Imagine a painless and nearly instant home-selling process.
Well, it’s a lot closer than any of us ever imagined. The end-to-end customer experience for real estate transactions has seen billions of dollars poured into iBuyers and there are no signs of it slowing down.
iBuying is simple, a real estate company uses data science, AVMs, and public record data to identify a home with high investment potential and makes an instant offer. They charge a higher fee for convenience but sellers benefit by being able to vacate a residence within weeks, if needed, even days. Typically, iBuyers charge a 7-10% fee compared to a standard 6% agent commission and will offer 80-100% market value for a home. You may take home a bit less than the traditional method but you can save time and all the headaches that come along with selling a home.
One of my favorite industry experts, The Notorious Rob recently predicted that 60% of home sales (not transactions) will be iBuyers by 2025. Quick math, 5.3M homes sold in 2018 would mean 3.18M homes sold in 2025 via iBuyers. That’s uber growth, no pun intended. In 2018, iBuyers represented ~0.2% of the national market share and up to 5% in the markets they operated in.
There are five companies leading the charge in the U.S. with Opendoor seated at the top thanks to the most home iBuyer market purchases in 2018. But will Opendoor still come out ahead at the end of 2019 with some of the largest real estate companies entering the space –– and quickly?
There are three critical factors –– customer acquisition cost, capital and data –– that I believe will influence who ultimately dominates the market this year but to no surprise, it is my prediction that the one with the best data will have the biggest advantage.
First, Zillow. At this moment, with a market cap of $7.35B, they have the largest war chest, the most employees and resources to fuel their iBuyer growth. Rich Barton was announced CEO in 2019 and set out a series of longer-term goals, including buying 5,000 homes a month. That’s a colossal increase from the 500 they purchased in Q4 of 2018.
Second, Opendoor. To date, $1.3B in venture capital has been raised and over $1B of it in 2018 alone. The CEO, Eric Wu has said that in the not-so-far future, the transaction of a home sale will cost nothing. This is a bold statement, but at the moment, Opendoor has a ton of capital and has taken off with 60% iBuyer market share in Phoenix.
Third, Redfin. Market cap $1.77B and the second largest online real estate platform next to Zillow. They recently partnered with RE/MAX, providing a unique opportunity to increase its reach to agents and potential buyers and sellers. It is highly likely they will be a large competitor to Zillow in this space.
Fourth, Offerpad. Raised nearly $900M from venture capital and $100M in debt. They are operating in over 700 cities across the U.S. and had a larger price appreciation on their purchased homes than Opendoor and Zillow in 2018, fluctuating between 7% and 9% (find details in Mike Delpretes Inman Connect presentation).
Fifth, Knock. Full transparency, they are a Foundry Group portfolio cousin. Raising over $430M since 2016, they are positioned to be a rapidly growing startup in the iBuyer space. Sean and Jamie, the founding team, bring vast industry experience (formerly at Trulia) and are using data science and technology throughout the entire home selling process.
Now you know the players, so who will win and how?
Number #1 = Customer Acquisition Cost (CAC)
It’s all about the seller leads in the iBuyer model. Zillow and Redfin have the advantage here looking at the sheer amount of website traffic that each receives. According to Alexa: Zillow.com is ranked the 35 most visited website in the United States with ~37M monthly unique visitors. Redfin.com is ranked the 155 most visited website in the United States with ~15M monthly unique visitors.
The ability to split-test instant offers on this amount of website traffic creates a distinct advantage for Zillow and Redfin.
As for Opendoor, Offerpad, and Knock. They will continue to use traditional methods of advertising, marketing and direct mail to make offers to potential sellers. This is a solution but it will be harder to acquire leads with larger competitors joining the space.
Number #2: Capital
Zillow wants to buy up to 5,000 homes a month. At a median price of $300,000, that would cost $1.5B a month. Yikes. You need a lot of capital to do that. Having a war chest like Zillow or $1B in raised capital like Opendoor is another big advantage in the iBuyer space. Now, with that being said, if another 2008 happens, everyone is screwed. I don’t have a ton of data on this but you can imagine how sitting on thousands of homes with only 50% of their original value could bankrupt a lot of companies in this space.
Number #3: Data
Data collection, maintenance, and quality are critical to iBuyer success. They need to rely on historical public record data such as transactions and assessments to make informed data-driven decisions when evaluating and making an offer on a property will make or break these businesses. Access to this data can be incredibly difficult and requires a ton of resources to get the best data. From looking at the current landscape, Zillow has the most software engineers and data scientists attacking this problem and investing millions every year. Last but not least, accurate data fuels accurate AVMs (automated valuation model) that estimate the home value (we’ve all heard of the Zestimate) and are key to succeeding at the iBuyer model.
Everyday we hear a new bold prediction, assumption, or fundraising round around iBuyers. We cannot predict the future but iBuyers are gaining traction quickly because they remove friction, pain and time from the real estate transaction process. This could be a disruptive transition to the traditional, legacy process of real estate. Exciting times ahead!
This article was originally published on propmodo.com.