Home Front by Budge Huskey: Profits Are Not Rolling in for iBuyers
Special to the Herald-Tribune
Published June 1, 2022
In 2017, we were introduced the the term “iBuyer” by Stephen Kim, an equity research analyst for Evercore ISI. An abbreviation for “instant buyer,” it was coined for the practice of institutional purchasing of residential properties directly from owners. Bypassing the traditional home selling process, this growing segment of the market is one area of purchase activity by investors which represented one out of four home transfers in the final quarter of last year, according to CoreLogic.
The iBuying trend represents a seismic shift in the way the housing industry functioned for the last hundred years. Institutional investment in properties is nothing new, as we witnessed the phenomenon following the foreclosure crisis when private equity groups such as Blackrock amassed hundreds of thousands of residential properties for the purpose of holding and renting. IBuying differs in that the institutions purchase merely to make minor improvements to enhance value with the intent of a rapid sale to a third party. In many respects, it is sophisticated flipping.
Countless smaller institutions and investor groups are pursuing an iBuyer strategy, yet 95% of activity is generated by the major players: Zillow, Open-door, Offerpad and Redfin. All focus on major metropolitan areas across approximately ten rapidly growing states, including Florida, and generally establish caps on the value of properties bought.
On the surface, iBuyers offer a compelling alternative to the traditional home selling process. An immediate cash offer on your property and a commitment to close within 30 days. No prepping. No showings. No negotiations. No uncertainty. Yet the fees associated with the process are commonly in line with traditional marketing through a Realtor, and instinctively, many owners feel they may be leaving money on the table without extensive marketing to create awareness and the competition it fosters. Ultimately, the iBuyer’s intent is to profit from the transaction, which seems plausible only if the seller’s profit is compromised. Herein lies the interesting twist.
IBuying has proven, over these years, to be a grand experiment in search of economic justification. A path proving anything but easy. As of last year, only Offerpad turned the corner by reaching an average positive margin on purchases, while others continue to bleed capital through extensive losses. Some are throwing in the towel. The housing Goliath, Zillow, exited buying in November of last year after realizing over $28,000 in an average loss per home. Mike del Prete, an industry writer, perfectly captured the iBuying economics in his phrase, “red is the new black.”
For major iBuyers, the expectation all along was never to realize sizable profits per home turned, but to make a minor profit while serving up opportunities to sell mortgages, title insurance, and other revenue streams related to the event — a razor and blade theory sounding good in the boardroom, yet so far unattainable in the real world. The elephant in the room, looking forward, is the impact of housing value trends on this grand housing experiment. Not demonstrating sustainable profitability would seem normal for the first few years of proving a concept, yet massive losses are occurring in an environment of housing prices growing at the fastest pace in history. With the industry now returning to sanity and prices trimming and even predicted to slightly turn in some categories, the capacity to turn a profit will become nothing less than herculean. Game over?
Billions have been invested in iBuying by private equity and other players. Time may prove those funds would have been far better off sitting in the bank. All the hoopla endured in recent years within the industry of how traditional real estate practices were soon to be extinct, and yet the theory proved applicable in only 1.5% of the total home sales nationally last year.
Who knows, but perhaps the tried-and-true notion of a Realtor sigh in the yard and the economic principles of an open competitive market wasn’t such a bad idea after all.