The Digital Flippers

Virtual open houses, digital closings and other online services have become more common as the technology sector carves out a bigger place for itself in real estate. These services are typically used as part of traditional real estate transactions. Now tech companies are taking aim at the real estate transaction itself with “instant buying” or iBuying. The iBuyers purchase homes, handle minor renovations and repairs, and put them back on the market within a short timeframe.

Established companies like Zillow as well as venture-backed startups like Opendoor and Offerpad are predicated on the ability of algorithms to estimate the value of individual homes. Ostensibly this technology, along with economies of scale, provide greater efficiency than traditional house flippers and make the experience much more convenient for sellers. “You should be able to sell a home within a handful of clicks,” said Eric Wu, Chief Executive of Opendoor.

In some ways the stakes are higher in real estate than in any other sector being disrupted by technology. The ramifications extend not only to consumers and competitors, but potentially to the entire economy, given the integral role of the housing market in the U.S. economy. Accordingly the trend has its detractors, who are loathe to see more volatility in the real estate sector.

In less dire terms, skeptics charge that with its ultra-thin margins, instant buying will eventually lose its luster with investors, the New York Times reports. Glenn Kelman, CEO of online brokerage firm Redfin, said there is danger in pouring huge sums into buying up homes “without having a clear idea of how you’re going to make money on almost every single home.” If that happens, he said, “You’re just putting the housing markets, the capital markets, at some degree of risk.”

The purpose of iBuying is to eliminate the hitches that slow down the real estate market, such as long, drawn-out negotiations and financing that falls through. But as Sam Khater, chief economist for Freddie Mac points out, that slowness helps keep real estate stable. “From a net-worth perspective, real estate is by far the biggest asset for most Americans, and historically that value has been very stable.”

For this reason, iBuying’s foremost challenge could be adoption. Given the size and importance of the investment, many sellers could be reluctant to take chances on a new and unfamiliar process. “The biggest headwind to this getting mass traction is human psychology,” said industry analyst Mike DelPrete. “The bigger the potential downside, the more risk averse they are.”

Nevertheless iBuying is growing briskly: Zillow expects to buy 5,000 homes per month in three to five years, up from fewer than 700 homes in 2018. Opendoor bought over 11,000 homes last year. Redfin is investing in instant buying as well, with its RedfinNow program. Traditional real estate brokers are following suit. Firms such as Keller Williams and Realogy, which owns Coldwell Banker, Century 21 and other brands, are planning instant buying programs of their own.

One looming question is what will happen to iBuyers when the housing market slows down, as they could be left holding thousands of homes. Zillow and Opendoor contend that their products could be even more valuable in a downturn. During periods of rapid change, the housing market can come to a standstill as buyers and sellers struggle through negotiations. But instant buyers, using emotionless algorithms, could jumpstart the market by accepting lower prices and thus setting benchmarks for other sellers.

That said, Zillow is not placing all of its bets on its instant-offers program; rather it sees selling homes as a way to feed its mortgage lending business. “Where you are able to make money is through mortgage origination,” said Svenja Gudell, Zillow’s chief economist. “That’s why we own a mortgage company.”