Is iBuying here to stay? Over the past two years, that’s been a popular question as industry pundits debated the future of large-scale algorithmic home-flipping in real estate during a time where tech and innovation were on the rise.
Real estate experts and leaders are convinced that there is a longstanding place for iBuying in the industry, despite skepticism around the sector, especially following the demise of Zillow Offers.
However, a new question that has yet to be answered is: to what extent?
“I think it’s going to be a tough business to sustain long term, but I do believe there will be players,” Jeb Griffin, director of emerging technologies for the National Association of REALTORS®. “We’re going to probably weed out some of these iBuyers, which you’ve already seen.”
Mass Market Problem, Niche Solution
Since Zillow announced in November that it was bowing out of iBuying, its competitors—Opendoor, Offerpad and Redfin—have maintained that they aren’t letting up on the sector.
Despite the companies shrugging off speculation regarding the business model’s sustainability, there are still real estate experts delving into the potential role that iBuyers will play in real estate in the long run.
Sean Black, co-founder and CEO of Knock, a non-traditional lender, touting itself as a home-swap service, says that iBuying has served as a niche sector designed to address challenges with the transaction process in real estate.
“I think there is a tectonic shift in the way that we buy and sell homes, and it’s way overdue, Black says, adding that iBuying was the first attempt at streamlining buying and selling houses.
“If you think about what you want as a consumer in this transaction,” Black says. “You want certainty, convenience and cost savings, and you want it all on your phone.”
Black notes that the collapse of Zillow Offers in late 2021 proved that iBuying isn’t the best market solution for what he called a “mass-market problem.”
“It’s a solution for some segment of the population but a very small one,” Black adds. “It’s going to be a good option for people who are not that price sensitive and don’t care about taking a discount for the luxury of walking away with the cash in hand.
Considering home prices are still rising along with mortgage rates, that leaves a waning pool of sellers willing to let go of their homes for quick and discounted prices, according to Black.
It also presents a challenge regarding how iBuyers analyze and calculate home values, according to Sam Chandon, dean of the Schack Institute of Real Estate at New York University.
“Some of the market participants that have stepped back have access to the largest data sets and the strongest analytical teams that we see in our industry,” Chandon says.
Chandon notes that a significant flaw in large-scale algorithmic house flipping comes down to small and sometimes unobserved details that can alter price forecasting.
“The systems work reasonably well when determining the current value of a potential acquisition,” Chandon says. “What the systems are not as effective at doing is forecasting forward where values will be in six or 12 months.”
Minor forecast errors can lead to significant changes in a transaction from the time the cash offer is made to when a platform flips and resells the home, Chandon says.
While iBuyers have seen steady growth in the past two years, Easy Knock CEO and co-founder, Jarred Kessler, says the business model and the companies still have a lot to prove—mainly that they can weather a market cool or downturn.
“That I think will be problematic for iBuyers because they are just in a churn business, and the only window that we’ve had into that was during March to May of 2020, and Opendoor had to fire 30% of their staff,” Kessler says.
As the market shifts in the future, Kessler says that most iBuyers will need to diversify their product offering vertically or horizontally to survive.
Opportunity in Market Shift
Real estate professionals have had mixed feelings around iBuyers in recent years, with many viewing the tech-focused companies as a threat to business for real estate agents.
While Wendy Forsythe, chief brand officer at Fathom Realty, doesn’t think the sector will fundamentally change how the market works, she says that companies like Opendoor and Offerpad provide a niche service for sellers that will likely survive in future markets.
However, the number that sticks around may be up in the air.
“There are more than 5.5 million transactions done across the country,” Forsythe says. “If they get 1% of those that’s a pretty big number of transactions, so in the large scheme of things, the math it takes for that model to work, that’s what those businesses will figure out.”
Anthony Lamacchia, CEO of Lamacchia Realty, says there is still a market for iBuying on the horizon especially as the frenzied behavior slows down.
“Right now, homes are selling quickly,” he says. “People don’t have a big need to sell directly to someone or an institutional buyer.
Lamacchia Realty is a traditional brokerage that has incorporated instant offers—a foundational component of iBuying—into its business model as an ancillary tool for consumers.
While the housing market is coming down from its feverish activity of the past two years, buyers are still competing for a limited supply of houses.
Lamacchia thinks that iBuying will likely become a more popular option for homeowners when the market slows.
“There is no question that there is a market for it,” Lamacchia says. “The market for it will increase when the market slows down. I see that market increasing.”
Jordan Grice is an associate online editor at RISMedia. Email him your real estate news ideas to email@example.com