Lastly, it makes money whenever it sells a property for more than it was purchased for.
Knock, founded in 2015 by Jamie Glenn, Karan Sakhuja, and Sean Black, is most notably known for allowing homeowners to swap their homes.
Knock will purchase the property on the owner’s behalf while representing them in the sale of their current home, which is listed on the open market. Once their current home is sold, Knock will turn over the new home to the owner alongside the mortgage.
The firm makes money by charging a 1.25 percent convenience fee as well as the profit it makes when selling off purchased homes.
Redfin, founded in 2002, is an online real estate brokerage based out of Seattle. The company, to this date, uses technology to help its real estate agents in their sales process.
Redfin launched its iBuying division in 2018 under the tag RedfinNow. The company charges service fees, which can range anywhere between 6 to 12 percent. On top of that, Redfin charges another 1 percent for estimated closing cost as well as 0 to 3 percent for associated repairs.
Apart from flipping homes, Redfin makes money via interest paid on the loans it issues (through Redfin Mortgage), listing fees on its real estate marketplace, and a concierge service for homes priced above $500,000.
Redfin has raised more than $319.6 million during its startup life. Another $138 million were added to its balance sheet when the company went public in July 2017.