Written by Louis Wilson on 06/20/2019
While many cities have had iBuyers come to town, no city has seen as much activity as Phoenix. iBuyers bought around 5,000 homes in Phoenix in 2018, or roughly 5%. This number may sound small, and it is only one city, but it has caught a lot of people's attention.
Phoenix is the perfect test city for iBuyers such as Opendoor, Offerpad, and Zillow. It has a rapidly growing population, the majority of the homes are homogeneous, and most of them been recently built. Arizona also possesses a friendly regulatory body, allowing lenders to repossess homes after 120 days without having to go to court. All of these factors have lead iBuyers to flock to Phoenix to test out their business models.
iBuying, roughly defined, is when a company makes an offer on a home with cash, instantly, without ever setting foot inside of it. iBuyers use proprietary algorithms to spot, appraise, and determine offer prices on homes. In addition to public data such as the size, location, and age of a home, they ask users to submit photos. They also send a human inspector after an offer has been accepted before finalizing the transaction.
iBuyers typically take submit offers that would be lower than an offer that a seller would receive if they sold their home through the normal process. Sellers take discounts because iBuyers offer speed and certainty. They also offer lower fees (or at least they claim lower fees!) than traditional real estate agents.
After buying the home, iBuyers make updates to the home. They re-paint walls, fix bathrooms, and upgrade anything else they deem necessary. They then put the home back on the market. It is important to note that iBuyers are not real estate investors. They do not want to hold onto homes for long. There goal is to make small margins on many homes. For their business model to work, they will need to make a meaningful impact in many cities.
While 5% of homes in Phoenix may seem small, a lot of industry experts think it is just getting started. One expert, Rob Hahn, predicts that 60% of homes in the US will be sold through iBuyers by 2024. This prediction may seem bold, but Rob compares it to ride-sharing just a few years ago. In 2014, Uber and Lyft had roughly 8% market share. By 2018, they had over 72%. Rob notes that these markets can go through rapid change when new companies come in and "solve consumer pain and do it for less than the traditional ways." While we agree that the traditional home buying process causes a lot of consumer pain, we are not as convinced as Rob that the iBuyers can save sellers money.