iBuyers. Who are they and they affect they Home Renovation-House Flipping Business
The back in the days usual process of selling your house was full stress, hustle, uncertainty and frustration choosing the right real Estate Agent to represent you during the sale are very different after 2018
Thanks to a new major players called iBuyers, selling a house is as easy as selling a single product online.
What Are iBuyers?
iBuyers are major companies that purchase houses, directly from the owners. The seller doesn’t have to pay an agent 5-6% fee to list the home, stage it, market it, or even show it to potential buyers. Instead, they tell the iBuyer about the property—things like its age, condition, and zip code—and using data and mathematical algorithms and the iBuyer predicts the home’s future value anbd process the sale really fast. The seller of course have to pay slightly higher fee of 7-7.5% but the iBuyer saves a lot of time and inconvenience to the seller during the process.
The iBuyer will then present the seller with what they can pay cash for the sellers home which they can accept or decline. If they accept, the cash will be in their accounts within a few days or little bit more, and they’re free to purchase another property.
In most cases, iBuyers take the properties after the sale, fix them up, and list them back on the market for a profit
The biggest threat in 2020 for the small real investor, house flipper and the people who just doing it because they love renovation houses for some profit when they can put their hands on one is the so-called iBuyers. The home-flipping industry has transformed in the last few years so much with the small investors will not just competing with local professional flippers but you will compete with bigger companies and even giant investors iBuyers who have come on the scene. Companies like Zillow, Opendoor, Offerpad and many more.
Here you can find the Pros and Cons for selling your house to iBuyer by Hooquest
Who are they?
Those are actually the very experienced house flippers but with millions of available cash. iBuyers are paying cash for houses, but their money comes from Wall Street. They close within just a week or so, renovate the house and put it back on the market. It's house flipping on a very high level. The major player among iBuyer companies Opendoor, claims that they bought around 10,000 houses for just a few years. Zillow another major player has been in business for less than a year and already has over 1000 houses inventory. This number is without the homes they've already sold. iBuyers are in many different markets across the U.S. and they're growing very rapidly. Some experts predict in the near future they may reach over 100,000 houses combined between all of them each year.
Here some date below from iProperty Management for the market share of iBuyers in 2018 and what percentage of people are willing to sell their house to iBuyer
Small house-flippers concerns.
They will never be able to pay for a specific home as much as those major players. Those companies are not using bridge loans, but they’re receiving lines of credit from Wall Street with very competitive rates. This could be the beginning of what Amazon is doing to a lot of retailers, literally running a large portion of the industry out of business or declining their market share to a minimum.
The target of those companies is to take market share.
They want a slice out of house selling marketplace. Small investors are around two-three percent of the market. They are ten percent and more of the market. The 10% I'm referring to is those people who prefer to give away a small discount, pay little higher 7.5% fee instead of the regular 5-6% and sell their home directly to those buyers by skipping the market time, enjoy the freedom of flexible move out and fast and smooth transaction.
Those iBuyers has all the data to target only the motivated sellers.
Their major goal is to invest in volume and their ability to target only the motivated sellers is a concern of the real estate agents as well because the iBuyers are taking the best type of clients.
“Traditional realtors have, of course, started fielding questions from home sellers wanting to know more about Opendoor and Offerpad. Traditional realtors argue that going through iBuyers risks leaving a significant amount of money on the table, compared to letting potential buyers bid up the price through realtors.”
The ones that are ready to sell and must sell fast. Because of their target volume and they are not focused on a specific region only as of the small investors they are able to extract the best clients from every state they operate and leave behind the difficult ones. Zillow states and cities of operating iBuying
They are looking only for easy flip deals.
iBuyers targeted sellers are:
Veterans
Empty Nesters
Millennials
Relocation Buyers
Their main target is to buy a home that needs only light rehab not a total home renovation with many complications. The houses that can be ready only after a few weeks of work and be able to hit the market right after. And as far as their target is the volume they can afford a smaller margin from each house as far as they can maintain the major scale of buying them. The houses that require a lot of work, major issues to be solved, many months to be finished and pulling off multiple permits for the renovation are the ones left behind for the regular investors.
The solution for the smaller investor is to become a specialist in the homes that have major issues and learn how to solve them most efficiently as far those are the houses iBuyers won't touch. This is the niche where the smaller house flippers should focus in the future and let's be honest many of us are also trying to stay away from those houses as much as we can.
Is the iBuying profitable for those companies?
So far Zillow for example only losing money from its iBuying business. Their home sales fall far from their so-called Zestimate. As I said above in the article they are targeting volume and they can accept lower margins than the regular investors but at this point, their disruption of the house flipping houses market only costs them to lose money with high volume. They probably understand soon that this business is not algorithmic as many others and it's a very complex business that needs attention on a case by case for each home instead of approaching every house without taking into consideration many factors that smaller investors consider before buying a specific home. What they achieving at this point is taking the right to make money of those houses from the smaller investors by approaching them with their algorithms they just losing money from most of them.
Get used to.
Most likely those Real Estate behemoths will find a way to adjust their business model so they can start making profits. What's left for the smaller investors is just to adjust, get used to and realize the truth in many businesses that nothing lasts forever and in every business, you have to adapt according to the changes or just fall apart.
Be creative.
As much as the smaller investor will feel that only leftovers are left behind they have to realize that those companies spend millions on research on how to target the right people.
In the same way the smaller investor has to spend on education in different aspects of the construction that requires a lot of knowledge for specific work to be performed and find a way to extract the value of the least likable homes by those iBuyers and start making money from those houses. There is also a difference between the targeted markets between house flippers and iBuyers is explained below. There is value in every house if it's approached correctly and with the right knowledge.
The advantages of the smaller investor.
THE DIFFERENCE BETWEEN HOUSE FLIPPERS AND iBUYERS
The iBuyers are driven by strict guidelines, rules, algorithms, and type of homes They will never buy high-end homes because those home requires special attention and in most cases even a specific home design team. Those are expenses they will never even consider. They will stay away from homes with HOA and strict condo in house regulations on the renovation process, in other words, they are predictable and specialized in specific house markets. This is the opportunity for the smaller investor to study those markets and avoid the toe to toe clash with those iBuyers. Instead, focus on the completely opposite side of the house flipping business and find it's niche.