Today's topic will be about this developing trend of what are called "iBuyers", which are buyers that are more "convenient" to a seller, and who buy houses "as-is" with "all cash". In today's controversial environment of taking a position, this sounds all too familiar.
I would like to bullet point some of the problems of this iBuyer Trend:
1. iBuyers are really iBrokers
The "buyers" really are intermediaries for larger venture capital companies, one of these companies, Opendoor, just closed on $300 million more to bring their total funding over $1 billion to buy single family homes for rent and for flip. It is estimated to spend more than $4 billion per year buying homes. Though the terms of the funding are not public, no one hands someone else $1 billion with no strings attached, they have their guidelines and what they can and can not do and are functionally no different than brokers.
2. Therefore, more importantly, THEY CHARGE COMMISSIONS ANYWAY
Service fees, service charge, convenience fee, or anything else other than "commission" which has become a taboo word. iBuyers charge between 5% - 11.5% fee on sale. This is at least better than some other real estate models, which charge "marketing fees" because at lease commissions are contingent on a transaction happening. Real estate agents do not get paid unless their seller gets paid, their interests are aligned.
The reason for this is pretty simple, it does not cost the buyer out of pocket to hire a real estate agent in California (technically the seller's agent pays the buyer's agent, though the implications are a different topic in itself). Therefore, an iBuyer is buying from a "For Sale By Owner" (FSBO), where a seller would want to "save the commission", and the buyer would want to "save the commission". The conclusion is simple, it can not go both ways, so iBuyers are set up to charge the commission in the offer price to begin with.
3. Properties are always sold "As-is"
In a California Association of Realtors purchase agreement, in section 11 of the most recent purchase agreement, it states, "the Property is sold (a) “AS-IS” in its PRESENT physical condition as of the date of Acceptance". This is the same as the iBuyers who purchase "subject to home inspection" or "subject to interior inspection". There are many cases that they require repairs that any other buyer may have asked for anyway; assuming you would have a competent agent to filter the craziest repairs. In fact, when you are a seller dealing with a counterparty in a transaction, it is good to have an advocate (such as a good Realtor) who does what you are hiring them to do every day. Speaking of contracts...
4. They use their own contracts
iBuyers have their own proprietary contracts, written by their attorneys for their benefit. There really is no advantage for a seller to use this contract weighted in the buyer's favor when they have an option. In my personal business dealings, I would rather approach on "neutral ground" with contracts that 87% of buyers use to transact homes in this country. It appears this is a better way to get a fair deal that gets someone where they want, when they want to be there.
5. Not built to last
Zillow claims that they shoot for a 1.5% profit margin, and in some markets they are getting to be 20% of the buyer pool (Phoenix). Their "Zestimate" as as self-reported 4.5% margin of error, which exceeds their stated profit. The issue is what happens when the music stops? They are taking massive market risk on a global scale with "other people's money" to make a little bit more money. If this sounds like the incentives that created the subprime crisis, it is starting to smell like it. What happens when (not if) markets "correct" their prices a very conservative 10%? What would happen to communities when "flip owners" are insolvent?
The most important lesson I took from the financial crisis of 2008 was how flippant people were with "other people's money", and if they treat people who are giving them money poorly, how would they treat those who are "expenses", i.e., employees? Counterparties?
6. Where do we go now?
Real Estate home buying has been trying to "reinvent the wheel" and "disrupt" a dinosaur industry, despite the fact that 90% of homeowners would recommend or hire their realtor again. They are essentially doing what local real estate investors have been doing, only with the word "tech" in front of it. With that in mind, I want to emphasize that there are good and bad people in the world, and that companies are simply a collection of people, no different than the "shady" Realtor, Flipper, Cash Investor. The choice we have to make is who do we want to associate ourselves with, and whether our efforts and energy are better spend filtering out bad people and finding good people. iBuyers is not a newfound solution to an age old problem, it is simply the same old with different people.
#askGene #notiBuyersbutiBrokers
Yorba Linda, CA-TRREG DRE#01843673-RP100 DRE#02059058-P:714-831-1800-E:info@theresultsrealestategroup.com-W:www.theresultsrealestategroup.com-Facebook - Twitter - Instagram - LinkedIn
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