Sell or Buy? Offerpad, Opendoor, Zillow and Redfin
Listing your house for sale? Looking to buy a house and having difficulty competing? If you are in the market to either buy or sell, chances are an iBuyer may be lurking. What is an iBuyer when you look to sell or buy? Offerpad, Opendoor, Zillow and Redfin were the four major firms in 2021 acting as iBuyers. These buyers run computer programs when a house comes on the market to determine an offer price they may be willing to pay. And they pay cash. You are competing against them and they bought more than 70,000 houses in 2021.
If you are selling, you may get an offer from them. That offer will state a price, but will then deduct a number of fees the iBuyer charges. The charges include a brokerage fee or service charge. This is like the real estate commission an independent real estate agent would charge, but the company keeps it all. Then there are closing costs. Title insurance, escrow, survey and other costs can add up. In a normal market or a seller’s market, the buyer may pay some or all of these fees. With an iBuyer, the seller pays the fees to the iBuyer who likely has its own title and escrow company. Add another 1-5% to your costs. The iBuyer then sells the home itself, limiting the commission it incurs on the sale by paying itself through its own brokerage company.
Do iBuyers Make a Lot of Money This Way
Despite pocketing a number of fees from sellers, iBuyers didn’t make money in 2021. Zillow reported losses of nearly $1 billion with more losses to follow in 2022. Opendoor reported losses of $662 million, although much of that was from richly paying themselves (executives). Offerpad eked out a profit of $6.5 million and Redfin reportely lost $110 million. In general, they overpaid for most of those houses, driving up the cost for everyone. Many sellers were happy. Unfortunately, they then had to buy a home in a market where prices were excessively bid up by iBuyers. So any added gain may have been lost by overpaying for the next home.
Then, the iBuyers needed to sell those homes they paid too much for. It took them on average nearly 3 months to get a home ready for sale and close on a sale. In order to lose money, the iBuyer had to have sold for less than their cost. Their cost would be the price paid plus repairs, plus any commissions to outside brokers on sale, plus the interest cost to hold the house for those three months. At the time in 2021, interest rates were rock bottom, so iBuyers didn’t have a major hit from interest payments. But from 2022 and beyond, that cost will be a bigger factor.
Overall, iBuyers didn’t make money. But they see this as an investment in a long term business model. Except Zillow. Zillow lost so much money that it left the iBuying business.
Outlook for the Housing Market and iBuyers
With Zillow cratering and dropping out after massive losses, one less iBuyer is in the market to compete in home buying. At present as of March 2022, the amount of homes available for sale is fairly low, so there is still strong competition to buy. But iBuyers seem likely to become much less of an influence. In order to compete, they will try to keep purchase price offers high enough to buy. But they have to balance this with the additional costs to hold the property from rising interest rates. In addition, they can’t sustain massive losses for a long period of time, so look for them to be more careful in offering prices.
Once the spring 2022 selling season kicks off in late March/early April, we’ll see if the available homes for sale follows the normal pattern of a large jump in offerings. If so, homes may not sell as quickly or for as much. Be prepared by reading Winning Mortgage, Winning Home. Gift it to a family member or friend looking to buy-you only need an email address for them. Especially consider a gift for a first time home buyer. Learn what mortgages are better in the current rate environment.
On average, it appears iBuyers lost about $30,000 per house. That’s about 10% of the purchase price. In a rapidly appreciating market. So, market appreciation likely saved them from losing even more money per house. 2022 and beyond are unlikely to be so forgiving to iBuyers. In order to make money and have a rational business model that doesn’t lose money, their offers need to drop on average by 10% or more. Less competition will flatten or drop prices once any pent up demand recedes.