I’m right in the process of trying to wrap my head around this, as it’s new to me.
I’ve read about Zillow doing the iBuying thing and how they bit off more than they could chew. They bought houses at high prices, seeking to re-sell them quickly, but they lost money on them instead and have had to stop this practice.
But there are many other businesses doing this, and I don’t think I’m talking about the “We Buy Ugly Houses” guys. Googling, I see Opendoor Technologies, Offerpad, etc. They claim they save you a lot of hassle, namely, dealing with realtors, staging a house, doing repairs, etc. But there must be a catch. They must charge a lot, right?
Like I said, I’m right in the process of reading up on this topic. But if anyone has experience with this new way of doing business, I welcome their input.
Zero experience, but I was reading a bit into how Zillow screwed up so badly in doing this. One article pointed out the unequal nature of the transaction. As the homeowner, you may be aware of flaws in the house that will cost the new owner a bundle to fix. Also, why wouldn’t I start by quietly getting the house appraised to find out what it could sell on the open market? Or I could bring in a real estate agent and ask them for a quick estimate of the sale price. I heard that in some cases, Zillow was paying 25% over market value. So if my real estate agent friend tells me the house will sell for X and Zillow is offering X plus 25%, I might well take them up on the offer, especially as I don’t need to pay a commission or clean it up or stage it.
Realtors and repairmen and house-stagers charge a lot too, so Zillow et al could plausibly save money by taking that expertise in-house.
The adverse selection issue is a problem, but I would be surprised if someone doesn’t figure this out long-term. House sales have very high transaction costs, so there’s a lot of room for someone to come in and make the process simpler and cheaper and capture a bunch of those costs for themselves.
This is true in all house sales, right? However a prospective buyer finds out about them in order to offer a lower amount, Zillow or one of its competitors could potentially do the same thing.
Uusually the buyer’s offer is pending inspection but my understanding is that the ibuyers like Zillow are buying without that. Sometimes without even seeing the house in person.
Even then, though: inspections will find some obvious expensive problems, but they’ll miss a lot too.
I wonder how much of a disadvantage corporate buyers are at by actually following disclosure requirements.
If you’re an individual who is selling your house, and maybe last year the plumbing was messed up for a bit and you had a plumber out who told you he could do a quick fix but really you should all the pipes and replumb in the next few years for $10,000. I bet a lot of individuals quietly lose that recommendation, sell the house and don’t breathe a word, and then the next buyer deals with it. But if you’re Zillow, it’s a lot harder institutionally to do so. The plumber’s recommendation is going to be in writing and it’s going to find its way into a file and that file is subpoenable if the next buyer finds a big plumbing problem.
If that’s true, though, one possibility is that long-term the iBuyers will be able to charge a premium because they actually fix stuff and don’t hide it from future buyers. Just like people will pay a premium to buy a used car from a dealer, over a private party, not just for the ease of it, but also because the dealer has a professional mechanic who evaluated and fixed issues with the car.
Having bought two houses my impression is that a ton of the process is dumb and archaic and a big hassle, and there’s a lot of low-hanging fruit for someone to come in and make it better. Which is why I’m optimistic for the industry, although I don’t know about individual companies.
Compare to buying a car. You can walk into a dealership and buy, with financing, an $80,000 car in a few hours. Buying a house that costs maybe 2-3 times that takes months and endless nonsense.
I always assumed the catch was that they pay less for your house than you’d be likely to get selling it through a real estate agent. I got a flyer from one of those companies recently listing what they paid for similar houses in my neighborhood. It wasn’t that much more than I bought my house for, and I bought my house during the 2008 recession. But you don’t have to make any repairs or anything, so there’s that.
If they pay you less for your house, I wonder if it is as much as what you would have had to pay a realtor for their cut plus closing costs. 6% comes out to a lot of money in today’s market.
I wonder if that’s really a good thing overall though. Housing prices are already so high that home ownership is beyond the reach of the middle class in many places. I feel lucky to have snagged a house in this crazy market when I did, and I don’t like the idea of companies buying up the available houses on the market and selling them at a premium while my friends are still trying to buy.
If the iBuyers are successful, they will likely lower the cost of housing slightly, since they will reduce overall transaction costs and capture only some of that surplus. The premium I’m talking about is not based on them cornering the market on houses or anything, just that a house from a trusted business like this may be more attractive than one from a random untrustworthy seller.
The real reason housing prices are crazy is that in many places there are significant regulatory barriers to adding more housing.
Even without these companies buying up houses to flip, at least since 2008, companies (and individuals from overseas) have been buying up homes to rent.
Frankly, I think this is a sign that housing is in a giant hubble.
Anyone speculating in real estate right now is taking a large risk. Zillow getting out of the house-flipping biz is just one more sign of it.
Inflation printed today at 6.2%, well above expectations. No one is saying ‘transitory’ any more. There was a 30 year treasury auction today, and it had very low demand and the big banks had to step in to prevent a failed auction.
Interest rates will have to go up. In this environment, that will be an economic calamity, and real estate will be the first victim.
Also, Evergrande, the largest real-estate firm in China, just defaulted on its payments. It’s essentially bankrupt. That’s a lot of money ($300 billion). Forget more Chinese investment in American real estate for now, is my guess. That will also impact prices and sales.
The only reason to buy real estate right now, IMO, is as an inflation hedge if you are sitting on a ton of cash and don’t own your own home.