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Silicon Valley is coming for your house

It is looking at real estate transactions through iBuying in which companies buy homes, perform some light maintenance and put them back on the market

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A Phoenix house that Zillow bought for resale. By offering “instant buying”, Zillow and other companies say they are bringing efficiency and convenience to home sales.

New York

IN TODAY'S on-demand digital world, buying and selling a home remains stubbornly, painfully analog.

Most sales still begin with a real estate agent (and a hefty commission). Most still end in an office, with the two sides signing page after page of legalese.

Silicon Valley wants to change that. Tech companies have begun to nibble away at the edges of the residential real estate industry, offering virtual open houses, digital closings and other services.

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Now they are coming straight for the real estate transaction itself through "instant buying", in which companies buy homes, perform some light maintenance and put them back on the market.

Established companies like Zillow and venture-backed upstarts like Opendoor and Offerpad have raised billions of dollars on the promise that they can use sophisticated algorithms to predict the value of individual homes.

They contend that those predictions, combined with old-fashioned economies of scale, will allow them to be far more efficient than traditional home flippers.

The companies and their backers say they are doing what tech is best at: bringing efficiency and convenience to a process not known for either.

Silicon Valley has already upended the way we hail a cab and order takeout, they argue. Why not improve a transaction that even well-educated professionals find intimidating?

"You should be able to sell a home within a handful of clicks," said Eric Wu, Opendoor's chief executive.

But houses are not taxis. A bad cab ride might set a user back US$20 and make him or her late for a meeting. A house is the largest asset for most people and the most expensive purchase they will ever make in their lifetimes.

At best, sceptics see instant buying, also known as "iBuying", as an overhyped, capital-intensive business whose explosive growth will fizzle out once investors tire of profit margins that Zillow itself calls "razor thin".

At worst, they worry that it could bring volatility and risk to an industry that has already brought down the American economy once this century.

Glenn Kelman, chief executive of Redfin, the online brokerage firm, said there was a danger in pouring huge sums into buying up homes "without having a clear idea of how you're going to make money on almost every single home".

If that happens, he said, "you are just putting the housing markets, the capital markets, at some degree of risk."

Instant buying is a small part of the market, but it is growing at breakneck speed. Zillow bought fewer than 700 homes in 2018. It expects to be buying 5,000 homes per month in three to five years.

Opendoor, the first big iBuyer, bought more than 11,000 homes last year and in the past year has raised more than US$1 billion to step up its pace.

The companies typically aim to hold homes for 90 days or less before selling them, typically to an individual buyer. For the eventual owner, little changes about the process.

In Phoenix, instant buying accounts for 6 per cent of all real estate transactions, according to Mike DelPrete, an industry analyst.

And in a sign of how iBuying is reshaping the housing market, Kelman's own company is getting into the game, buying homes in California, Colorado and Texas through a programme it calls RedfinNow.

Even traditional brokerage firms like Keller Williams and Realogy, which owns Coldwell Banker, Century 21 and other brands, have announced plans for instant-buying programmes.

The trend is a threat to the brokers' business model - but if it is going to happen regardless, they would rather get a piece of the action.

There have always been people who need to sell their homes quickly because of a lost job or a sudden move.

But selling fast has come at a price, usually a steep discount. Instant buyers promise a much smaller discount, perhaps shaving only 1 or 2 per cent off what a homeowner might get in a conventional sale.

For the right seller, that trade-off might be worth it.

Whether iBuying works outside markets like Phoenix and Las Vegas is an open question.

The model has yet to break into the Northeast, where the housing stock is older, the weather drives up maintenance costs and there are fewer of the kind of cookie-cutter subdivisions that the industry's algorithms assess best. Prices are higher, too, making mistakes costlier for the companies.

Companies say they will be able to wring more efficiency out of the system as they gain scale and experience. But experts are doubtful. Chris Mayer, a real estate economist at Columbia University, said the things that made housing transactions expensive would not change.

"This isn't like selling a mortgage, where everyone is selling the same mortgage, or seats on a flight," Mr Mayer said.

Indeed, Mr Wu's vision of selling a house with a few taps on a smartphone remains far off. For now, algorithms help determine iBuyers' preliminary bids, but those offers do not become final until an inspector has had a look around.

It still mostly falls on humans to determine whether a foundation is cracked or a kitchen needs remodeling.

Even the back-office functions remain labour intensive. Zillow Offers has close to 200 employees in Phoenix working in rows of cubicles to scale and streamline the decades-old process of working with a real estate agent to price, stage and show a home in hopes of getting the best price in the market.

One row of cubicles has analysts working to create indexes of comparable prices. Another row has people taking calls from potential sellers and helping them close the deal.

Others are working to get crews to paint, carpet and landscape recently purchased homes so Zillow can quickly get them back on the market.

Zillow essentially acknowledges that it does not expect to make much money per home on its instant-offers programme.

Instead, it sees selling homes as a way to generate business for its mortgage-lending arm, which it developed after acquiring Mortgage Lenders of America last year, and for other services.

It is the rough equivalent of the car dealership that sells cars at a loss but makes money by offering financing.

"Where you are able to make money is through mortgage origination," said Svenja Gudell, Zillow's chief economist. "That's why we own a mortgage company."

The question no one can yet answer is what will happen to iBuyers - and iBuying - when the housing market inevitably cools, leaving companies holding thousands of homes that are worth less than they thought.

Zillow and Opendoor say their products could be even more valuable when the real estate market slows.

The housing market often seizes up during periods of rapid change, as buyers and sellers struggle to agree on prices. Instant buyers, with their emotionless algorithms, could get the market moving again by accepting lower prices for houses held in inventory and thus setting benchmarks for other sellers.

That disagreement highlights a tension at the centre of the iBuying model. It aims to eliminate the frictions that slow down the real estate market: protracted negotiations, contingent offers, financing that falls apart before closing.

But that very slowness contributes to real estate's stability - it is hard to have a "flash crash" when it takes 90 days for a sale to clear escrow. And a large part of the US economy, from the 30-year mortgage to the home-equity loan to the property taxes that fund school districts, is built on that stability. NYTIMES