Last Updated on November 11, 2022
Homeowners in Phoenix, Las Vegas, Atlanta, and other iBuyer-heavy markets, hold on to your shirts. It’s going to be a rough ride ahead!
Markets like these have had a big runup in prices, in part because of the entry of iBuyers who have purchased large numbers of homes. Now that the market is sliding, the other side of that proverbial coin has come–the rapid exit of iBuyers, and the dropping prices that their exits will bring.
What is an iBuyer?
iBuyers are companies who buy homes based on a financial algorithm. They are continually evaluating and setting prices for homes across the country and if you’d like to sell yours, you can reach out to them and they’ll make an offer on your home based on the information they already have from public records and, usually, a single visit or inspection to your home.
The iBuyers may visit your home, but they don’t do the kind of exhaustive local research human buyers will do – they don’t know the details of the neighborhood, and they may not even know how your house is finished in comparison to those around it.
They expect to buy your home, make a few quick improvements and then sell it quickly, often within 90-120 days. They’re hoping they can sell it for more money than they bought it for as a result of smart buying strategy and the improvements they’ve made.
While iBuyers have been around in various guises for some time, it’s only in the past decade or so that the business has really grown.
With the charge led by companies like Zillow, Opendoor and Redfin, these firms expanded rapidly, using their deep financial resources to buy large numbers of homes. In certain markets around the country, their purchases (and sales) made up a substantial proportion of market activity, running as high as 8 or 9 percent of overall transitions.
Top 10 iBuyer Markets
|Metro Area||Market Share
|Dallas-Fort Worth, TX||5.1%||5.8%|
|San Antonio, TX||5.7%||6.1%|
|Las Vegas, NV||4.0%||7.1%|
Why would anyone sell to an iBuyer?
iBuyers are all about speed and simplicity.
Want to sell your home to a regular human who will live in it? You have to find a broker, make some improvements, stage the house, get inspections done, host open houses and more. It’s a ton of work.
And when you do find a buyer and get a deal in place, there’s risk that the buyer won’t or won’t be able to close the purchase if they can’t get a mortgage or they get cold feet for some reason.
By contrast, an iBuyer, if they’re interested in your home, will make an offer immediately and can close rapidly, often within a matter of days or a few short weeks. And, at least in the past few years, it’s been a virtual certainty that they would close on the transaction.
For the owner of a home, it’s a lot less work to sell to an iBuyer, and they have much more confidence that the transaction will close – a valuable combination!
As a result, if the iBuyer offers a price that a seller thinks is reasonable and within the ballpark of what they might get from selling to anyone else, it’s a real no-brainer to go with the iBuyer.
What is the Lemon Problem for iBuyers?
The iBuyers have a problem: homeowners know more about their homes than the iBuyers do.
iBuyers attempt to get around this by offering less than they think the home is worth, but here’s where the lemon problem arises.
Let me illustrate two scenarios:
You’re selling your home and your friend, a real estate agent, tells you it’s worth $400,000. You’ve heard about iBuyers and you reach out to a couple and get offers from them.
You get three offers as follows:
Offer #1: $350,000
Offer #2: $375,000
Offer #3: $425,000
All three iBuyers have done their best to calculate what your home is worth, but none of them are exactly right. You, a rational home seller, jump on offer #3 and get the deal done quickly at what you believe is above market.
You win, and the iBuyer, unknown to them, has bought your home above the market price. They bought a lemon. The other iBuyers who issued offer #1 and offer #2 don’t get to buy your home at below market price because another iBuyer came in with a higher offer.
Imagine, once again, that you’re selling that same home that you think is worth $400K. You get three offers from iBuyers and here’s how they line up.
Offer #1: $345,000
Offer #2: $350,000
Offer #3: $365,000
Again, you’re a rational seller, and to you, the $35K difference between the highest offer and what you believe to be the market price is a ton of money. You don’t want to give that away, so you decide to market your property and take your chance with a human buyer.
Once again, the iBuyer doesn’t get the chance to buy your home at below-market prices. Maybe you do better selling to someone else and maybe you don’t, but regardless, the iBuyer missed out.
These scenarios illustrate the heart of the lemon problem. Because the homeowner has a pretty good idea of what their home is worth, they choose the best circumstances to sell to an iBuyer and avoid any circumstances that aren’t to their advantage.
As a result, the iBuyer is far more likely to buy “lemons” – homes worth less than they paid for them – than they are to buy homes where they pay less than they’re worth.
iBuyers have had help…until recently
Since shortly after the Covid pandemic began, home prices have been on a tear as homeowners, spending more time at home, sought upgrades to their living circumstances.
From March 2020 to June 2022, home values rose a staggering 42%, much faster than any period in recent history.
This historic increase protected the iBuyers, because if they were paying too much, the market soon saved them by increasing prices to the level they had paid or higher.
Now, as you can see in the chart above, home prices started correcting in the summer of 2022, and iBuyers no longer have the protection of rapidly rising home prices.
Will The iBuyers Survive?
As of November 2022, some of the highest profile iBuyers have exited the market – Zillow and Redfin most notably.
Zillow is likely the luckiest of that pair, having to sell over 7,000 homes while the market was still rising. Redfin, on the other hand, has to sell its inventory into a sinking market.
iBuyers like Opendoor and others are still in the market, but their business, dependent on rising home prices, will be very challenging to operate in the next few years.
In a declining market, fewer sellers emerge, because homeowners don’t like to sell their properties for less than they were worth unless they have to. As a result, even if they do survive, the remaining iBuyers will have to shrink substantially in the face of declining transactions.
And, in order to survive, they’ll also need to find a way to beat the lemon problem, and none of them have found a solution to that yet.
What Happens When iBuyers Exit?
iBuyers aren’t like other owners. Most homeowners, as mentioned above, slow the process of selling in a declining market. iBuyers do not.
One of the biggest costs for iBuyers is having to hold on to homes. Holding on to a home means paying the financing cost of the home, as well as taking the prospective losses on the sale. And in a falling market, those losses can get bigger by the day. In this kind of environment, iBuyers need to exit properties quickly.
They typically guess where the market is in terms of prices for their properties and price at 2% below that level to ensure a quick sale.
In a market where iBuyers have been responsible for close to 10% of the transaction volume, that can mean that they can bring overall property values down fast for all other owners in that market.
What does all of this mean for renters?
Rent has increased at a staggering rate since late 2021–up 28% from October 2021 to October 2022–according to Dwellsy’s own data. This has been driven by the hot for-sale housing market, the covid pandemic driving more of us to need more space, and a host of other factors.
What we’re seeing now is the reversal of many of those trends.
iBuyers exiting properties are likely to lower overall home prices in markets where they’ve been particularly active, which reduces the cost of ownership and gives all of us more choices at more price points, whether renting or owning.
Plus, in a down market, many homeowners who need to move choose to hold on to their existing properties, rather than sell at a loss. This increases the supply of rentals, which should further reduce rents.