Brokers Need to Weaponize to Combat iBuyer

March 19 2019

wav weaponize combat ibuyer Who is getting to the listing appointment first? Is a traditional broker the first call for a listing appointment, or do consumers reach out to iBuyer programs like Zillow, Redfin, Keller Williams, Realogy, Opendoor, Mark Spain, or others first?

For now, iBuyer programs will continue to reach more markets and brokers need to prepare their strategy, consumer and agent communications, and agent training. Opendoor and Redfin were the first brokers to weaponize with iBuyer programs. Mark Spain is having tremendous success. Are you next?

What Drives Sellers to Consider iBuyer Programs

WAV Group is often consulted on iBuyer programs by the MLS community, the brokerage community, and the media to deliver opinions on iBuyers. We often develop two perspectives. The first is driven by data that depicts what is happening in the market place today. The other is a series of considerations on what may happen in the future.

WAV Group consumer research has long understood the complications facing sellers that make iBuyer programs attractive. People rarely want to sell their home before they know where they are moving. In a seller's market, buyers have a much higher likelihood of having their offer accepted if it is not contingent on their home selling (cash offer, no contingencies). Some brokerage firms have partnered with mortgage companies to deliver innovative programs that are similar in solving the problem for sellers. Howard Hanna's "Buy before you sell program" is a great example.

There are other considerations, too. Some are related to privacy, others are related to convenience and certainty. If economic depreciation of their home value is not a key consideration of the seller, iBuyer is a two-day process! Some slice of the seller pie craves this convenience. As a broker, you need to understand how your firm can best serve these sellers. You do not need to worry about the iBuyer; you need to understand how to leverage it.

Today's Perspective

In terms of today's circumstances, we see the iBuyer programs occupying narrow bands of the markets. Depending on the company, they often deliver their services in a handful of markets where property types have highly predictable transaction prices and time on market at a median price point. Most iBuyers start in Phoenix where there are thousands of tract homes that are highly stable and meet these three criteria. In mature iBuyer markets, the percentage of trades is currently running at about 5 percent of the market. That is not a huge share, but who knows what the future holds.

From a competitive perspective, Zillow Offers and Redfin have an advantage in terms of opportunity acquisition. Zillow can make seller leads available to Premier Agents when they do not settle on a purchase. That gives them a secondary revenue source. Although Zillow is running advertising right now, I do not think that they needed to. They already have the traffic on Zillow.com to drive hundreds of thousands of opportunities at no additional cost. The same is true of Redfin. Like Zillow, Redfin is also a parcel-centric website that can offer iBuyer purchases to sellers on their home without advertising. The secondary revenue source for Redfin is that they can traditionally list the property at a discounted brokerage fee. Because these firms have enormous consumer traffic, WAV Group believes that they have an advantage for success. They are leveraging an existing asset they have developed in consumer traffic to reduce the marketing costs of attracting sellers.

Another advantage that Zillow and Redfin have over the industry leaders in this space is an understanding of buyer demand. OpenDoor is clueless about this. Knowing how many buyers are searching for homes in an area where iBuyer options are available to sellers is a key strategic advantage for Zillow and Redfin. I am not bullish on Opendoor because their customer acquisition costs must be higher than other iBuyers and they do not have insight into how many consumers are buyers for a subject property.

Overall, none of these companies seem to be making much of a profit on these trades yet. I do not see this changing anytime in the near future. Because of increased iBuyer competition and the costs of attracting sellers, I am not sure that they will make much of a profit anytime soon. However, as the title of this article suggests, if iBuyers are attracting listing presentation opportunities ahead of non-iBuyer brokers, that is a problem. Everyone wants to be the first call for a listing presentation.

One way that brokers have positioned themselves well for the iBuyer emergence is the adoption of Buyside. With Buyside, listing agents can show sellers how many buyers are in the market for their home. This is a great tool for supporting sellers at making the best possible decision on their sales strategy.

Long Term Perspective

This section is all theory. Do not put much stock in it, but use it for strategic conversations in your business development conversations. What if...

What if there are multiple iBuyer offers on a property? Recently, we have been preoccupied with the impact of iBuyer competition. When there are multiple iBuyers in the market, it drives competition that benefits the seller and reduces the total addressable market of the iBuyer company. If companies have a goal to purchase a certain number of homes, they may need to propose a higher price in the face of competition, risk more capital, which would suggest lower margins. This is not good for iBuyer companies who already trade on narrow profits. To combat this, market expansion approaches like the one that Zillow Offers has announced gives them the opportunity to be an exclusive iBuyer in a market. No competition is the best circumstance for margining the business. The race is on to open markets where there are no competitors.

What if sellers start out their home sale consideration by contacting iBuyers rather than a traditional listing broker? As mentioned above, at an increasing rate, iBuyers are attracting listing presentation opportunities ahead of non-iBuyer brokers. That is the top of the listing sales funnel. Zillow is driving seller leads across their entire footprint and selling leads to agents. As this grows, so does Zillow's revenue opportunity to sell leads. Good for Zillow. This is especially good for Zillow because they are not selling leads on the backs of listings syndicated to them. It is a nice defensive strategy in the unlikely event that the broker pulls their listings.

WAV Group has noted that Zillow is featuring its company-owned properties in search results. Zillow is always testing and experimenting with improving search results. Again, this is smart and may be considered self-serving. We have always advocated for brokers to do the same thing on their website when a property they have listed matches a search result.

Sidebar – Zillow's sort order prefers properties that have video tours and 3D walkthroughs. If you are not leveraging Matterport, GeoCV, Property Panorama, or Virtual Tour Café in your syndication feeds, get on that today!

What if there is a requirement of an iBuyer disclosure? We have seen requirements of disclosures on dual representation. Will a requirement emerge for iBuyers to disclose to sellers that they are sacrificing some percentage or dollar amount of value in their home through these programs? There are similar disclosures when the seller opts out of listing their home in the MLS.

What happens if days on market gets longer? WAV Group does not agree that this will kill iBuyer programs. We do think that it will narrow the total addressable market. Fewer homes will fit the criteria of homes an iBuyer will purchase because their risk increases as the time they need to carry the house increases over time.

What happens if property values are trending downward? This is a circumstance that will often be associated with longer days on the market. iBuyers will need to develop offers that predict a lower future home value 120 to 200 days after they purchase the home. Again, this will narrow the number of iBuyer transactions.

Will iBuyers drive a shift to discount brokerage? We already know that Redfin is a brokerage that delivers a full-service seller experience for less than most competitors in the market. Our understanding is that other iBuyers also negotiate broker representation that is for a lower fee, often at 1 percent to the listing broker. If a 1 percent fee becomes the new listing standard, that could have a significant and very disruptive impact on traditional brokerage that charge sellers around 2.5 percent. Even at 2.5 percent, brokers already operate on very narrow profit margins. It is interesting for firms to model what would happen if they only collected 1 percent. Could you stay in business? What would you need to change? Would agents be able to be compensated enough to make a living? What would happen to the 100 percent commission brokerage models?