How Much Of A Threat Are Zillow & The New iBuyers?
By Fuquan Bilal
A new breed of iBuyers have their sites on transforming and taking over the real estate industry. How much of a threat are they really?
Hundreds of millions of dollars are being thrown into this new real estate strategy, and some of the most powerful companies are behind it. Should smaller real estate investors be worried?
The Rise of the iBuyer
‘iBuyers’ are the new name given to online home buyers who promise owners and sellers a quick transaction. The pitch is generally a cash offer and fast closing. While there are many small wholesalers across the country which may fall into this category, most notable are the big giants.
Zillow has moved into this space with its Zillow Offers program. Opendoor has attracted hundreds of millions of dollars in investment capital from funds like Softbank. Opendoor has also partnered with brokerage Redfin to buy up homes. Offerpad has partnered up with Keller Williams. Opendoor has also partnered up with home builder Lennar to promise a seamless transaction to cash in your old home and upgrade to one of Lennar’s newly built homes.
Buying the Business & Manipulating the Market
Zillow is notorious for losing billions of dollars in attempts to buy up different segments of the market. Their plans call for very slim margins and fast house flips. Opendoor smells a lot like other Silicon Valley startups which may be happy to lose a lot of money to push their competition out of the market.
Zillow is particularly worrisome due to how much influence they have over perceptions of home values. It’s easy for them to manipulate prices down when they want to buy, and up when they want to sell.
When you have a billion dollars to blow, it is pretty easy to artificially influence market prices in a given area and drown out the competition.
It’s something to watch.
Threat to the Economy
Perhaps the biggest threat these giant iBuyers present is to the housing and financial markets and the economy in general. While they may not yet be buying more than a few thousand properties each year, if they fail, they could leave many properties in foreclosure, cause huge losses for their investors, Wall Street and stockholders, and help vaporize billions of dollars from the economy.
These companies do not yet seem to have the experience to do this well. Their margins are slim. They could get stuck with a lot of inventory. Of course, this could be a great thing for those looking to buy up real estate in bulk.
Are iBuyers a Threat to Smaller Investors?
These giants may be of more help to smaller investment firms and individual investors than most realize.
It is true that they have a lot of advertising power and they may be happy to overpay for properties and can afford to outbid you. Yet, there is still a lot of room for everyone else.
To start, they are normalizing this form of buying and selling houses, which is great for everyone else.
So far the data shows that around 50% of offers they make are turned down by sellers. Plus, they charge hefty fees for the privilege of selling to them. Often 7% of the sales price or more. They still haven’t fully automated, meaning the process is much more traditional, involving inspections and Realtors, than they let on. Many sellers are going to be resistant to the fact that companies like Zillow are going to low ball them, and then put the listing on their own site for a profit the next day.
More significantly, these giants are moving slow. They are only in certain cities. Their buying criteria is pretty narrow. That leaves a lot of units for others to buy up. They may be generating a massive amount of Realtor leads in this way, but smart investors can leverage this noise to their own benefit.
Lastly, these iBuyers could become major buyers of your own real estate product too. Find the deals at the right prices and instantly flip them to Zillow and Opendoor.
It’s all about knowing who is in your market, what they are buying and for how much, and how you can use that to your own advantage.
Investment Opportunities
Find out more about investing in secured debt and real estate, go to NNG Capital Fund
Fuquan Bilal
Fuquan Bilal founded NNG in 2012 with the principal mission of capitalizing on the growing supply of mortgage notes in the interbank marketplace. Mr .Bilal utilizes his 17 years of residential and commercial real estate success to identify real estate opportunities and capitalize on them. To date, he has successfully managed three private mortgage note funds that primarily invest in singlefamily performing and nonperforming mortgage notes. His financial acumen and proprietary set of investment criteria enable him to purchase underperforming real estate assets at a deep discount of face and market values, thereby increasing the value of the assets. This, coupled with his ability to maximize the use of leverage, enables him to build strong, secured portfolios with solid passive income flows.
