Sunday, May 19, 2024

It’s the disruption, stupid! Redfin Now and the end of iBuying as we know it

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As Redfin winds down its operations, Opendoor and Offerpad are the last ones left for the most part — and they’re both struggling. Was iBuying a flash in the pan or is everyone simply looking in the wrong direction?

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Ahead of their earnings report, Redfin announced it was shutting down its iBuyer platform, Redfin Now, and laying off 13 percent of its workforce. It’s the latest in the long, slow wind-down of iBuyers, the disruptive industry category that was once looked upon as a harbinger of doom for real estate agents and “normal” real estate transactions.

Just as when Zillow Offers went belly-up, people are now saying, “Does the end of Redfin Now mean that iBuyers are over?”

The short answer is no. The long answer is a little more complicated. That’s because iBuyers have been around forever. There aren’t really two iBuyers — Opendoor and Offerpad — left. There are plenty of large institutional investors that buy direct from the consumer. They just don’t market themselves aggressively in the same way that some of the larger, now-failed, iBuyers do (or did). 

There are four different types of investor categories: The large iBuyers like Opendoor and Offerpad, the large institutional investors like Wedgewood, investor-focused marketplaces, and individual or small-scale investors.

All of them will broker cooperate and work with you as an agent. The difference is that you’re more likely to have a relationship of some kind — maybe even an ongoing professional relationship over the course of many years — with any of the last three categories than you are with Opendoor and Offerpad, at least as they’re currently doing business.

That agent relationship for an investor is critical. They know it. Even your local buy-and-hold investor might be willing to pay more for your client’s listing right now than Opendoor and Offerpad because they’re constrained by their algorithms and that local investor is not.

In addition, Opendoor and Offerpad don’t want ugly houses. Many investors will be happy to take an ugly house off your hands and make it work with some aspect of their investor business. Maybe they’ll flip it completely, or maybe they’ll do some minor repairs and rent it out. They have more flexibility and the ability to look at the needs of each specific property.

In short, the problem for the struggling big-name iBuyers is not their business model. It’s the focus on disruption. The other investors who are doing the same thing, even on a large scale in multiple states, are succeeding in many cases because they are closer to the agent and closer to the industry.

AI and computer algorithms are never going to replace the person valuing the property. Zillow and their automated ARVs came out of their iBuyer experience and realized the error of their ways. That’s why they aren’t even putting the Zestimate on listings anymore. They ultimately found out they were basing everything on what turned out to be false values. 

To be successful right now, any investor, iBuyers included, needs to figure out how to be more nimble in a depreciated market. Look at the bigger institutional investors and find out what they’re doing right. Buying for fees, buying for the commission, whatever the strategy, there are ways to make it work.

Wedgewood and others like them, built on a foundation of buy and flip, rehab, and revitalization, actually know how to navigate a market like this. It’s a human who’s looking at their properties, not a computer. The lesson? Invest in people, not technology.

Having been in the disposition world for years, managing the disposition of assets for Wedgewood in multiple states, I can tell you that if nobody’s driving properties and getting boots on the ground, you can’t expect good results. Views, nearby commercial districts, the lot’s proximity to unattractive features — a computer’s not taking those factors into consideration. 

None of these iBuyers were adding value to the homes they were buying. That means the margins are even tighter, so they can’t afford to make any mistakes in valuation. That’s hard enough to do in a robust, rising market. It’s virtually impossible to do in a depreciating market with limited in-person information.

In addition, you have to know when to cut and sell. Do the large iBuyers have the flexibility and the speed built into their model to allow them to react to the market in real-time? This is the time for Opendoor and Offerpad to get rid of the properties that aren’t going to work, get them off the books, and go in on properties bought with a human eye and an expert’s evaluation. Selling the house is the easy part, if it’s the right house for its market.

If you’ve ever read the book Ready Player One by Ernest Cline, you may recall that the characters spend too much time in the virtual world and forget how to communicate with normal people. That’s sort of how I see the failed iBuyers.

Remember, the ones that failed — Redfin and Zillow — were internet search platforms to begin with. They had no business in iBuying and no real interest in the industry or the consumer. They got into iBuying with a bunch of cash trying to fatten their bottom line.

They were so focused on disrupting the industry that they lost touch with the realities that make it work. 

They forgot that the view from your living room window can make all the difference in how that home is perceived by the market. They forgot that sometimes, a real estate agent’s opinion of value or a well-hosted open house can be a game-changer, especially in a tight market.

How do we rethink the “i” in iBuyer? Is it internet, investor or institution? There’s a place for Opendoor and Offerpad in the industry and a role for all of us to play. We just need to find ways to work together as complementary parts of the industry. We need to share the common goal of making the buying and selling experience the best it can be by keeping people in the driver’s seat.

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