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Zillow On The Ropes? The Dirt on iBuyers

Posted by John Hathorn on November 11, 2021
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Have you heard the expression “iBuyer”? The term can be used to mean “internet buyer” but more commonly it means “instant buyer”. The term was coined by companies like Zillow and Opendoor that use price modeling algorithms to value property and who will sometimes buy and quickly resell homes. The consumer draw to selling “iBuyer-style” is the relatively quick and easy turnaround for cash, in as little as 24 hours in some cases as there’s no need for repairs, preparing, staging, or showing the home. This can be a very costly mistake, but more on that later. 

Although the high-end Santa Monica real estate market has yet to see any ibuying, the method was beginning to get traction in low to middle market communities until Zillow abruptly exited the market last month. Turns out Zillow was way off on their valuations and had to sell a bunch of houses for less than they paid. 

And what exactly is the convenience of speed and ease really worth? Consumers are learning that they leave money on the table when selling to an iBuyer.  A 2019 MarketWatch investigation found that iBuyer offers “would net their customers, on average, 11% less than owners who choose to sell their homes on the open market, when fees and other costs are considered.” A 2019 analysis found that “the typical cost to a seller appears to be in the range of 13% to 15%.” And a 2020 study found “an average seller to iBuyer is willing to pay $9,000 to sell their house immediately.” 

Still, iBuyers appeared to find more interest among sellers in Southern California than other parts of the country. iBuyers accounted for 1.2% of all home sales in Los Angeles and Orange County, and 2% of all home sales in the Inland Empire (compared with the national average of 1%). In some markets, such as Phoenix, the iBuyer market share was above 5%. It might be too early to tell what this will mean for the future of real estate. It remains unclear whether the iBuyer model can be profitable. Opendoor alone lost about $1 billion since launching in 2013. Then Zillow made headlines after panic purchasing over the Summer only to then exit the iBuying business altogether, losing nearly 400 million dollars in the process. This raised questions about whether the tech powering these companies is up to the challenge in such an overheated, fast-changing housing market. “Fundamentally, we have been unable to predict the future pricing of homes to a level of accuracy that makes this a safe business to be in,” Zillow Chief Executive Rich Barton said during a conference call with analysts. At the time of this article’s writing, Zillow is currently listing 2.8 billion dollars in assets, nearly 7,000 homes that it bought, at a much lower value than what they purchased in an embarrassing attempt to recoup some of their losses.  

Such a strategy still requires an accurate prediction of future home prices. Mike DelPrete, an independent real estate analyst and scholar in residence at the University of Colorado in Boulder, stated that after a red-hot market in the first half of the year, both Opendoor and Offerpad adjusted faster than Zillow to a housing market in which price appreciation had slowed. According to his analysis of the Phoenix market, both Opendoor and Offerpad reduced the prices they paid for homes in September, as well as the number of homes they bought. Zillow kept buying more homes and paying more for them. By October, Zillow was listing homes in Phoenix for 6.2% less than what it paid, while Opendoor listings were priced 1% above what it paid. 

While the appeal for the iBuying experience is supposed to be convenience and speed, those who bought homes from Opendoor didn’t always leave stellar reviews — Aguayo, a 36-year-old part-time real estate agent, bought a home through Opendoor in July. She said she, and her husband, sought to move from a rented apartment to a property with a yard for their two young children. Aguayo’s experiences were anything but convenient, saying the point person Opendoor assigned to her transaction didn’t respond to questions in a timely manner, if at all, forcing her to call a general phone number and constantly update different employees where she was in the buying process. The escrow company Opendoor used was also hard to get in touch with and at one point told her to wire an incorrect amount, Aguayo said. 

This story does have an upside, however. Aguayo discovered an incredible weakness she could exploit through the company: Opendoor employees she came into contact with weren’t native to Southern California. It enabled her to successfully negotiate her family’s purchase of a new home with a yard to about $37,000 below the list price by pointing to other houses listed for sale in a less attractive part of Duarte. “Had the agent been local, they would know not to compare this house to those, because this house is in the best neighborhood,” Aguayo said. 

So, if you want to leave money on the table… sell to an iBuyer! But if you want to maximize your home value, call me to discuss and how Pence Hathorn Silver can help you outperform the market. 

Just one new listing since my last update-

237 Alta Avenue– I just listed this primo lot value for $5,495,000. Located “West of 4th” on a large 10,668 square foot lot. This is a great remodel or build new opportunity.

There are three new escrows-

558 15th Street – Listed by Pence Hathorn Silver for $7,250,000.

410 Lincoln Blvd – Listed for $7,489,000.

332 12th Street – Listed for $7,549,000.

Six sold properties-

434 26th Street – I sold this lot value property for $3,120,000. 

628 10th Street – Sold for $3,150,000. Originally listed for $3,699,000.

2528 La Mesa Way – Sold for $10,945,000. Originally listed for $10,995,000.

311 21st Place– Sold for $4,300,000. Originally listed for $3,750,000.

746 20th Street– Sold for $3,565,000. Originally listed for $3,295,000.

523 7th Street– Sold for $6,900,000. Originally listed for $7,499,000.

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