First, Silicon Valley came for print media. Then they came for video stores. Now they’ve gotten around to the $100 billion real estate industry.
But there’s no need for panic. The iBuyer industry, backed by venture capital and driven by data analytics, is still in its infancy, handling only a tiny fraction of total U.S. home sales. And anyone who works in real estate will tell you that the industry could definitely use some streamlining.
But although real estate is still in the very early stages of “disruption,” we’re already seeing some big-picture changes that could have major consequences for homeowners, home sellers, agents, rental investors, and everyone else involved in buying or selling a home. Some of these changes are good, some are neutral, and some look worrisome, but they’re all inevitable.
Let’s go over some of the basics, and look at five of the biggest changes sweeping through the real estate landscape.
What Are iBuyers?
iBuyers are startups that use high-tech tools like algorithms and data analysis to assess the market, precisely value homes, and extend near-instant offers to sellers. Leading iBuyers like Opendoor and Offerpad are backed by billions of dollars in startup capital and are buying up homes in major markets across the country.
Think of the traditional cash buyer, an individual investor appraising homes with a combination of experience and gut instinct, buying homes one by one, a few a year, and then flipping them. iBuyers are the big 21st-century version of the cash buyer, working on an entirely larger scale.
The benefits to sellers are clear; iBuyers make selling your home a lot faster and simpler. In just a few years, iBuyers have grown to the point that they purchased almost 10% of all U.S. homes that were sold in 2018. So how are they affecting the larger real estate landscape?
Being a Rental Investor Has Never Been Easier
Although rental investors are, to some extent, competing for the same properties as iBuyers, the emergence of iBuyers has made being an individual rental investor easier overall.
That’s because iBuyers act as a sort of filtering mechanism, identifying and turning over a certain kind of property with ruthless efficiency. Famously, iBuyers don’t buy all homes; they’re not like the “We Buy Houses for Cash” companies that put up signs by highway off-ramps and will buy vacant homes that have had all the wiring torn out by scrappers. iBuyers prefer homes built after 1960 that are in good condition, and their purchases have focused almost exclusively on this kind of newer, nice home.
How is that good for individual investors? Well, iBuyers are identifying high-quality properties on a large scale, quickly buying and refreshing them, and putting them back on the market almost instantly. And crucially, since they make their money on service fees, and not from resale profit, they’re reselling these homes at a fair market price.
The upshot? There have never been more high-quality affordable properties on the market that are ready to be rented on day one.
They’ve Carved Out a Niche for Fixer-Upper Investors
If you’re the type of individual rental investor who doesn’t mind carrying a home for several months while you do a gut renovation, iBuyers have essentially ceded that territory to you.
One by-product of efficiency is predictability. Since iBuyers rely on algorithmic comparisons to value homes, their models perform better in markets with uniform, predictable housing stocks, i.e. suburban areas. And placing an emphasis on speed and turnover means they don’t have any desire to buy homes that need even moderate amounts of work.
So while they’re snapping up tract housing at a record pace, older homes with tons of character but outdated bathrooms don’t even get a look. If you’re an individual investor with a trusted contractor, these homes can yield massive profits, if you’re willing to put in the work. The best part is, you won’t even have any competition from the big boys.
They Might Be Creating the Titans Who’ll Eventually Crush You
Money gravitates toward money, and as iBuyers have streamlined the sale process, and bought huge swaths of homes, they’ve also created a pipeline to huge institutional investors. A report from ATTOM Data Solutions found that nearly 10% of Opendoor and Offerpad sales in 2018 were bought by a few massive bulk property investors. The report lists Tricon American Homes, owner of 17,000 rentals, Invitation Homes, owner of 80,000 rentals, and a company linked to private equity titan Cerebus which manages 18,000 rentals through FirstKey Homes, as the top three buyers of iBuyer properties in 2018. The report also notes that these big investors are often buying homes in batches of ten or more.
This is a continuation of a trend. In 2016, only 3.9% of iBuyer sales were to big institutional investors. A year later, that had risen to 6.6%, and in 2018, it rose again to 9.6%.
It’s clear that, as revolutionary as iBuyers could be, they’re just the middleman. The real beneficiaries of this sea change are going to be these huge corporate landlords.
They’re Reshaping and Stabilizing Regional Markets
Another by-product of iBuyer efficiency is that, as they concentrate their purchases on newer, good condition homes, they’ve expanded radically in some market, while abandoning other markets entirely.
It’s no coincidence that two of the leading iBuyers, Offerpad and Opendoor, began their operations in Phoenix, and still have the largest presences there. The Sun Belt city, which saw a huge post-war expansion, has one of the biggest stocks of newer, suburban-style single-family homes. You can see this same logic at work when you trace iBuyer expansion; from Phoenix, they expanded to sprawling cities like Houston and Dallas in Texas, up to Las Vegas and Denver, and then east to Atlanta and North Carolina.
Whatever the long term effects of iBuyers are, they’re going to be unevenly distributed. Cities like Phoenix and Atlanta are likely going to see big impacts, even if that’s only in the form of market stabilization. Cities without an iBuyer presence, meanwhile, will continue on being inefficient, although with inefficiency comes opportunity. An opportunistic, ambitious investor will want to take this into consideration.
They’re Setting Up a Future that Belongs to Landlords
The move by huge institutional investors to buy up housing stock and rent it out makes sense, in the big picture. With Millennials and Generation Z delaying or even giving up on homeownership, we’re looking at a near future where nearly everyone’s a lifelong tenant. If big investors, enabled by iBuyers, can smooth out the rental market and bring rents down, they’ll accelerate that trend even more.
This could be great for individual investors. There will certainly be demand for rentals from individual landlords rather than big corporate management companies, and a rising rental tide will definitely lift all boats. But also keep in mind that if huge corporate landlords end up dominating the market, they’ll also dictate the terms of things like leases and rents. As in most industries, the biggest companies make the rules, and the rest of us have to play along.
This article has been contributed by Ben Mizes.