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Business Observer Friday, Nov. 1, 2019 2 weeks ago

Disruptive model takes on residential real estate

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A buzzy new way to sell a home has arrived in the region. Going beyond the hype will take fortitude — and a lot of deals.
by: Mark Gordon Managing Editor

Right around Thanksgiving last year, Jeffrey and Lauren Shaw experienced something that almost never happens to other couples or families: They sold their house — sans the stress that normally comes with that process.  

The Shaws sold their three-bedroom, two-bathroom house in a Fishhawk Ranch subdivision, in east Hillsborough County. They got $241,000, just above what they wanted. They closed less than a week after Thanksgiving. They had virtually no showings, never met with a real estate agent and did most of the behind-the-scenes work online in their own time. They chose their own closing day.

The process was much different than six months prior, when they listed the house for sale the first time. That’s when they had to deal with people coming in and out for showings, disrupting their lifestyle, which then included pets, a sick relative and one spouse who works from home.

“They told us this was going to be so smooth, but I didn’t believe it,” says Lauren Shaw, who, along with her husband, emphasizes they are Florida transplants from New York and as such have a high BS meter. “But it really was. I can’t believe it was as smooth as it was.”

‘I think about all the times I’ve sold a house or bought a house and how stressful that was. This process really eliminates a lot of that.’ Candice Bradley, Opendoor

The source of the smooth sale? iBuying. It’s essentially companies, boosted by technology and a want to simplify the complicated, that purchase homes directly from homeowners and pay all cash. To some in real estate, the burgeoning iBuyer trend is a market disruption gold rush, the best thing in the industry since the internet allowed people to search for properties in their pajamas.  

The Shaws sold their house to San Francisco-based Opendoor, one of the first of what’s now several iBuyers operating in the Greater Tampa market. The goal, for Opendoor, a competitor named Offerpad and, more recently, Zillow, among a few others, is to do what Uber, Netflix and Airbnb have done in their respective industries: build a brand around technology, artificial intelligence and sophisticated algorithms that make it easier, faster and better for customers do to something, from hailing a ride to watching movies to going on vacation.

“People expect to be able to do things almost instantaneously anytime they want from their smartphones today,” Zillow Spokesman Viet Shelton says. “They expect to push a button, and it’s like magic. And that means transaction simplicity has arrived for real estate.”

Big target

Although each iBuyer differs slightly in strategy, approach and marketing, there are several similarities. Tampa and the surrounding region, including as far south as the Sarasota-Manatee market in some instances, is about the 20th region some of these firms has entered. Phoenix and Tucson were some of the first targeted markets for iBuyers, with big metro areas in Texas and California not far behind. Florida is a later entry to the iBuyer party — partly, some real estate executives say, because property appreciation in the Sunshine State has started to slow.

Courtesy. Viet Shelton with Zillow

The model for most iBuyer entities is one of the similarities: On the sell side, homeowners can go to any of the company’s websites or apps, type in their address and get an offer within seconds. That offer figure is based on dozens of data points, from school districts to comparative sale prices for nearby homes to crime rates. The iBuyer pays for the house through a pool of capital, mostly from debt and equity financing. On a national scale, the three big Tampa-area iBuyers have raised some $5 billion.

The iBuyer then handles inspections, title searches and related work. Sellers in most cases can use an iBuyer’s rehab crew or do it on their own. Soon after that work, like with the Shaws, the sellers get a check and are politely asked to leave the keys and garage door openers on the counter.

After paying for the house, iBuyer entities then rehab it and list it for sale, in partnership with a local real estate agent. iBuyers makes money off a fee it charges sellers — not in reselling the house, where margins, iBuyer representatives say, are tight. The fee ranges from 4% to as high as 12%, depending on the market and other factors, but is normally around 7.5%. In some cases it’s comparable to the traditional real estate agent commission.

From an iBuyer perspective, this house-buying method is nirvana for anyone who doesn’t want the hassle inherent in listing a house for sale (which, most iBuyer backers say, is a target market of everyone.) There are high levels of iBuyer sellers with kids and dogs — a particular demographic where getting and keeping a house tour-ready can be a major pain. “For a lot of people, living in a house when it’s time to sell it they have to live like it’s a museum,” Shelton says.

That’s a point Opendoor Tampa Senior General Manager Candice Bradley emphasizes when meeting with clients like the Shaws. With a Harvard MBA, she joined Opendoor in September 2018 after working in finance. Her career stops include working in private equity, a health care real estate investment trust based in Chicago and several high-level posts at St. Petersburg-based Raymond James. Her executive roles at Raymond James included regulatory issues and corporate and real estate banking strategy. She also spent two years as an assistant to Raymond James executives Tom James and Paul Reilly, where she helped lead initiatives on the bank’s strategy, M&A opportunities and operations.

“I think about all the times I’ve sold a house or bought a house and how stressful that was,” Bradley says. “This process really eliminates a lot of that.”

Adds Bradley, who, like others on the iBuyer frontlines, regularly hears from too-good-to-be-true skeptics: “Many times people look into this, and they go" ‘How could this be? Is this real?’ But we are not flippers. We’re not just looking to buy low and sell high.”

Hype machine

Budge Huskey, long-time Florida and global residential real executive, gets the iBuyer appeal. “Based on their model of coming in and eliminating a lot of steps in the sales process, and then offering quick cash, who wouldn’t want that?” Huskey asks.

Courtesy. Budge Huskey, Premier Sotheby’s International Realty

Huskey once oversaw 86,000 agents as president and CEO of Coldwell Banker Real Estate. Now president of Naples-based Premier Sotheby’s International Realty, he has seen other trends like iBuying, which, while not necessarily turning him into a skeptic, at least makes him cautious. “There have always been people out there willing to buy inventory to resell it,” Huskey says, citing For Sale By Owner for one. “The iBuyer people take it to a different level. There’s been nothing with this type of technology and algorithms.”

Huskey thinks the big challenge for any iBuyer will be to overcome what every real estate agent faces: people. “I believe that in real estate — and this can’t be understated — there’s the human nature aspect,” he says. “Everyone feels their home is special, and often times that means they think it’s worth more than it really is.”

Huskey wonders if those people will balk at working with an iBuyer. He adds the current hype for iBuyers might not match reality. He recently read one estimate — which he doubts — that predicts 25% of all home sales nationally will be through iBuying within five years. Real estate consulting firm 7DS Associates goes even further, projecting iBuyers could have a role in six of 10 real estate transactions by 2024. On a current basis, another report, from research firm iProperty Management, says 9.6% of the 6.12 million closed home sales in 2018 were of the iBuyer variety.

Even as others enter the iBuyer fray, including legacy real estate firms, Huskey predicts it will likely remain niche, not next best thing. “I think it will grow,” he says, “but will still only represent a very small percentage of the overall real estate market.”

Think local

Technology is the backbone of any iBuyer model, but the three iBuyers with the most traction in Tampa share a common thread far from data and algorithms. That comes in working with local real estate brokers and agents — especially when reselling homes.

Offerpad, for example, announced a partnership with Keller Williams in August that could eventuality include all its markets nationwide. “We don’t know what’s going on in your backyard,” Offerpad Spokeswoman Cortney Read says. “That’s why we have local teams.”

Zillow and Opendoor likewise work with local real estate teams. Zillow, under the brand name Zillow Offers, partners with Land O’ Lakes-based 54 Realty, and also has a general manager, field team and local contractors in Tampa. Opendoor officials say it’s helped its real estate broker/partners in the Tampa market make $3 million in commissions since it sent its first offer to a Tampa homeowner in May 2018. Bradley, the Tampa Opendoor executive, adds the company has worked with over 1,100 sellers and buyers in the area and has generated $6 million in economic impact in hiring local contractors and tradespeople.

Courtesy. Cortney Read with Offerpad

Other similarities among Tampa’s iBuyers include:

• They tout flexible closing dates, from one day to three months — a perk designed to, again, make it easy for the client and run counterintuitive to the old way of selling a house. That old, inflexible way often delays, and sometimes kills, home purchases. This is a key iBuyer selling point, Zillow’s Shelton says, because then sellers “can go focus on the fun part about real estate: looking for a new house. When you have a high level of certainty and ease and convenience, it’s much better than the old way of buying a house, which can be stressful and opaque.”

• A need for lots of transactions to make the model work, given profits come in fees, not in reselling homes. “It’s a high volume, low margin business,” Read says. “People think of us as flippers, but we’re actually the total opposite. If we don’t deliver for our customers on the sale side, this will never work.”

• They avoid, for the most part, the luxury market, mostly because it doesn’t fit the high-transaction volume model.

• Customer education is a key challenge, to woo skeptics and get in front of customers who only know the old way to sell a house. Most people buy or sell a house a few times, Read says, so it’s not like Uber or Lyft, where the transactional nature of the offering means people can try the new way many times. “Selling a house doesn’t happen that often,” she says, “so we have to be there at that time.”

Challenges aside, iBuyer proponents and officials are confident in both the concept’s staying power and its ability to disrupt the marketplace. “We are dramatically changing real estate,” Bradley says, “and that’s really exciting.”

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