Wednesday, February 21, 2024 | The Latest Buzz for the Appraisal Industry

An Uncertain Future for iBuying Operations

Since 2020, iBuying has soared in popularity as many sellers have taken advantage since the start of the pandemic. Many homeowners have benefitted from the surge of people departing dense cities in search of lower living costs. Sellers used iBuying to bypass the lengthy aspects of the traditional homebuying process to receive cash payments in an expedited manner.

However, some iBuying companies have seen their business growth falter or pause as the course of the pandemic — and the housing market — changed. What should appraisers know about the state of the iBuying market? Here’s an overview of current trends.

The Upsurge of iBuying

A strong housing market is the key driver of iBuying’s success. Home prices skyrocketed between mid-2020 and mid-2021 by 18.5%, according to the Federal Housing Finance Agency House Price Index. More recently, iBuying companies have seen a resurgence in business and operate as some of the fastest-growing markets in today’s economy.

A report by Zavvie shows that iBuyers bought over 71,000 homes in 2021, making up 1.3% of the national market share. In comparison to 2020, only 14,000 homes were purchased, which shows a five-fold increase.

Essentially, iBuying offers homeowners the opportunity to sell their homes directly to companies using algorithms to estimate the home’s value. What’s the upside to this tradeoff? Faster transactions are conducted in the process. Rather than spending weeks finalizing the sale, the process takes days – and there are fewer hurdles, like multiple showings and escrow periods.

Major iBuyer companies, like Opendoor and Offerpad, have offered these services widely – allowing people to sell their homes through their websites. However, for those who’ve endured the traditional homebuying process, a seamless homebuying transaction may seem too good to be true.

The second-largest iBuying operation was an arm of Zillow – which has since shuttered its operations over claims of labor and supply chain issues. Zillow has now decided to exit the iBuying business entirely. Ultimately, this raises questions about whether the technology these companies utilize is robust enough to match the ever-evolving housing market.

Why iBuying’s Future is Unclear

The exact cause for Zillow’s shutdown of its iBuying branch was its inability to predict local housing prices accurately while purchasing and turning over inventory at scale. The company was experiencing a profit loss in most cases, buying houses at higher prices than it could sell them for. With a $304 million inventory gone to waste, Zillow found it difficult to estimate home prices during the quick-changing pace of the housing market during the pandemic.

Although Zillow has a plethora of data on properties and homebuyers, the data for local neighborhoods is more difficult to obtain and study with accuracy. Therefore, they were unable to evaluate the quality of individual homes successfully.

Will Zillow’s departure impact the housing market?

Currently, iBuyers only make up a small share of all home sales transactions – accounting for 1.6% of the market share in the U.S. Opendoor has been the nation’s largest iBuyer operation for the past few years. Meanwhile, Offerpad is now the second-largest iBuyer alongside other smaller players, such as Redfin, Knock, Perch, and others.

What’s to Come Next for iBuying?

Even as the tech-driven instant-offers remain a small slice of the real estate market, the iBuying model seems like it’s here to stay. Zillow may have left the market, but this has only made room for companies like Opendoor to keep building their services. What’s more, these competitors have plans to ramp up their iBuying services.

The issue some clients run into with the iBuying model is that sellers are barely making a profit or still losing money while home prices are increasing. Simultaneously, iBuyers are hoping to sell these homes quickly – but generating data to accomplish profits at scale is still a tough proposition even for advanced algorithms.

However, there’s a definite market need for iBuyers since people need to sell because they face financial distress or immediate moves. There are homeowners in need of the convenience of a quick sale at current market value, and they’re not necessarily focused on obtaining the largest margin for profit.

It’s also unclear to financial experts exactly which companies are doing better than others, since iBuyers account for their margins differently — after all, major tech companies like Zillow have different revenue streams than the smaller, dedicated buyers. Overall, real estate experts aren’t entirely sure what the future holds for these businesses, but it’s safe to say the market has a place for them.

iBuying Doesn’t Work for Everyone

iBuying is still a very new business model. Homeowners placing priority on immediacy will continue to benefit from having players in the market who will take a property off their hands. While the market share iBuying can capture is debated, strong companies are likely to find success in many regions.

However, iBuying isn’t for everyone. Not all homes would qualify for sale, even if you lived in an area where iBuyers offer their services. And many homeowners without time or financial pressures are more hesitant about the risk of vetting a newer company and service — they’ll be tasked with looking for hidden fees, transparency concerns and other critical questions about tech startups.

The benefit of the traditional home buying and selling model, including the role of a trusted appraiser,  is good service and accurate and appropriate pricing. Appraisals assure the buyer and seller are getting their money’s worth and help them mitigate risk.

Of course, most reputable iBuyers will send out appraisers in person to confirm a deal, too, but desktop appraisals are also a growing trend to accompany a faster, more digital process.

Weighing Traditional Sales and iBuying

Even though there are certain advantages to iBuying, the offer of getting a “fair market value” based on computer algorithms turns out to be a questionable proposition for homeowners not in a resource crunch. Many real estate experts see iBuying as an interesting tech service that fills a need, but may not grow as exponentially as it did in the uncertainty of the pandemic.

Either way, sellers should decide what’s worth more to them. If the timing for prepping the house and scheduling showings doesn’t fit within the schedule, then iBuying might be appropriate. However, the concern for maximizing the profit is where a seller’s agent and home appraiser should come into the picture.

Tom Armstrong, MAI

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