iBuyers pump the brakes in response to housing market uncertainty

The housing slowdown is raising new questions about the future of iBuyers, those deep-pocketed companies that had been snapping up homes primarily in Sun Belt markets. After hitting pause at the beginning of the pandemic, the upstarts ramped up homebuying as home values shattered one record after another.

Now, though, home prices are cooling and even retreating, and iBuyers, or instant buyers, have sharply pulled back on their purchases in recent months. In the latest news to roil the sector, the No. 3 player, RedfinNow, said November 9 that it had closed its home-flipping business.

While the other two major iBuyers, Opendoor and Offerpad, continue to operate, their offers aren’t as generous as they were earlier this year. For home sellers, that means the options for a quick-and-easy sale are narrowing.

“They were buying houses like crazy in the first half of the year,” says Stefan Peterson, co-founder of Zavvie, a real estate technology company that works with real estate brokers to help sellers compare offers from iBuyers. “Then in July, they really put the brakes on. They’re just not making a lot of offers. The market’s risky right now. It’s unpredictable, and they’re responding in an appropriate way.”

How iBuying works

iBuyers are a newer breed of real estate player. Opendoor and Offerpad position themselves to homeowners as a fast, painless way to sell. Homeowners avoid the hassle of painting and staging their homes, and need not clean up and clear out for showings. The iBuyer makes a cash offer, and the seller can pick a closing date. The iBuyer then spruces up the home and quickly puts it on the market for sale.

For all the headlines and hype surrounding iBuying, the concept remains small. iBuyers account for less than 1 percent of all U.S. home sales, according to the National Association of Realtors.

To entice homeowners to sell to them in a hot market, iBuyers dangled aggressive offers. In the second quarter of 2022, iBuyers offered homeowners an average of 105 percent of the value of their properties, says Peterson.

Fast forward to the third quarter, and the typical offer fell to 98 percent — meaning sellers were accepting a slight discount for the convenience of not needing to market their homes.

Why iBuyers are pulling back

In the aftermath of the COVID-19 pandemic, the U.S. housing market caught fire. Mortgage rates plunged below 3 percent, and home prices soared amid strong demand and tight supply.

The market is finally cooling, however. Sales of existing homes have fallen for seven months in a row, according to the National Association of Realtors, and home price growth is dropping at a record pace. Meanwhile, mortgage rates rose at their fastest pace in decades.

Opendoor, the largest of the iBuyers, said it reduced home-buying activity by 45 percent in the third quarter of 2022 compared to a year earlier. The company laid off 18 percent of its workers in early November.

“Navigating a once-in-40-years market transition has required us to operate with urgency and discipline to manage risk and overall inventory health,” Opendoor CEO Eric Wu said in a Nov. 3 statement.

In other words, iBuyers are concerned about buying homes now that will lose value in a few months.

Offerpad said its pace of buying slowed 33 percent in the third quarter of 2022 compared to a year earlier. “We continue to navigate through this period of market dislocation by appropriately managing down our inventory levels and strategically acquiring homes that reflect current conditions,” Offerpad Chief Financial Officer Mike Burnett said Nov. 2.

Before the Nov. 9 news that it was pulling the plug entirely, RedfinNow had slowed its pace of buying while the housing market shakes out.

“We’re now selling homes much more quickly than we are buying them,” Redfin CEO Glenn Kelman said in the company’s second-quarter earnings call. “In July, we put more than four homes under contract to sell for every one we put under contract to buy.”

Of course, turmoil is nothing new for the iBuying sector. Last year, Zillow roiled the market by pulling the plug on its iBuying program, known as Zillow Offers. The company said it had lost $1 billion on iBuying.

Zavvie’s Peterson doesn’t expect the other iBuyers to shut down their businesses. After all, the entire model was invented as a way to remove some of the uncertainty from the selling process — and uncertainty abounds in today’s shifting real estate market.

“A lot of consumers really like the idea of selling their house to an iBuyer and skipping the open-market process,” says Peterson.

‘Power buyers’ emerge

While Zillow has pulled out of iBuying altogether, it is testing a variation on the theme, known as “Zillow-backed offers.” For a fee, Zillow will stand in as a cash buyer on behalf of buyers who need financing.

As of early October, the pilot program was available to buyers in Raleigh and Denver purchasing properties priced at up to $750,000. From the date of the closing, buyers have 90 days to secure their financing, but if it falls through, Zillow will step in to buy the home. The buyer will then have another 90 days to repurchase the home. If the buyer is still unable to land a mortgage after the second 90-day period, Zillow will resell the home.

In this way, Zillow is entering the new space of “power buyers” — companies that stand in as cash buyers on behalf of consumers who need financing but want their offers to stand out. Knock, Orchard, Accept.inc, Homeward and Ribbon are among those that make cash offers on behalf of buyers who are creditworthy, but don’t have $500,000 available, for example, to wire to sellers.

Should you sell to an iBuyer?

In today’s market, iBuyers offer the safety of a certain sale. However, their offers are growing less generous as the market shifts. Should you sell to one of these companies? Here are some factors to consider:

• Where you live and the age of your home matters. iBuyers aren’t an option for all sellers. The companies haven’t been active in such cities as New York, Chicago and Boston — they’ve focused on Sun Belt metro areas like Atlanta, Charlotte, Phoenix and San Antonio. iBuyers also tend to avoid older homes, properties that need extensive renovations and unique homes that are difficult to value. They’re mainly looking for newer, suburban homes.
• Compare offers from multiple iBuyers. In many markets, Opendoor and Offerpad compete for your business. If that’s the case, ask both for bids. And in some markets, real estate brokers and investors have created their own small-scale iBuying operations.
• Talk to a real estate agent. Get a proposal from a traditional agent. How much might your home sell for, and what would a Realtor charge in commission? Although you’ll skip the commission with an iBuyer, iBuyers do charge a service fee, typically around 5 percent. Your agent’s commission might or might not be comparable to this fee, so it pays to compare your all-in costs.