Sunday, July 28, 2019

THE RISE OF iBUYERS

How does it feel to be living through the age of disruption in real estate?  For decades, the real estate template was mostly untouched.  In the past decade, change is taking place all over.  

Welcome to the beginning of the iBuyer era, which is simply a generic term for huge corporations stepping in and buying homes directly from individual sellers for cash.

For many years, “fixers” were the domain of HomeVestors, We Buy Ugly Houses and traditional mom and pop real estate investors who scoured the landscape looking for old people (usually) willing to sell their dated, dirty and smoky homes for cheap.

Throw some paint on the walls, recarpet, drop in some new countertops… and bam, an instant $60k - $100k of profit was just waiting to be had!

Over the past few years, Wall Street has become very fond of the housing market, and new startups like Offer Pad, Open Door and Knock have jumped directly into the space of making cash offers to longtime owners who don’t want the headaches of fixing up and marketing a home for sale and those willing to leave (lots of) cash on the table in exchange for convenience.  

With their success, others have come rushing in, with Zillow, Redfin, Keller Williams and (soon) even RE/MAX quickly putting platforms in place to play the iBuyer game.

It’s important to understand how these models work, however, as now that Zillow (in particular) is going mainstream with their iBuyer product (open their app to check the Zestimate for your home and the first thing you see is an invitation to sell your home to Zillow directly), consumers are suddenly being inundated with iBuyer awareness.

I recently showed a home in Boulder that was being offered for sale through Zillow directly.  It was listed for $745,000 and had new (unimpressive) apartment-grade carpet and fresh stock eggshell paint.  No staging, and a yard that was more dead than alive. 

Public records showed they had “purchased” the home for $725,000 just a few weeks earlier, which didn’t seem right.  So I did what the old reporter in me always does… I starting digging deeper.

In this case, the path to the truth was to reach out to Zillow directly and ask them about buying my own home.  I clicked on a button and within about two minutes the phone rang – it was a polite, courteous, well-trained Zillow sales associate who asked me a few questions and then asked me to upload pictures of the kitchen, baths, Master bedroom and front/back yard spaces of my home.  

Within 48 hours, she said, someone would reach out to me with a “preliminary” offer for my home. 

I took a little time clean up, took about eight different photos, and emailed them to my concierge.  She called me to confirm receipt (excellent customer service, by the way) and told me I would have that preliminary offer within two days.

I noticed repeatedly that she kept saying the word “preliminary”, so I asked for an explanation.  In short, she said, Zillow will evaluate your home based on the pictures, consider the health of your market area and then factor in their “convenience fee”, which is the bomb sitting in your living room about to blow up.  

The convenience fee is the amount Zillow is going to charge for the convenience of selling your home directly to them, without Realtors, marketing, staging or showings.  In my case, that convenience fee was a 12% markdown from their original valuation (which had nothing to with the Zestimate, by the way).

At this point, my concierge told me that the next step would be to send out their home inspection service.  If they found additional deficiencies (old furnace, leaky water heater, a bad roof or other major mechanical failures) she said my offer would be adjusted “accordingly”.

By now, I pretty much had the information I needed to understand their product and so I opted out of additional follow up. “My job’s looking a little bit more secure,” I said.  “I think I’m going to stay put.”

The takeaway here is that working with Zillow, Offer Pad, Open Door or any of the other iBuyer options in our market today will likely result in a chop of somewhere between 12% - 15% of your home’s value. That’s pretty severe. 

But the severity of that markdown won’t be found in public records.  It will be found on the sellers’ settlement statement.  To the case of the home in Boulder, Zillow offered $725,000 for the home, which is not far removed at all from the $745,000 they re-listed it for in the MLS.

Looks pretty enticing, eh?

But in reality the seller paid a convenience fee that may have been $75,000 - $100,000, and that’s something that doesn’t show up in public records. 

I would be very careful about getting too cozy with any home offered through an iBuyer program, because with the extraordinarily strong market we’ve had in Denver for the past seven years, why would anybody sell at that kind of discount?  Unless there were some very serious and negative issues going on, whether we’re talking structural problems, mold issues, or someone getting shot in the living room during a drug deal gone bad. 

All of these iBuyers have a few things in common.  They are well-funded, they train their sales and service reps at a high level, and they are going to raid your equity. 

Is there a market for this product?  Yes, absolutely.  If you’re 82 years old, widowed, a smoker and overwhelmed by the thought of renovating 50 years of neglect and enduring weeks of showings to get your home sold… then this might be your ticket.

But those instances are going to be rare and, more often than not, a last resort. 

I’ve always said that when you buy a home, you also buy history.  And if I’m paying a retail price for a home that’s been treated like garbage, there had better be a compelling reason (and commensurate discount) to do so.

Paying retail for a product that somebody didn't want - especially when that former owner knows more about that house than anyone else - is asking for trouble, in my opinion.  

And with 40% more homes on the market in Denver today than just one year ago, there certainly are plenty more choices.  

It's been said that, at a poker table, if you can't figure out who the sucker is within two hands, it's probably you.  Big corporations are not looking to sell these homes to shrewd, savvy buyers.  If you sit down at the table with an iBuyer company and can't quickly figure out who's being duped, you might want to take a look in the mirror.