A handful of startups and established real-estate firms, flush with cash and armed with the latest in machine-learning software, are profiting off and reshaping the $26 trillion residential real-estate market. Companies like Zillow Group Inc. (Z), Opendoor and Offerpad are buying and quickly selling thousands of homes, all with the aid of computer algorithms, according to a recent in-depth feature story in The Wall Street Journal.
The main testing ground for this new way of transacting real estate has been the hot housing market of Phoenix, Arizona, one of the fastest growing metro areas in the U.S. Last year, Zillow, Opendoor and Offerpad purchased nearly 5,000 homes in the metro area. About 5% of homes sold in Phoenix last year were done through so-called ‘iBuying’ (instant buying), according to a Bloomberg column.
“It’s the dawn of e-commerce for real estate,” Zillow Chief Executive Rich Barton told the Journal. “Phoenix is ground zero.”
What It Means for Investors
Real estate has long been considered one of the most illiquid assets. It can take months for a homeowner to find a prospective buyer, and using a real estate broker to find that buyer adds additional transaction fees. Even before the sale sign goes up, renovations are often needed just to get the home in a presentable condition. But the iBuying real-estate firms of the present are beginning to eliminate the hassles involved in selling a home.
Sellers can now visit one of the iBuyers’ websites, type in their address, upload some photos of their home, fill out a form, and receive an offer within 24 hours. They no longer need a real estate broker to connect them with a prospective buyer, nor need worry about the buyer securing a mortgage. Sellers are also spared the hassle of doing preparatory renovations, as iBuyers are willing to purchase fixer-uppers that will later be renovated by their own tradespeople. Selling a home has become as easy as clicking a button.
But all of this would be near impossible without the help of algorithmic software telling the companies what to buy and how much to offer. The algos allow firms to compare potential purchases using a wide range of data including the typical metrics like square footage and comparable sales, but also more idiosyncratic features that affect a home’s value like proximity to schools, golf courses, and noisy rail lines or intersections.
The algo technology allows iBuyers to become the new middlemen, offering home sellers speed and convenience, while snatching up the transaction fees that normally would go to real estate brokers. They also hope to make profits off any appreciation in home prices and the added value from slight home improvements.
In order to hedge against potential downturns in markets, these high-tech flippers like to follow larger rental companies into new neighborhoods. Blackstone Group’s Invitation Homes Inc. (INVH), which has become the country’s largest single-family landlord, becomes a kind of buyer of last resort in weaker markets. If iBuyers have trouble offloading one of their recent purchases, there’s a good chance the big landlord firm with deep pockets will take it off their hands.
But firms like Redfin Corp. (RDFN), with its online 3D-maps making it easier for buyers to purchase homes without needing to physically visit the site, are also improving the demand side of the market. This click-to-buy technology, combined with the iBuyers’ click-to-sell technology and big buyers of last resort like Blackstone, act as a kind of market maker in real estate, offering a never-before-seen kind of liquidity into real-estate markets.
While the added liquidity helps traditional homebuyers and sellers, it is also likely to attract a new breed of speculators and their cash. Some fear that this new reality could be setting the real estate market up for another boom and crash similar to the housing crisis of 2008, which was preceded by a housing bubble fuelled by increased amounts of liquidity in financial markets.