Disrupted Disrupters

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COVID-19 is causing the iBuyers’ business model to stall

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With COVID-19 spreading, the iBuying frenzy seems to be fading fast. Commerce is slowing and even closing in some locations, especially major cities, making it difficult for iBuyers to determine fair prices for homes. Zillow, Redfin, Opendoor and Offerpad have all withdrawn from the iBuying market for the time being.

The only company not putting on the brakes seems to be HomeVestors, the “We Buy Ugly Houses” company that was in the iBuying space before that term became cool. The companies recently occupying this space never made it to South Carolina, but we saw “We Buy Ugly Houses” signs on telephone poles throughout the state, even in the most rural areas.

Some economists are speculating that COVID-19 may put a nail in the coffin of the “institutional fix-and flip” business model of those companies recently entering the market. The model was considered risky in the best of times. In times of economic uncertainty, it becomes even riskier. Safely buying a home at 95% of the market value requires confidence that the market won’t drop substantially.

HomeVestors, on the other hand, is attempting to grow by selling franchises and advertising that it remains in the market that others are leaving.

Other economists and some of the companies themselves are arguing that iBuying is a viable alternative in a market where it’s difficult to show homes and hold open houses. At this point, the correct answer is anybody’s guess.

The retreat of Zillow, Redfin, Opendoor and Offerpad before they even reach South Carolina is good news to South Carolina closing attorneys and real estate agents who view the iBuying phenomenon as another disruption to our business model as well as another possible means of dilution of control over residential closings by attorneys.

It sounds as if, for now, truly ugly houses may be the only ones subject to iBuying in South Carolina. The disrupters have been disrupted by economic uncertainty.

Motley Fool: “Zillow Plans to Do to Real Estate What Amazon Did to Retailing”

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Zillow Offers is not available in South Carolina yet, but it may be a matter of time

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This blog has promised to keep South Carolina dirt lawyers informed about the growing phenomenon of home “iBuying”. Please take a look at two recent articles from Motley Fool linked here.

One of the articles, entitled “Zillow Plans to Do to Real Estate What Amazon Did to Retailing”, indicates Zillow is aggressively taking on the neighborhood real estate broker. The other article, entitled “Why Zillow Wants to Pay More for Homes” indicates iBuying is a scale game, meaning the number of homeowners who accept Zillow’s offer increases dramatically with relatively small increases in price.

Zillow has been planning for this game for years. It already has a massive amount of traffic on its site and has accumulated an enormous amount of data. Go take a quick look at the data Zillow is showing about your own home!

To date, according to Motley Fool, Zillow faces intense competition from Opendoor, which leads the iBuying industry, already serving more than 40,000 customers. But Zillow is working hard to catch up. Opendoor operates in 21 markets. Zillow is in 17 of those markets, four additional markets, and plans to open in five more by the middle of 2020.

In early 2017, Zillow dipped its toe into the process of selling homes by launching a product it called “Instant Offers”. The product was initially tested in Las Vegas and Orlando and was described as a method for homeowners to sell their homes for a discounted price without the traditional complications of repairing, listing, staging and allowing for open houses.

The process started with a homeowner providing basic information via Internet about the home (square footage, number of bedrooms and bathrooms, and remodeling information) and uploading photos. The Zillow product then connected the homeowner with investors who buy homes in the area, and, typically, an all-cash offer was made by one or more of the investors. The homeowner paid no fee for the service and was not obligated to accept any offers. Zillow touted the product as a method to alleviate the seller’s stress and to allow the seller to close in a shorter time frame.

Other companies, Opendoor and Offerpad were already operating in this space at the time of the Zillow launch. The launch was called another example of technology disrupting the process of closing real estate transactions.

Real estate agents, of course, met the news with alarm. They said sellers would be suckered into making mistakes that might cost them the education of their kids, vacations or just the ability to sleep better at night because they have more money in their bank accounts. An online petition was initiated, asking the National Association of Realtors to threaten Zillow with being removed from access to listings. The NAR responded that it could not sponsor or encourage such a boycott.

Zillow has always stated publicly that it is not in the business of getting rid of real estate agents. Its executives called Zillow a media company, not a real estate company, and said it sold ads, not real estate. Even the Instant Offers program encouraged sellers to use a realtor even while avoiding the traditional listing and sales process. The question then became the amount of commission the real estate agent would earn for reduced services. When real estate agents initially complained about Instant Offers, Zillow responded that 70% of its revenue came from working with real estate agents.

In early 2018, however, Zillow announced that it would begin buying homes directly from sellers and then turning around and selling them. With this announcement, Zillow began selling ads and houses. Two test markets were announced, Las Vegas and Phoenix. Zillow said that when it buys homes, it will make the necessary repairs and updates and list the homes as quickly as possible. Zillow said local real estate agents would represent Zillow in the transactions. Zillow also announced in a press release that the vast majority of sellers who requested an Instant Offer ended up selling their homes with agents.

So far, nothing is in the works for South Carolina as far as we know, but since it is just next door in Atlanta and Charlotte, how long can it be?

Stay tuned for more news on this topic. Real estate lawyers will need to figure out how to remain in the game whether properties are sold through the Internet or not!