There is a lot of hype around the iBuyer space, but followers of the industry might have a hard time getting a full and fresh perspective. In essence, iBuyers are solving homeowners’ need to access home equity via a quick sale. I now operate a company that also aims to do this, after spending 15 years in investing and risk management, including buying single-family real estate, and the way I see it, the biggest threat to the iBuyer market is other iBuyers. That threat creates real financial risk for all entities involved.
IBuyers come in and buy homes with hopes to resell them quickly. They make their money by buying at a discount to the market and then selling at a higher price. It’s a velocity business. There are more and more of these companies coming to market every day, and that has set the stage for them to make less money and more poor decisions, such as being looser with their risk standards. Instead of sticking with the sale price these companies are happy with, they will price the house offers with the goal to win business. If there are 12 offers on a home and an iBuyer’s offer is not competitive, they will need become more aggressive with their offer, thus putting themselves at more risk.
The outcome will be more risk-taking while we’re at the top of the real estate cycle, investing and buying homes when things are at their best in the economy. Think of a chart of housing prices and imagine we are currently at the top of the chart and prices are the best they have been in decades. Risk-taking like iBuyers will need to do in this environment will lead to problems. Specifically, when the economy enters a recession, homes are much harder to sell. We are experiencing the longest recovery and boom in history; it would be hard to imagine that this can continue for another four years. If you have a company that owns thousands of homes with the intent to sell them and the market suddenly drops, then you have a problem. Investors and companies will be underwater.
There is no way for iBuyers today to avoid the need to be competitive and even aggressive with their purchases. When people compete for price, they must reach a business model that can put their businesses at risk. These companies will have to make a hard decision: Do we tighten our discount or do we lose market share?
How can iBuyers avoid this outcome?
There will always be cowboys who swing for the fences and disregard risk — but in my view, this is never good. I would highly recommend to operators not to succumb to the temptation of changing their business model to make projections seem better. Slow and steady wins the race.
IBuyers need to base their risk models on the state of the economy and where they are comfortable, rather than on the goal of winning more business. Patience will leave investors or iBuyers with the ability to operate in an environment of market correction. IBuying is something that has never been truly tested in a recession in this form.
Furthermore, the people running these businesses are better off having a real estate background, rather than a tech one. This is a real estate business that is tech-enabled. In 2008, the housing market dropped over 15% on average and in some regions, the market dropped 50%. There is no technology that helps hedge that process or mitigates it. The best hedge is cutting your losses. I often hear iBuyers say they can hedge their portfolio — they have figured out a product or way to hedge their portfolio if the market drops. From years of experience in real estate, I believe the only hedge is to cut your exposure and sell homes. In a soft market, this is impossible.
Lastly, institutions need to respect the homebuying ecosystem and allow consumers to participate in the market. This only happens if brokerage firms embrace what they are great at, which means providing their clients with outstanding service at the best price.
Will the worst case play out?
I sincerely hope not, and I think the consumers will become smarter and the operators will be responsible. At the top of a real estate cycle, it’s not the best time to purchase homes in scale, even if it’s at a discount. My guess is the iBuyers will continue to have a place in the ecosystem, but only the strong will survive. More sophisticated players will enter the arena, with a better understanding of risk versus disruption.