How iBuyers Are (and Aren’t) Changing Real Estate
In recent years, iBuying has emerged in markets across the country. But what exactly is an iBuyer?
The onset of COVID-19 changed the real estate landscape in many ways. Now, more than ever, people have become accustomed to virtual tours and viewing open houses online. With the internet reshaping real estate, convenience has become paramount. Companies have also transformed to meet the needs of their customers. One such reaction is the iBuyer.
The term iBuyer stands for internet buyer. In contrast to traditional home buying methods, iBuyers transact entirely online and move quickly. Sellers choosing this route avoid going through a real estate agent and dealing with open houses before receiving offers.
Investors across the country have taken notice. Some local investors view iBuyers as a threat. Others are looking to begin investing online themselves. In any case, it’s important to understand. This article gives insight into iBuying as well as practical tips to stay competitive.
Places where iBuyers operate
According to Zillow, iBuyers reached 1 percent of all U.S. home purchases for the first time recently, as homeowners used an iBuying service to sell more than 15,000 homes in Q2 of 2021. Despite being a small percentage of the overall market, iBuyers concentrate in areas such as Atlanta, Phoenix, and Dallas. These were the hottest iBuyer markets in Q2.
iBuyers target emerging markets in the Sun Belt and west that are seeing mass migration. These markets also offer newer housing stock, similar in size and age, and relatively affordable to potential homeowners. Those factors allow them to very precisely gauge the home’s resale price. They may make light repairs and updates with the promise of quickly reselling the property, according to The New York Times.
Impact on local real estate
Any time a new real estate technology and process enters a market, it will have an impact. iBuyers appeal to sellers who are looking for a convenient, quick, no hassle sale. As iBuying becomes more common, sellers may look for quicker, more painless real estate transactions — whether traditional or otherwise.
Some have asked if iBuyers are driving the price of real estate upwards. Experts think the current rise in housing prices has more to do with a supply and demand issue. This is especially true in certain hot markets, according to an analysis by NPR’s Marketplace.
There’s definitely a shortage of housing. The National Association of Realtors estimated in June 2021 that there’s a shortage of 6.8 million housing units. Without enough housing to go around, and an increasing amount of people looking to buy homes, the market dictates that prices will rise.
Ways that individual investors can stay ahead of iBuyers
The good news for real estate investors is that there’s plenty of deals to go around. iBuyers still purchase a relatively small percentage of the overall housing stock in the U.S. Plus, those purchases focus on a very specific type of house and real estate market.
Here are a few ways real estate investors can compete with iBuyers:
- Invest in geographic areas that iBuyers traditionally shy away from.
- Build a brand in your community that people recognize.
- Consider housing stock (older, more run down) that doesn’t appeal to iBuyers.
- Purchase from iBuyers and use those properties for rental income.
- Capitalize on hyper local knowledge to make smart decisions on where and what to buy.
- Leverage your contacts to get tips on available real estate and the changing local real estate market. Anyone from property managers to contractors to real estate agents offer additional boots on the ground.
- Use existing rolodex of lead generators to find homes missed or overlooked by iBuyers.
- Deliver marketing to established list of homeowners.
iBuyers are likely a part of the real estate landscape, at least for now. Local real estate investors can capitalize on their knowledge of real estate and certain markets to stay ahead of the competition.
Is iBuying sustainable?
The reason for iBuying’s popularity is simple: it’s fast and convenient. However, as we learned from Zillow’s iBuying experiment, it might not be sustainable in the long term.
Here’s how it works
- Typically, an iBuyer uses an automated valuation model (AVM) to price a home and make an offer. By taking the guesswork out of the home selling process, it appeals to homeowners. It also speeds up the transaction considerably.
- At this point an offer is made, which a seller can either accept or reject. It’s important to note that there is only one offer from one iBuyer.
- The iBuyer charges fees to the seller, which is a key component of the business model. Even so, many people are incentivized to transact. iBuyers work quickly and pay cash, eliminating the need for appraisal or time spent waiting for a mortgage approval.
- Once an iBuyer purchases a property, it usually resells it to an individual for a profit. Since they typically resell after some light maintenance and repairs, they are primarily reliant on high appreciation in the market. This is in contrast to forcing appreciation through renovations as flippers do.
What does the future hold for iBuying?
The future is yet to be determined, but it appears as though this model is unsustainable in its current form. Sundae CEO, Josh Stech is a seasoned flipper and has worked in the real estate space for 12 years. When reflecting on this, he responded:
“Because iBuying focuses on homes that don’t require much renovation, they are banking on instant and market appreciation. Their version of instant appreciation is charging you a fee for their service. Historically that fee was as much as 12%, and is now closer to 7-9%. At some level of fee, sellers will no longer see the value.”
Sundae can help
The more lead generators you have in your portfolio as a real estate investor, the better positioned you’ll be to make money. Sundae’s online marketplace allows you access to exclusive, vetted properties you can’t find anywhere else. It also serves as an additional tool to marketing campaigns, cold calls, and direct mail that you’re already doing.