Despite some iBuyers attempting to reinvent themselves, succeeding will be difficult unless they make fundamental changes to their model.
One of the trends over the past several years has been iBuying, where companies called iBuyers offer sellers so-called instant offers to buy their homes. In addition to receiving cash quickly, the iBuyer handles all necessary repairs.
Some iBuyers had initial successes. The promise of quick cash, without repair hassles or dealing with real estate agents, and quick closings appealed to sellers. In 2019, Opendoor said they were buying and selling 3,000 homes per month.
iBuyers are overloaded with inventory
Jump forward to late 2021 and early 2022 as the market began to shift, sales slowed, and iBuyers were burdened with inventory they had snapped up but were unable to quickly sell. To be profitable, iBuyers model requires quick, frequent sales. As the market shifted, this became difficult to accomplish.
Zillow shut down its iBuying arm, Zillow Offers, in late 2021. By late 2022, Redfin Now had stopped iBuying as well. Meanwhile, Opendoor has suffered huge losses since the second half of 2022 and is continuing to sell off its inventory in 2023.
Another challenge that iBuyers began to face was working with faulty algorithms that suggested inaccurate sales offers. Due to their inexperience in navigating shifting markets, iBuyers overpaid for houses and didn’t have enough margin to withstand the inevitable losses that occur when a market shifts.
Also, many underestimated the time involved to coordinate repairs with contractors, and how much actual costs can vary from initial estimates. In essence, iBuyers overpromised what they could reasonably deliver. iBuyers could get away with making limited repairs in a strong sellers’ market, but they are realizing more repairs are needed in a down market where the buyer has more leverage.
iBuyers forgot the importance of human interaction
Most importantly, iBuyers neglected a vital aspect of real estate sales: human interaction. Selling and buying homes is an emotional process for many people. They often have questions that require a knowledgeable human who can give them answers and advice, help them interpret the data, and offer points that data doesn’t reveal.
Some iBuyers are trying to adjust their businesses by going in other directions. Zillow partnered with Opendoor to give sellers both a cash offer and their “Zestimate” of what the house would bring selling on the traditional market. Zillow, Redfin, and others are refocusing on rentals.
To survive, iBuyers must make serious changes to their model, including using accurate algorithms. They need to adjust their offer prices to build in potential market risk so they have more margin to cover potential losses. Most importantly, they need to at least offer the option of “high touch” – the human ingredient – combined with high tech. If they do that, of course, they will no longer be iBuyers as we currently know them.
Nick Ron is CEO of House Buyers of America, Inc.
This column does not necessarily reflect the opinion of RealTrends’ editorial department and its owners.
To contact the author of this story:
Nick Ron at nron@housebuyersofamerica.com
To contact the editor responsible for this story:
Tracey Velt at tracey@hwmedia.com
