In a recent interview with Fortune, Redfin CEO Glenn Kelman spoke about the role that iBuyers have played in driving prices up during the real estate boom and how they are now helping to drive prices down during the correction. Kelman said he sees this strategy play out in real-time as Redfin deals with its portfolio of iBuyer-purchased homes.
"My take is that because builders and iBuyers account for more inventory, that leads to a faster correction," Kelman told the magazine. "We're one of them - we're an iBuyer."
To understand what he's talking about, let's look at what iBuyers are, how they operate, and their role in the current real estate market correction.
What are iBuyers?
iBuyers are companies that use technology to buy and sell homes quickly, and they claim efficiently. The most well-known iBuyer is probably Opendoor, but there are many other players in this space, including Zillow Offers, RedfinNow, Offerpad, and Knock. These companies typically use algorithms to determine an offer price for a home, which they claim is fair, and can close on a sale in as little as seven days.
How do iBuyers operate?
iBuyers generally follow a similar model:
1. A homeowner wants to sell their home quickly and without hassle, so they contact an iBuyer.
2. The iBuyer uses technology (algorithms, data, etc.) to determine an offer price for the home that considers its profit margin, carry costs, and other market factors. The offer price is typically 20-30% below market value.
3. If the homeowner accepts the offer, the iBuyer will send an inspector to assess the home's condition.
4. Once the inspection is complete, the iBuyer will complete the purchase, amend their offer, or withdraw it. If the iBuyer purchases the home, the iBuyer then makes repairs and improvements and then puts the house back on the market at a higher price seeking a profit or a lower price to minimize their loss.
5. The cycle repeats until the iBuyer sells the home, keeps it as a rental property, lists it with a traditional real estate agent for sale, or bails itself out by selling its portfolio to a Venture Capitalist.
What role are iBuyers playing in the current real estate market correction?
As Kelman mentioned in his interview with Fortune, builders and iBuyers account for more inventory than ever before, so they are helping to drive prices down during this market correction. This is because they can quickly buy homes at scale and then turn around and sell them just as quickly.
That model works in a rapidly appreciating market, but in a neutral or buyer's market, that model is a balance sheet nightmare. However, because they have deep pockets, access to capital, and NO EMOTIONAL attachment to the home or the community, they can weather these losses better than smaller investors or traditional homeowners. If they tank the values in one market, they move on to another like a crew of hungry sharks searching for their next meal.
Bottom Line:
iBuyers are having a significant impact on the current state of the housing market. Whether you think this is good or bad depends on your perspective; however, there's no denying that their influence is being felt by everyone involved in real estate - from buyers and sellers to investors and developers.
I think the biggest issue with iBuyers is they tend to prey on uninformed and underrepresented homeowners. After all, if you are willing to take 20-30% less than market value, it would not be hard to do that in the open market and attract far more than one buyer. What remains to be seen is how long this trend will continue and its effect on the market in the long run. I suspect iBuyers will face greater scrutiny from local governments in the future, and it will be interesting to see if any Fair Housing issues emerge from the practice.
