Price-skewing iBuyers like Zillow hurt US homeowners, rivals say

Screenshot 2021-09-29 at 2

(Photo credit: Getty Images)

High-tech “iBuyers” like Opendoor and Zillow have burst onto the housing scene in hot US markets with an enticing promise: For a fee, they’ll buy your home for cash, let you choose your move date. and will help you avoid the irritating process of showing your house.

IBuyers are trying to grow quickly in order to gain market share and recognition, throwing out their current hopes of profit in a resumption of the ridesharing wars in the 2020s. the process ; Earlier this month, a TikTok went viral after pushing conspiracy theories on iBuyers’ end goals.

The review of iBuyers is not limited to internet users. Competitors and local realtors are starting to voice concerns about the model and say they know a better way.

“These are price-distorting entities,” Vishal Garg, founder and CEO of Better.com, a digital home ownership company, told Motherboard. “They hurt our customers.

Zillow argues that it would make no sense to skew prices and said in a statement that his “goal is to buy at market rate, then sell quickly at market rate.”

“If we pay too much, we will lose money on the resale. If we bid too low, the owners won’t use us, ”Zillow spokesperson Viet Shelton said. Opendoor declined to comment.

Do you have any advice for the journalist of this article? Using a non-business phone or computer, you can contact Maxwell Strachan securely on Signal at 310-614-3752 or by email at [email protected]

IBuyers say they mainly hope to make money from the convenience fees they charge when you sell. Zillow says his “modest fees” are typically around 5 percent nationwide. Opendoor’s fees are generally around 5 to 8 percent. After your move, they do some light repairs and quickly resell it on the market, building up any appreciation.

Such a model costs too much, Garg said. “I don’t like it because it means consumers are going to lose money,” Garg said. His company, Better, offers an alternative model. Better to buy homes on behalf of people for themselves while charging a low commission of around 1.5% for the purchase, well below the industry average, the company said. Better to earn money on finance and insurance.

Garg himself is a controversial figure. Articles in The daily beast and Forbes detailed his “scorched earth management style,” and Garg was sued for fraud and embezzlement, which a company spokesperson called “baseless.” (“Better has grown its business almost exponentially by staying relentlessly focused on delivering great results for our customers,” the company said when asked about the allegations.)

The company, which is valued at over $ 7 billion and preparing to go public, nevertheless believes that he is pushing for changes similar to the removal of fees for travel agents in the airline industry. In Dallas, the company has already started trying to get homes bought and sold on the Better platform with zero percent commission for both parties, he said.

When Sean Black launched Knock.com in 2015, he said he wanted to create certainty, convenience and transparency for homeowners without “buying their old home at a discount.” He and his co-founder developed a business where they could help people buy their new home with cash, move out, and then sell their current home while making just one mortgage payment.

Black, co-founder and CEO of Knock, said iBuyers helped create liquidity in the market, but did so at unnecessary “cost to the consumer”. He compared the iBuyer industry to Hilton and Knock hotels to Airbnb, saying his business is an open platform, doesn’t own real estate and therefore is less capital intensive and lighter on its money. feet.

“We are able to pass all of these savings on to the consumer while continuing to make a good, healthy business while ensuring that consumers get a better deal,” Black said.

But for now, iBuyers are winning the war to gain public attention. David Chol, real estate agent and director of sales and operations of the Texas division for Marketplace Homes in Austin, Texas, works frequently with iBuyers, he said. He estimated that around 60% of his customers are now interested in learning more about iBuyers and said he has seen a “massive increase” in the number of people choosing to use iBuyers this year.

He has a simple explanation: Zillow has offered fees as low as 1% this year, he claimed, which Chol called “quite shocking.” “It’s easy to sell something when you give it your all,” he says. Zillow is essentially trying to break even as it grows its iBuyer business, the company recently told Motherboard. Chol believes that iBuyers will face challenges selling the convenience benefits as they increase their fees.

As an example, he said that when a few Zillow offers recently came with an 8% higher fee, the non-financial benefits didn’t seem to matter much.

“If the only way to do it is to donate the house, how is that sustainable? Chol asked. “How do you maintain market share when you can’t sell the house in every transaction?” ”

Overall, Chol believes companies similar to Knock are being overlooked nationwide, even though they offer the same benefits to customers at sometimes even more “affordable” prices. “Maybe they’re overlooked because it seems too complicated,” Chol said. Black agrees with Chol’s assessment, saying the iBuyer model was easier to understand.

Garg compared the iBuyer model to ticket scalping, noting that iBuyers tend to be most active in hot markets like Phoenix and Raleigh. “Do you have to buy slices from someone who just went to the pizzeria before you?” Garg asked. IBuyers aggressively take issue with the idea that they are pinball machines, claiming that any profit they earn on resale is incidental. Businesses are targeting mid-level homes that don’t require major repairs. But Garg argued that the simple act of buying and selling homes could distort prices.

“They create both artificial surpluses and artificial shortages in the supply of housing,” Garg said. “This means that you behave speculatively, and speculative behavior in real estate markets usually ends up negatively impacting homeowners and the people who finance homes.”

Black wonders what will happen to iBuyers if the market cools down, leaving them with thousands of homes worth less than they bought them for. Zillow says that’s no problem. “Zillow offers are designed to work in a hot or cold real estate market,” Zillow’s spokesperson told Motherboard. “If there is a change in a market, we are able to adjust the service fees that we charge to reflect the costs that we incur when we resell the house.”

Earlier this month, Sean Gotcher posted a TikTok theory about an anonymous online real estate company that people were using to search for homes. The Las Vegas-based real estate agent wondered aloud if such a company might end up using a combination of data and inventory in the future to manipulate house prices. The TikTok went viral, and Zillow said in response that the video was born out of “disinformation and lies.”

Motherboard asked Gotcher by phone if he believed his hypothetical scenario could come true, noting that many viewed it as a conspiracy.

“Call it a conspiracy. I hope that will never come to pass, “he said. But, he added,” But these big companies told me a lot until something did. Then they did. say, ‘Oopsie, I’m going to pay a fine.’ “

One point on which Gotcher and Zillow can agree: iBuyers are not the main reason for the housing crisis. They compose a tiny fraction of the monstrous $ 36 trillion real estate market, which had problems long before the term “iBuyer” was ever conceived.

“This is not the whole housing crisis. That’s part of what we have to pay attention to, but it’s not what drives all of these prices up, ”Gotcher said. “It’s not a thing. It is not a business. It is not a single government system. It’s fucked up, in all aspects.

Comments are closed.