Will iBuyers end house flipping for small real estate investors? They have many traditional real estate investors terrified! Companies such as OpenDoor, OfferPad, Zillow Offers, RedfinNow and Knock are being referred to as "iBuyers" and even large brokerages such as Keller Williams and Coldwell Banker now have an iBuyer branch. These iBuyers are buying houses for quick cash, renovating and then reselling; just like traditional house flippers have been doing for decades. However, they are doing it on a massive scale like never before seen in our industry's history. Funded by billions in Wall Street money, they are buying thousands of houses in many major markets across the US and expanding rapidly. Here's how iBuyers will impact small real estate investors:
What are iBuyers?
They're basically traditional house flippers on steroids. iBuyers are paying cash for houses, but their money comes from Wall Street. They close in seven to 10 days, fix the house up and resell it. It's house flipping on a massive scale. The leading iBuyer company Opendoor, claims that they bought 10,000 houses in their brief history. Another company called Zillow is only in two markets right now, have been in business less than a year and are sitting on over 1000 houses in inventory. That number doesn't count all the houses they've already sold. iBuyers are in many markets across the U.S. and they're growing rapidly. Some pundits predict that they're going to be buying over 100,000 houses combined each year before it's all said and done.
Traditional Real Estate Investors Are Worried
Meanwhile, traditional real estate investors, small house flippers that have been doing this business for a long time are frightened. They're worried for 3 reasons:
- they can't pay as much as iBuyers have been currently paying for houses
- traditional investors don't have nearly as much money
- their money is a lot more expensive than iBuyers' money
These iBuyers aren’t getting hard money loans, they’re receiving lines of credit from Wall Street with super low interest rates. Does this mean that these iBuyers, we'll call them the Walmart of our industry, are they about to put us out of business? Is this the end?
One of the reasons you learn from me is because I want to share truth in wisdom. Some of you have been asking me about the OpenDoors of this industry for a while now. I purposely didn't deal with the subject until now because I wanted to have some time with my apprentices and I going toe to toe against these iBuyers in major markets. It is essential I have some real insight and truth to share with you.
The goal of these iBuyers is to take a slice out of the overall house selling marketplace and go way beyond what we've ever done. We are the two percent of the market. They are ten percent of the market. What ten percent am I talking about? I'm referring to the ten percent of people that would rather sell their house directly to a buyer but still make pretty close to market value. They would prefer to take a small discount on what they would have gotten had they used a traditional real estate agent, just to make it simple on themselves. This isn’t surprising because selling a house and moving is a real pain usually, right?
Now that's a little different than us because we deal with the two percent of people that have strange situations. Sometimes they're willing to take a much deeper discount, the house needs a lot more work, and all those things in between. However, as a consequence of them taking their ten percent, they're grabbing some of our market share too, and that’s why all these traditional investors are so terrified right now.
Targeting Motivated Sellers
Because they're interested in volume, they're buying a lot of deals from motivated sellers. This does have real estate agents concerned, because it's taking some of their better clients. Just like a real estate investor wants a motivated seller, real estate agents love those clients as well. They want clients that need to get rid of their house because pricing is so powerful in selling houses. They can list the house slightly lower and it gets sold right away. It makes them look good, and they get referrals from it. If you have a greedy client as a listing agent, they're going to want you to sell the house for more than market value and you are dealing with the difficult part of the market share. Understandably, agents are pretty upset because their best customers are being taken by iBuyers.
Since the market share they are interested in is uncomplicated motivated sellers, it also means that they're not as interested in real problem situations. They're going to look for things where they can just buy quickly and move on and make it simple and fast. This means not messing with something that's in probate, that's going to take three months to finalize, or it's upside down or close to it. They're still a traditional house flipper at its core.
Creative Investors Provide Creative Solutions
They're not looking for complications and that's our zone. I've been dealing with complications with house sellers for almost twenty years now and that is where we shine. If you're a creative real estate investor that can solve complicated problems, there's an encouragement here. iBuyers are not going to touch it, but it’s perfect for us. So that's the first big piece of this puzzle. If you're a creative real estate investor, you're focusing on complicated situations oftentimes or you're providing creative solutions.
Pay Cash and Close Quickly
iBuyers have one big tool in their tool belt, pay cash and close quickly. I'll admit, it's a powerful tool, however sometimes sellers don't need or want that. They may prefer to move out over a course of time. some clients have certain requirements and you can make a deal work as a creative investor. So, the good news is their trash is our treasure, and it's our treasure to make a lot of money. Traditional investors don't have that benefit. They're going toe to toe with iBuyers and they're losing. However, creative investors like us, we're stepping in and we're able to continue to do what we've always been doing. It’s true that we're not able to grab some of those low hanging fruit in certain markets, but there's more to this subject.
Are iBuyers Making Any Money?
Zillow right now has lost money in the last four quarters on their iBuying operation. They're paying too much for houses. It turns out that it costs more than they thought to hold onto a property. It doesn't sell for as much as their little Zestimate machine told them. It seems real estate investing is a little bit harder than they thought and not quite as automated. Right now, some of these iBuyers are losing money, but remember they're using billions of Wall Street dollars and their goal is to win on volume. Now that in and of itself is kind of hilarious. I don't know if you've ever seen the old school Saturday Night Live commercial with Phil Hartman called First Citiwide State Bank, where ultimately the way they make money is volume. If they're losing money now, how is volume going to help them make money later?
Adjusting Business Model
We’ve been watching these organizations very closely, and have noticed that there's been a dramatic difference in how much they're offering. They're beginning to drop their offer amounts, realizing that they were paying too much before. This drop in price means they will lose some of their market share because some of the early people that sold to these iBuyers made out like bandits. Some people were hoping they would go out of business because they're paying too much for houses. My thought was they're probably going to adjust their business model to figure it out. Furthermore, as they begin to adjust, they're going to figure out how to make money in this business. Also, they may begin selling additional services such as title services and mortgage leads as ways to monetize.
Are They Creating a Real Estate Bubble?
Others have said that this is an indication that we're in a real estate bubble, because these iBuyers with way too much money are paying too much for houses. First, they are paying for more affordable price point houses, which as I've already clearly argued in many videos, is where the opportunity is. That's where there's the lack of inventory, and it's becoming more and more difficult for someone to buy a home that they can afford in America. So, I think they're focusing on the right market. I don't really know if there's going to be a real estate collapse or not. As I have said many times, I'm not good at predicting the future.
The New Normal
I am going to assume that these monstrous organizations with billions of dollars are going to figure out profitability and be in business. Therefore, you need to look at this as if this is the new normal for our industry. iBuyers are here and they are paying cash for houses just like you and me, only they're paying more, and they are a tougher competitor. You may be asking, what's the good news? Here's the first piece of good news.
Making Our Business Mainstream
When they entered the business, they began spending millions on marketing and branding versions of marketing, not just the direct response marketing that we do. As a result, they've made the business of a home seller being able to sell directly to a company rather than going through a real estate agent more mainstream.
This is the analogy; with this high tide, all the boats in the harbor are rising. What’s happened is they've taken our two percent and they're making it three percent. They are still taking their one percent cut, and we're still back to our two. They are making our market bigger, so even though they're taking some deals from us, they've created some deals that we wouldn't have before. It's fantastic! We're getting significant deal flow volume with our apprentices that are in markets where they are heavily competing against these iBuyers. In places like Phoenix and Atlanta we're doing great and it's because they're creating more business for us.
Creative Real Estate
As I mentioned earlier, an advantage as a creative real estate investor is we are taking their trash in some cases, and it's our treasure. Sometimes we're dealing with sellers that go directly to us and have never heard of these iBuyers. Occasionally they have already connected with Opendoor and we are a breath of fresh air.
Here’s little tip if you're in a marketplace with an iBuyer. Typically, what we like to communicate to the sellers is that we are similar to Opendoor, only we're local, we're small and we're more creative. We can do things that they can't do. They're a big company and they have specific rules. There's a lot of things they don't buy and say no to, and we're more likely to say yes, but we're creative about it. As a result of trying to be more profitable, what they're also doing is they're building rules, rules, and more rules. They won't buy property in a HOA, they won't buy condos, or anything over 500,000. iBuyers are becoming traditional real estate investors. As they make more deals, they lose ever so often and they create more policies.
These rules create opportunities for us. In many respects they are just a traditional investor like have always been in our world. We have always been the ones that take on the deals that traditional investors aren’t willing to touch. I will agree they're a little bit different. They market in some of the places that we market for sellers. Also, they interact with more of our leads than the traditional investors have in the past. However, the high tide has allowed us to create more opportunities. We're doing better than ever. I hope they do well. I wish the best for any competitors I have because I know how to weave and bob and be successful regardless of the competition.
Creative vs. Traditional Investing
If you're reading this post and you want to know more about the difference between creative and traditional investing, I have a video on it called Creative Real Estate vs Traditional Investing. I believe I'm one of the first to really describe the difference. It's what's made us so much money over the years in different markets, whether it's up, or it's down, or who the competitors are, it's so consistent and powerful.
- iBuyers are taking a big chunk out of the investor market share, but they've also created some market share for us, allowing us to continue with our two percent.
- They may not be profitable now, but they might become profitable.
- There might be a real estate collapse and they might lose everything, or the market might stay healthy for affordable houses and they might become successful.