iBuyers offer quicker closings for sellers who would like to avoid the uncertainty of knowing when and if their home will sell, according to a paper written by co-authors Dr. Michael Sklarz and Dr. Norman Miller. For motivated sellers who want a predictable sale date and need to move, perhaps a long distance from the current location, the researchers found that iBuyers have provided a welcome alternative to traditional brokerage.
“Rather than compare iBuyers to traditional brokerage, as if the market was required to offer only one choice, we welcome a plethora of choices for homebuyers and sellers,” Sklarz and Miller wrote. “A robust and competitive market will provide different levels of services and charges to compensate providers for cost of service and risk.
“Here we address the question who are the iBuyers, how do they make money, what risks do they face, and what are the benefits for sellers,” the authors added.
The largest iBuyer, based on capital raised to date, is OpenDoor, but there are several others including OfferPad, Zillow Offers, Redfin, Knock, Realogy CataLIST, Perch, Keller Offers from Keller Williams and others.
Some of these are local brokerage firms such as SDCountyhomebuyers.com and there might be a few localized iBuyers in every major metro.
In fact, iBuying can be viewed as comparable to corporate relocation companies that have been around for many years, providing a guaranteed a sale for employee transfers, but now offered to the general public and paid for directly by sellers, the article stated.
“The industry is still in its infancy and represents an extremely small part of the overall market, but one can’t ignore any financial innovation that has been growing in market share at over 25 percent per year,” Sklarz and Miller wrote. “Eventually the most efficient firms that make the fewest mistakes, with enough capital to reach significant market share will remain.”
At the same time, traditional brokerage valuation models used by iBuyers, the article went on to say, have a range of accuracy, just like all appraisals, and when this value estimate happens to be on the high side of market value, sellers are likely to recognize this and be more willing to accept the offer. When the offer is too low, the sellers will turn to other iBuyers or other more traditional selling options.
If sellers know the values of their homes better than the iBuyers, then there will be a problem of adverse selection for the buyers, the report stated.
Sellers tend to accept offers, even those considered conservative by the iBuyers, when they are close to or above market value and reject those which are too low. Not all sellers are better informed than the iBuyers, the authors cautioned, but there still is some risk of informed sellers taking advantage of relatively high offers.
“The kind of spreads observed, from our market value estimates to the prices paid by iBuyers, apparently makes sense for the iBuyer companies,” Sklarz and Miller wrote. “The iBuyers do have carrying costs involving significant amounts of capital, safeguarding the home risks, and adverse selection risks. They also bear significant risks if prices decline. A downturn in home prices, not forecast by the iBuyer market analysts could be devastating as they ramp up their business platforms, particularly if the cost of capital increases. At the same time, downturns are precisely when the most sellers would want this option.”