For about 2 1/2 years now I’ve been posting about the iBuyer real estate models – where a company will buy your house from you quickly, for cash. In a nutshell my concern has been that a) enough consumers are smart enough to take advantage of the mistakes these companies will inevitably make that b) these companies might lose their asses and c) they will have to give the rest of the homebuyers really lowball offers to offset their losses. So somebody is going to lose their ass on these deals – unless the offer prices are damn accurate. So who’s it gonna be?
Let’s face it. If you want to sell your home fast there is probably a cost to doing that. Well, it turns out that the guys at Collateral Analytics just released a study where they attempted to find out what the cost of working with an iBuyer was to the home seller. For starters, they point out that the iBuyers charge higher fees than traditional real estate agents – 2 – 5% higher. And then the seller is also typically charged a “generous repair allowance”.
But there is even more to the story because the iBuyer also has to cover their ass for the risk of holding the property and the risk that they overpaid for it. They cover these risks by purchasing homes at a discount to market value – on average. By looking at transactions over time for two different iBuyers in 4 different markets and comparing the purchase prices to their Automated Valuation Model they were able to estimate the size of these discounts.
See their results in the graph below. They concluded that these discounts ranged from 2 – 8%, though the discounts have narrowed over time as the market has become more competitive. And notice that one of the two iBuyers studied buys at a much narrower discount than the other one. Damn, I wish they would tell us who these guys are. Why are they hiding this information?
None of this should be a surprise to the long time readers of this blog. If you really need to sell your home fast I actually reviewed your options about a year ago: Selling Your Home Fast – The Right And Wrong Way. You can save yourself a lot of money by just putting it on the market and pricing it to sell.
Zillow Offers Is Somehow Managing To Lose Their Ass Buying Homes
I don’t know if either of the two iBuyers studied by Collateral Analytics is Zillow Offers but the irony is that Zillow’s publicly released information reveals that thus far they are losing their ass in this business. Their stock sank 20% last week on fears that they were going to lose a lot of money flipping homes like this. Apparently they had already predicted $80 MM in losses for the second quarter from Zillow Offers. Skimming their 10Q I figured out that their gross margin on that segment of the business is about 3.3%…but that’s before the cost of running the business. After taking that cost into account they lost $71 MM on this segment.
I continue to believe that these guys are going to get stung unless they lowball home sellers. As Collateral Analytics points out the iBuyer has a couple of risks that traditional realtors don’t have. First, an iBuyer owned home has a great big ole target on it’s back that invites criminal activity. Second, they talk about the adverse selection problem that I brought up in my first post on this topic. These seem like problems that can only be solved by lowering acquisition costs or by becoming insanely accurate in your value estimations. The latter is something Zillow repeatedly fails to demonstrate they can do.
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Gary Lucido is the President of Lucid Realty, the Chicago area’s full service real estate brokerage that offers home buyer rebates and discount commissions. If you want to keep up to date on the Chicago real estate market or get an insider’s view of the seamy underbelly of the real estate industry you can Subscribe to Getting Real by Email using the form below. Please be sure to verify your email address when you receive the verification notice.