Traditionally, selling a home “as-is” meant relying on someone locally to buy your home. But now there is an ecosystem of national corporate buyers of homes. The goal of these companies is to buy a home as-is, improve it, and then generate a return on that investment. That could mean renting the purchased home, selling it, or both. These corporate buyers offer sellers cash quickly and, in some cases, without an agent. These options and For Sale by Owner listing platforms compete for agent commissions. Agents can offer high-touch service. But corporate buyers and platforms can offer faster and cheaper alternatives.
Several hundred thousand homes are purchased every year purely to be renovated and sold. This is often handled by individual investors. They want to buy the home well below what they intend to sell it at. They then invest a substantial amount into improvements. Finally the home is sold close to the market price or above. This is called house flipping. The average house flip in early 2018 resulted in a ~$70K improvement from the purchase price to the sales price. And the person flipping the house likely invested close to $35,000 in those improvements. The time to flip a home is on average ~180 days.
Ultimately, home flippers are trying to buy houses at a steep discount. These homes need work and are selling for less than other homes in that neighborhood. Flippers risk their cash on the idea that improvements will pay off. And they invest six months of time into that process. But the potential profit of tens of thousands of dollars is attractive enough for many to take this risk on. Often, flipping is a full-time job for investors.
Some home flips involve a real estate agent. But often a home is purchased as-is from a seller who wants cash quickly. Or the property is purchased at an auction or from a bank. And many flippers are agents themselves who can list homes for free.
Single-family rental, or SFR, investors take a long-term view towards real estate investments. They purchase homes at a discount and turn them into rentals. They have to make necessary improvements and maintain these properties as rentals once tenant is in place. They often sell the home for a profit later.
Single family rentals have existed for a long time. But until 2008, these were almost all owned by individuals or local investors. Then, large institutional investors popped up to buy hundreds of thousands of properties. These institutional investors have figured out how to use their scale to reduce the price of improvements and marketing.
Single-family rental buyers try to purchase as-is homes at a discount. Their goal is to improve the home to get into rental shape. This process is called stabilizing. Once they can rent the home, they generate income each year from tenants. They also have the option to sell the home if the market seems favorable. This means that SFR operators generate income both on the ongoing rental and the sale price. A home flipper needs to capture their entire return in 180 days. An SFR can do this over 20 years.
Home flips and SFRs popularized models of buying homes for cheap, fixing them up, and renting and selling them. These are a good fit for cheaper homes, priced below other homes in their neighborhood. But for a seller of a home that wants closer to market price, these are not acceptable options. iBuyers, FSBO listing services, and investor marketplaces offer alternatives. Sellers can represent their own home and sell for cash closer to market prices.
iBuyers are companies that offer sellers cash for their homes. Unlike home flippers, iBuyers are paying close to market price. They charge a service fee to the seller. They will make some minor repairs. Think things like painting, cleaning, and electrical work rather than a kitchen remodel. They then list the home and attempt to sell it for a profit.
There are four dominant iBuyers: RedfinNow, Zillow Offers, Opendoor, and Offerpad. They are typically buying homes priced between $200K and $400K. They all charge a service fee to the seller. Often that fee is between 5-10% of the home price. They will make an offer within 24 hours, assess the home, make revisions to the offer, then close. Unlike home flippers, they are not offering meaningfully below market price. Zillow reports its iBuying financials in supplemental tables each quarter. This allows us to better understand their economics.
In Q4 of 2019, Zillow purchased 1,902 homes and generated roughly $600M in revenue from this business line. We can assume roughly 7.5% of this revenue was from service fees, or $45M, and the remainder was from the actual sale of the home. For the average home, Zillow sold it for ~$293K, and also collected ~$24K in fees.
We can figure out expenses from Zillow's acquisition, holding, and renovation costs. Zillow purchased each home for $286K, invested~$15K, and incurred ~$4K in holding fees. This means as a starting point, Zillow was purchasing a home for only a 2.5% discount to what it sold for (1-[$286,000/$293,000]). The total profit of the home from buy to sell was $7,000. But Zillow is investing $19,000 in investments and holding the property through sale. This means that the seller is getting a great deal before service fees. Zillow is actually losing $12,000 in buying, holding, and getting the home ready for market. Prior to fees, iBuying has been a huge win for the seller.
There are two items I omitted in the previous calculation. First is the $24K in service fee revenue. The $24K in service fees means Zillow is now making $12K instead of losing $12K. But Zillow must also pay to market and sell the home, with most of that fee going to a buyer’s agent commission. On average, the cost to sell a home has been ~$14K. This means Zillow is spending almost 5% of the final sales price on marketing and agent fees. Ultimately, Zillow is losing $1-2K per home after fees and marketing expenses. This excludes any interest and finance costs, which would add on even more expenses.
Zillow is losing money on each home it buys, but it has a path to profitability:
The option of increasing service fees is likely off the table near-term. iBuyers must compete to convince sellers to work with them instead of an agent. iBuyers will have to claw their way towards generating profit on each transaction. A large tool of this will be volume. Volume helps generate economies of scale on renovations. Massive inventory helps make an iBuyer site a destination for buyers without agents. If the service fee increases, this volume may be jeopardized. Longer-term, service fees may increase as iBuyer behavior becomes more common, though.
Many modern brokerages offer discount listing services for 1-2% for the home sale price rather than the traditional 2-3%. But this still can be $2,500 to $5,000 on an average $250,000 home. This is a considerable fee if an owner thinks the agent is not adding that much to the home value. But under 10% of homes sold in 2018 were sold by owner. Many owners are still not ready to abandon agents. Agents have proprietary resources like the MLS. In addition, agents will do a lot of work to sell a home. Finally, FSBOs often sell for less. But some platforms have popped up to provide some of those agent advantages in exchange for a smaller fee.
Flat rate listing services will post a property on the MLS. This means that an owner can have access to the same pool of buyer’s agents as an agent does. These sites syndicate the listing onto popular real estate portals. Finally, they provide extra resources to help owners provide services similar to agents like photos and contract templates. While the owner will have to do the work of marketing and showing the home, if they have the time, they can try to match an agent's offering. This means is an owner may pay $100-$500 instead of $2,500-5,000 in fees to sell their home. The risk, of course, is that the home takes longer to sell and/or sells for less. But at a $2,000+ discount, many owners are fine with this bet.
SFR and home flip investors are often not presenting competitive prices to sellers. These companies purchase homes at steep discounts. But online portals can help make the process more competitive. Non-institutional investors who want to invest in single-family homes can now do so through online platforms. One example is Roofstock, which charges a fee to the seller in exchange for showcasing the property on its platform. This increases competition for SFR investments, driving up prices for sellers. In exchange, the platform takes a service fee.
iBuyers often replace institutional SFRs and flippers as initial buyers. Homes that don’t sell from iBuyers are often later purchased by national SFR investors or flippers. For an iBuyer, this allows them to save face and maintain their brand presence. They avoid selling to a traditional buyer at a a significant discount and showing they made a bad investment. The SFR buyer receives a home ready for rent or sale. But they will need to use their own operational expertise to get it fully ready for market. Currently, almost 10% of iBuyer homes are sold to institutional investors.
New entrants like iBuyers, FSBO listing platforms, and investor marketplaces rely on charging fees to sellers. By contrast, home flippers and SFR investors profit from price appreciation of the home.
Ultimately, SFR companies and home flippers target cheaper homes. These homes are often below $200,000. They are frequently foreclosures or auction properties. These are not homes that agents will aggressively compete to represent. The commissions are lower because the home price is lower. And the owner likely doesn’t have the money to invest in improvements to get the home ready for sale. This is because these homes require $15K+ investments to go on the market.
iBuyers, flat fee listing platforms, and marketplaces help owners sell their property as-is for small discounts to the market price. And these service competes with traditional agents. These homes are often $200,000 or more. The owner may not have the cash to make improvements, but it’s probably not a ton of work to get the home ready for market. The means the owner will pay some amount of money to get the home ready for market. But they wouldn’t take a steep discount on their home. They know that at worst it would sell to a buyer who would make the improvements on their own. Because required renovations are under $15K, hiring an agent who gets paid $5K can feel steep. But it’s certainly better than taking a $20K discount selling to a home flipper.
Purchasing distressed homes requires time and effort, even for large institutions. Renovations on one distressed property are likely meaningfully different than they are on another. This is why the price needs to be low on the purchase. Investors must account for the time and risk of these investments. A single error can cost an investor the full purchase price of the home.
Modern services like iBuyers, flat-rate listing services, and marketplaces focus on homes that require minimal improvements and similar levels of service. The standard iBuyer is doing basic work. They paint and clean and then list a home online. An SFR marketplace is handling an inspection and then posting a unit on rental sites. Flat-rate listing services are inputting data on the MLS and providing an owner access to resources. These processes are simple and can be scaled nationally technology. But it also means that the profit per home is lower. As a result, these businesses rely on being easy and cheap for consumers. This helps drive volume to continue to drive down the cost of running the business but increase the number of homes sold through the platform.
Agents are still very important. They account for over 85% of transactions, which is over 20% more than they did in 2000. But sellers are starting to have many more options. On any given sale they can:
As friction is lower to explore these competing options, more sellers may consider them. The ultimate question will be if sellers feel that the value of these services is equal to or better than an agent once all the fees are considered.
