Where Do iBuyers Go From Here?
October 13,2022 | Posted By Nicholas Bergiadis in Buying
The real estate industry is a prime example of a dynamic marketplace that draws many players regardless of the market conditions. Some enter when the market is only going up and others enter when market prices are soft. In either scenario, it is the profit motive that leads these players into the real estate industry, and over the last several years many of the entrants were iBuyers (instant buyers).
Some iBuyers claim that real estate is broken but most in the real estate industry do not subscribe to that belief. However, like most industries there is always room for improvement. Continuous improvement to the real estate industry should be encouraged and welcomed by all.
Over the last several years iBuyers entered the market flush with cash and they thought that they could go in and buy a home at market prices and resell it in a few days or a few weeks for a profit, and for a while that was true. But many iBuyers made the mistake of putting too much reliance on pricing algorithms built by data scientists. Many of these data scientist have zero residential real estate knowledge or experience. The iBuyers did not fully understand the residential marketplace when they entered the market, and some still do not understand it today. Creating pricing algorithms is easy when the market is going up.
Today, many of the iBuyers have been sitting on houses for several months and selling them at a loss because of their reliance on unreliable pricing algorithms. The iBuyers missed the mark when they diminished the importance of the real estate agent. The iBuyer’s algorithm placed little value on real estate agents and real estate agents add value to each deal as agents effect pricing with their advice to buyers and sellers.
As with any equation there are two sides. We all know what iBuyers have done on the buy side. On the sell side, iBuyers still place little value on the real estate agent. Many iBuyers have inhouse agents listing the homes on the local MLS, but then they just set it and forget it. Outside of listing the property on the MLS, iBuyers have done little marketing to sell their properties. The iBuyer listing agent is often less responsive to buyer’s agents’ request than an independent listing agent. Again, their reliance is on the pricing algorithm. Ask any home seller what they demand from a listing agent, and you will discover everything iBuyers do not do when selling a home. Buying a home in any market is easy but selling a home in a soft market not so much.
iBuyers have unrealistic pricing expectations on far too many of the homes that they have listed for sale. Their ask price on many of the homes are on the top end of the pricing spectrum, but in many instances the condition of the property does not justify the list price. This is where real estate agents add value as an agent can provide objective advice on the real value of the property, especially when buying properties. This is not to say that real estate agents were not involved in evaluating the condition of purchases that iBuyers made, because some were. But it is evident that the pricing algorithm had more influence on pricing decisions than did the boots on the ground.
Some iBuyers have made the same mistake that many mortgage companies have made when they enter the market and that is they have not been able to forecast the market accurately when interest rates increase. Their plan to scale their business goes out the window because they cannot accurately predict the market when rates rise. Remember all the mortgage companies that claimed they were disrupting the mortgage market? Some did disrupt the market, and they should be applauded for that as they brought about positive changes that benefited the entire market, including the consumer. However, interest rates are up, and the market is now disrupting the disrupters in both residential real estate and the mortgage marketplace.
iBuyers have a place in the real estate industry as they can add value to the residential real estate marketplace. However, iBuyers will have a rough road ahead of them if they stay the course and continue to do it without real estate agents that are actively involved and have influence on pricing and sales strategy. If the iBuyer continues to rely too heavily on an unrealistic pricing algorithm when selling a home, then they will be doomed to failure.
Let the shakeout begin.
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