Real Estate Market Disruption |The iBuyer model
Dr. Evangelo Damigos; PhD | Head of Digital Futures Research Desk
- Competitive Differentiation
- Sustainable Growth and Tech Trends
Publication | Update: Sep 2020
In the traditional home sales model using an agent, the seller hires an agent who is responsible for marketing the home and attracting buyers. This process usually takes 2–3 months, during which time it is commonplace for the agent to conduct walk-throughs with prospective buyers. After an offer is received, the seller often has to wait for the borrower to finalize his or her financing to begin the closing process. At the end of this process, the seller pays 3%–6% of the sales proceeds as commission to the real estate agents.
Roger Ashworth, Head of the Non-Agency Mortgage-Backed Security (MBS) Strategy Team of Citi, contests that in contrast, the iBuyer model is a transition from the agent-based advisory system to a dealer-based system, where compensation is derived from a bid-ask spread rather than a commission. The iBuyer firm will assess the value of the property and offer a bid to purchase the home from the seller at a discount. The iBuyer firm then relists the property and attempts to resell for full value, capturing the difference between the discounted acquisition price and the full value resale price as revenue.
All-In Transaction Costs Could Be Lower for Selling to an I-buyer
The value proposition to home sellers in the iBuyer model is the ability to move on a short and definite timeline that eliminates the stressful waiting game and inconvenience of showings and open houses. Additionally, by using advanced analytic techniques for valuation and the prime collateral status of vacant, move-in ready homes for financing, iBuyer firms believe it is possible for the discount to be comparable to the traditional commission amount. In other words, a seller could sell his or her home in a matter of a couple weeks with the same expected net proceeds as the traditional, multiple-month process.
For buyers, the vacant state of the home allows for flexible move-in dates.
Additionally, many iBuyer firms offer trial periods and warranties on core infrastructure that offer peace of mind. In the longer term, we expect the iBuyer firms to also build out mortgage origination businesses. Because the iBuyer firm will have already done a title search and an appraisal during the acquisition process, this could potentially be removed from the lending process due to redundancy — thereby lowering the cost and time to close.
In short, an iBuyer as central liquidity provider could better accommodate the needs of buyers and sellers independently than they are able to accommodate each other, all at a competitive cost.
While these strategies are certainly poised to change the way we trade homes, there are several challenges and barriers to entry.
· A significant amount of capital is required to purchase, carry, repair, and sell homes, and this strategy also requires a reasonable amount of liquidity. These strategies may not work on, for example, the highest and lowest price points in a given area since liquidity is likely lower. There may be cases where the traditional broker model could co-exist alongside these liquidity providers, operating at the price tails.
· Additionally, the shifting age demographics might become a risk. Home prices may experience weakness as baby boomers move to either downsize their living situation by purchasing smaller homes or switching to renting. If millennials are either unwilling or unable to purchase these homes, there could be a scenario where home prices correct.
· Finally, regional expertise is still required to inspect and verify property pricing to protect against losses.
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