Coronavirus pandemic exposes weaknesses of iBuyer model

Coronavirus pandemic exposes weaknesses of iBuyer model

The $1.6 trillion real estate industry is a tempting target for disruptors. Hundreds of companies have developed thousands of solutions to automate different parts of the process, making the experience better and faster in many ways. But these are mostly incremental improvements — streamlining valuations or verifications, or creating mobile ways to apply for a loan. All worthy endeavors, but not truly disruptive.

That’s because it’s really hard to disrupt something so local, so regulated and so consequential in people’s lives. Something like ride-sharing is a breeze in comparison.

One of the most recent efforts to overhaul the business of residential real estate is iBuying, spearheaded by Opendoor. What iBuyers provide, first and foremost, is certainty. Instead of listing their homes with an agent and hoping for the best, sellers can input property information and get an instant cash offer within 24 hours. If a seller accepts that offer, they can skip making repairs and choose their closing date.

In 2014, Opendoor launched its iBuying service in Phoenix, which features a number of very similar homes, making the valuation of those homes easier to calculate. Opendoor makes money through service fees and by fixing and flipping the homes it buys. The company makes sure it can sell at a good price by doing an inspection once the seller accepts its offer, and then deducting any needed repairs from the seller’s profit.

With instant offers, Opendoor delivered a radically different experience in home selling, and other companies took notice. OfferPad launched in 2015, Knock in 2016, and Redfin began instant offers in 2017. Zillow, the granddaddy of real estate apps, was initially slow to respond to this existential threat, but eventually joined the fray in 2018 with Zillow Offers. Some iBuyers have teamed up with traditional real estate brokerages, while other companies, including Knock, Homeward and RealSure, help people trade-in their houses.

Are iBuyers the disruption the market needs? We may know soon enough. The main criticism of the iBuying model is that it will only ever be effective for a very limited number of houses, and only during certain economic cycles. In the midst of an unprecedented global pandemic, iBuyers are suffering along with every other business type.

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