What is an iBuyer?
An iBuyer is an automated, online firm which offers instant pricing for sellers seeking a quick sale. Widely known iBuyers include OpenDoor, Zillow, and RedFin. Through algorithm-driven market analysis and home pricing, homeowners can submit their property to be offered on and the iBuyer’s software will produce a number the company is willing to pay for purchase.
iBuyers were quick to move into “A” markets like Raleigh to capitalize upon the high turnover in housing created by influxes of new and changing industries in RTP and the Triangle area.
Perhaps transplants to the area were sent to Raleigh for work with a housing allowance that covered a mortgage for a $300,000 house for 36 months. At the end of that tenure, they have to sell the house and move to the next city they need to be in for work.
This itinerant professional's lifestyle is exactly what an iBuyer looks for; people who need to sell quickly and minimize the attention they give to the process more so than they need to maximize their profits.
How are iBuyers affected by recent events?
Their businesses are on hold indefinitely. Officially, they are all stating that they are on hold until the pandemic crisis is under control or resolved.
Zillow Group CEO & Co-Founder Rich Barton recently said: “Given the concerns for public safety and rapid developments by governments that restrict local real estate activities, we determined it was prudent to pause our home-buying to preserve our capital. We plan to restore Zillow Offers [to] full operations once health concerns pass and local health orders are lifted.” Leaders for RedFin and OpenDoor have made similar statements.
While the “we are doing this to benefit public health” angle is both commendable and necessary given current events, we must be honest with each other about the true reason behind their withdrawal from the market: an underlying lack of liquidity. See Mr. Barton’s comment on preserving their capital. A business owner, especially an owner of a business as large as Zillow, wouldn’t close their business down for any other reason than lack of money. Liquidity for this type of “buy low, sell high” flipping-adjacent model employed by iBuyers is dependent on a strong “bull” market; if the market shrinks, companies hoard cash, and there are no more deals. No deals means no profit. No profit means no point in continuing to operate.
iBuyers would be working to profit right now if it wouldn’t be public relations suicide in the long run, and if their models didn’t require large amounts of capital. Huge cross-national movements to get people to do the exact opposite and stay home have shown that the populace does not support any non-essential businesses trying to get people out of their homes right now. In a declining market, lost liquidity, and a potential PR nightmare if they attempt to be aggressive, iBuyers are doing the smart thing and pulling back. They lack the personal touches which distinguish the personal investors from corporate.
“Traditional” real estate firms must admit they are pleased to see the iBuyers pulling back. When touring potential properties with buyer clients, the homes owned by iBuyers never present as well as the properties owned by humans. My clients always would rather have the personal touch on a home instead of what a computer algorithm decided was the most cost-effective way to upfit a home for sale (no, OpenDoor, fresh carpet doesn’t matter if the subflooring is still stained and smells leak through).
There is no substitute for a real person’s experience. Whoever the local Zillow employee is that surveys the property and sends photos back to corporate headquarters probably won’t know where to look for small cracks that could indicate a larger, underlying issue. They won’t have a tennis ball in their car to check if the floors lay level. When the house is on the market for a while with little or no traction from buyers, an iBuyer will just think to lower the price until someone bites, if that. The home may sit vacant for months. If an experienced agent was handling the sale, they would be able to tell the owners that while that particular shade of pastel pink was very charming for the baby’s room, it needs to go.
Personal interests aside, it’s important to acknowledge that what has become an integral part of the way folks buy and sell houses has been suddenly pulled away. A person ready to sell their townhouse in Cary to Zillow in order to move the family to Oregon for their next work assignment is now scrambling to find real humans to sell the home to quickly, during a time when buyer interest and purchasing power is significantly decreased, while navigating a global crisis and trying to not end up carrying two mortgages (I’m stressed just reading that).
Don’t underestimate the panic in some of your neighbors’ living rooms right now. No one’s plans are still completely in place after the last few weeks.
How can local markets recover from iBuyer withdrawal?
Real human real estate investors have never been more crucial to local real estate market activity and health. iBuyers acted as angel investors, swooping in with cash and a quick closing to take the burden of home sale off your plate. There was no due diligence, repair requests, or mortgage process to go through. All of these processes are crucial during a typical person-to-person financed sale, but can be minimized or avoided altogether with some cash and investor sales.
With so little solubility in the stock market and zero interest rates on savings, smart investors looking to continue to grow their wealth while also helping out their local community should consider investing in real estate. There is no shortage of investable properties in the Raleigh-Durham area, ranging from true fixer-uppers to properties that can simply be bought as-is and turned into profitable rentals with minor cosmetic upgrades.
Individuals who are being paid to work from home right now are going to need a place to live comfortably. Those who live in downtown Raleigh are no longer experiencing the city life they thought they signed up for when they signed their lease. All nightlife and offices are closed indefinitely. If you were living in a crowded apartment building, wouldn’t you think long and hard about signing another lease once your current period is up? Why would you pay downtown prices for a location that no longer boasts a long list of activities you’ve come to expect from a thriving, bustling area? Why, when you can pay the same amount for a single-family or townhome, would you put up with a communal laundry area during a pandemic?
Now is the time for personal investors to get involved in their local community. A smart purchase of a rental property will pay dividends as Raleigh adjusts to this new digital-based reality and when we begin to recover from this economic recession. Residents being paid from home are about to realize just how important home truly is. They will be looking to upgrade their own to remain productive and maintain a high quality of life. Why shouldn’t you be their landlord?
March Market Review
A brief retrospective on the Raleigh real estate market's performance during March 2020.
Questions? Concerns? Comments? Contact me!
Jessica Mohr is a licensed real estate broker working in her hometown of Raleigh, North Carolina.