iBuying in Denver’s Housing Market is in Full Force
For decades, real estate agents have marketed themselves on being able to get their clients top dollar for their homes, making the cost of their commission worth it in the end for the seller.
But a new way to quickly — and conveniently — sell a house essentially at the click of a button has caught the attention of longtime agents who say it reinforces their need to innovate and remain on the cutting edge in a competitive environment.
It’s called instant buying, or iBuying for short, and it’s all about convenience.
“Maximizing net profit is just not as important for some clients today,” said Doug Gieck, vice president of production at 8Z, a 10-year-old Boulder-based real estate business that launched its iBuying platform, 8Z Offers, in April. “Sometimes it’s convenience, sometimes it’s life circumstances. We think it’s huge, though, and a real opportunity for consumers today.”
Since October, Zillow (Nasdaq: Z) and Opendoor — some of the biggest names in the budding real estate-tech industry — along with smaller operations, like local real estate firm 8Z, have bought up hundreds of homes in metro Denver in hopes of disrupting the local real estate market. Using algorithms, the companies determine a price they’re willing to pay for a house and if the homeowner agrees, a closing can happen in as quickly as a week, up to 90 days or sometimes even longer, depending on the deal. In return for that convenience — no stagings, no showings, no back-and-forth negotiations — the companies charge a service fee today of about 8% to 10% on average.
The size of the iBuying market in Denver will depend on the desire for that convenience, industry leaders say. Matthew Leprino, with the Colorado Association of Realtors, says he’s heard chatter that iBuying could reach as high as 25% of the market in the coming years.
“But there are also people who think this is just a flash in the pan and it could be gone next year,” he said. “I don’t see it as something that replaces real estate agents completely, but it does reinforce the idea that if you’re going to be a real estate company in 2019 and beyond, you also have to be a tech company and cater to clients in a way they’re most comfortable doing business.”
How big iBuying is today in Denver is difficult to track. A majority of the transactions happen outside the multiple listing service (MLS) and one of the major players, Zillow, uses different limited liability corporation names that don’t directly tie them to a sale. Jason Shepherd, with Atlas Real Estate Group, who represents Zillow in all of its transactions, said the company made about 30 acquisitions in April and has continued to see month-over-month growth.
Since October, Opendoor, which uses its company’s name in public deeds and relists homes on the MLS, has purchased more than 200 homes in metro Denver and sold more than 80 as of June 1.
8Z, which is about two months into its iBuying play, has made offers on about 100 homes, Gieck said, but has only purchased three.
From Jan. 1 through April 30, the Denver Metro Association of Realtors reported 15,610 deals, which means iBuying deals likely make up less than 1% of all transactions today.
While his firm has only purchased three homes, Gieck, with 8Z, said the best story came last month when a client in Greeley opted to sell his home through 8Z Offers. The seller, a father of a special needs child, felt the quick sale was the best option for his family.
“For him, that extra cost for convenience was worth it,” Gieck said.
The most obvious candidates for iBuying are professionals who get transferred and need to move quickly. But in dog-friendly Colorado, pet owners are also a growing customer base, said PJ O’Neil, general manager of Opendoor’s Denver office.
“Showing homes with multiple dogs is not a fun experience,” he said.
The same goes for families who don’t want a showing to interrupt a baby’s nap time, and older residents who want to downsize, but don’t want to deal with the logistics of a traditional sale, O’Neil said.
Zillow is also marketing to those who want to do a sell-by-owner deal, which Jeremy Wacksman, president of Zillow Group, said comes with its own hassles.
“It’s our job to control the process and remove the hassle and uncertainty,” he said. “You can take care of it at the push of a button. It’s magical.”
Competition and concerns
None of the big iBuying companies are saying that they can save consumers money by using their platform. Instead, they’re focusing on marketing that ease and convenience. Zillow is also hoping that once they buy your home, you’ll use their service to find your next home and finance that purchase through the mortgage-lending arm that they acquired last year. Wacksman said their iBuying margins are “razor-thin” right now, but that it would become an interesting business once at scale. Zillow operates in about a dozen markets today.
Traditional real estate agents in Denver realize that marketing can be persuasive, though, and could cost them business.
Kelly Moye, with Remax Alliance, says its up to agents to not only let their clients know how much money could be left on the table through an iBuying deal, but also to make the transaction as seamless as possible so that the client feels they’re receiving quality service.
She recently helped a client find a replacement home, but that person actually used Zillow to sell the condo he was living in. The condo was practically brand-new and had nothing wrong with it. It was a deal, Moye said, that she could have made as painless as his Zillow experience.
Leprino, who sold his previous brokerage firm in March and recently started a new one, The Ridgewood Company, said the concern, outside of the service fee companies like Zillow and Opendoor charge (a typical real estate transaction comes with a 6% commission fee), is the home value data they use on their sites. It’s extremely common, he said, for his clients to question selling prices for their homes because of the “Zestimate” home value they saw on Zillow’s site. Often times, he said, that estimate is wrong, but the general public doesn’t question it.
“If they start buying, let’s say, 5% under the market, that could impact a whole neighborhood,” he said. “It’s something we definitely need to keep an eye on.”
iBuying is only the first side of a home transaction. Once a company purchases a home, their teams work to sell it as quickly as possible.
Officials with Zillow and Opendoor say their goal isn’t to make money on the resale of a home they purchase. Instead, they hope to make their money on the service fee and subsequent products, like Zillow Home Loans.
While Opendoor averaged returns between $5,000-$8,000, they sometimes purchase a home for too much and take a loss on the sale. That happened in January when the company purchased a residence in Denver’s Park Hill neighborhood for $478,500 and later sold it for $462,500 — a $16,000 loss, according to public records. On the other end of the spectrum, in December 2018, it purchased a house in Green Valley Ranch for $352,000 and sold it for $393,000, netting $41,000.
Opendoor’s fee, which is at about 8% today, bakes in some money to cover losses, O’Neil said. But he’s not afraid to talk about the losses.
“It’s actually part of our selling point to homeowners,” he said. “Selling a home is uncertain and we do lose money on a handful of deals, from either missing comps we should have used or maybe that part of the market recently took a turn. If we can give the seller a number higher than what they were expecting, that’s great for them.”
The company also takes its selling a step further than competitors by using technology that lets consumers unlock homes on the market from their smartphones and tour without an agent — another convenience that’s being heavily marketed to homebuyers.
What the future holds
It’s been reported that iBuying has accounted for about 6% of Phoenix’s real estate market — a number that’s definitely realistic for Denver’s market down the road, said Shepherd, with Atlas Real Estate Group. Pinpointing how big it will ultimately grow is too difficult at this point, he added. But even if it does grow to 6% or higher, it shouldn’t take away work from more traditional real estate agents.
“I think it’s a fantastic tool for any broker to use with their clients,” he said. “It’s another option for them and as long as they know the terms of it, it’s something they need to utilize.”
It’s becoming big enough that 8Z launched “zavvie,” an iBuying offer comparison tool that gives clients a near-instant look at offers from all the major companies, including its own.
“It’s the Kayak.com of iBuying,” Gieck said.
The firm’s play is to show all those options and if Zillow, for instance, has the best offer, one of its agents will walk them through that process. The idea is that 8Z has a team of local professionals in Colorado whom a client can trust when they show them offers from those bigger national companies.
Opendoor has raised billions of dollars, including $400 million from SoftBank, for its iBuying business — a sign that their work in Denver isn’t done, said Leprino.
“When you have that type of funding, you can be as big as you want to be,” he said.
What it might come down to is if consumers start buying houses similar to how most people purchase cars today — by trading in an old car to a dealership and upping your ride to a newer model.
“Obviously, you’re not going to get as much at the dealership for a trade-in, but you don’t have to worry about cleaning and fixing it up, doing test drives — you just hand it over and move on,” he said. “It’s all about what’s best for the consumer.”
Article by – By Andrew Dodson – Reporter, Denver Business Journal