sell to an ibuyer concept

Very interesting business idea. Could work if done on a large enough scale to reduce local market exposure but taking principal risk may be too risky a business model.

Reminds me a little of those relocation companies that would help companies facilitate executive hires and transfers by buying their homes. What happened to those companies? I think some got left holding the bag during the S&L crisis. Buying and selling quickly is a good strategy but it's easier said than done especially if repairs are needed. Plus Zillow may have a conflict of interest with their Premier Agent business.

https://streeteasy.com/talk/discussion/43725-the-se-send-message-on-listings-for-sale

It obviously won't work for condos and coops.

Jelj, Why not for condos if they can price it?

I suspect some condos do not permit corporate ownership?

I don't think condos in general can prohibit corporate ownership unless that is in their original offering plan and I don't know of any where that exists that way.
As someone who has bought many units at foreclosure and resold them, it's always a lot more difficult than it looks like from the outside. Transaction and carrying costs eat your profit alive. I've told this story before so I'll just tell the short version here:
We bought a co-op at 345 Montgomery Street in Brooklyn for $2.50, sold it for $32,000, and in the end made a $200 profit.

As far as Zillow doing this I think they have some potential conflicts. If they have a property listed on their service, and have there "Z estimate" as far lower than the asking price, and then they make a low offer, do they run the risk of a lawsuit for trying to "run the price down"? There are a number of other possible scenarios I can foresee that could be perceived as conflict of interest (like when they go to resell it giving their listing use priority, etc.)

30, Ignoring conflicts, what do you think of this concept which is essentially you can sell to a broker who can sell with a lower cost than a flipper and gets a discount equal to selling commission plus 1-2% if the pricing is right?

I'm not sure how they can avoid conflicts. It's one thing if an uninterested third party is a buyer, but how are they getting the leads on these listings? I don't see any other way then it is people coming to them expecting to get transparent information about the market. So what are they telling these people? "We think your house is worth $400k, but we will pay you $250k for it"?

Also, I am not following your math.

Not a good sign once a company starts going off its original path and tries to start flipping homes essentially.

30, For open door the math is: They pay 7 percent less than what they think the current market value is with no broker involved. The seller is likely to incur 5 percent selling commission. Extra 2 percent is for convenience and speed. Then open door fixes it up and tries to sell it direct to the consumer possibly a few percent higher than the new renovated market price.

https://therealdeal.com/2018/04/23/home-flipping-startup-offerpad-ends-partnership-with-zillow/

If you can move the properties quickly enough to justify tying up the capital (i.e., you don't have a more lucrative investment for a similar time period), it might well work. There will always be sellers who just want to move the property (some estates, divorces, job transfers) and will price convenience over marginally increased return. It's the same as a securities broker moving from an agency-only business model to becoming a market maker and holding an inventory. Capital intensive though.

It seems to be working for some of these companies regardless of some of the potential conflicts Etc. I don't see it completely replacing the traditional brokerage business, however it's a nice option.

Yes, Aaron2 - capital intensive and risky as a business model especially compared to a listing service business. But I think this type of business has great potential if you can raise capital and have access to short-term financing. Also must have scale and diversity. But too big a leap for Zillow whose existing shareholders I assume will hate this idea. Maybe if they do a spin off but they seem to think its OK to coordinate this buy-sell business with its listing and information services. Bad idea.

There will always be sellers in a rush who will leave money on the table.

A few years ago, I tried to flip homes in New Jersey and failed spectacularly. At least I got a book out of it, but my take-away was that the most successful flipper is he with the cheapest cost of capital. I'm not sure that's Zillow Group, though I suppose we shall see.

I do I have to disclose I am long the stock for other reasons.

No one is making a profit flipping homes based on buying 7% below market. Generally speaking you need a 25% to 33% discount.

Agree but in this case, they buy 7% below and increase the new market price due to renovation and clean up (say actual cost of reno +25% which pays for carrying cost and other business expenses) and not pay any selling cost. If the market is ok, they get to keep 7%. If they can turn over 2 times a year, that is 14% return of their capital. If the market goes down, they will lose money naturally.

Also, do you mean 25-33% discount to renovated market value or as is market value? I agree with that if you are you spend 8% on selling expenses including taxes and carrying cost for 9-12 months from purchase to sale which could be at 6-8% .

I would not look at it as paying 7% below market value but rather 7% below comps which suggests there is hidden value to be had through various strategies - either hold for capital appreciation (and rental income), or renovate and flip within one year.

Obviously, keeping transaction costs, carrying costs and capital improvements to a minimum requires a lot of coordination and in-house expertise. I am not savvy about tax treatments for dealers but I suspect there are strategies for minimizing both ordinary income (in the case of short-term flipping) and capital gains (in the case of long-term holds).

Why would you say they don't pay any selling costs?

They can't be doing any kind of real renovation, marketing and closing and turning over twice a year.

They are listing themselves. Hence, no selling broker commissions if sold to direct buyer. They are also doing single family middle of the road houses, where Reno is very fast - matter of weeks as in painting, floors, kitchen and baths with stock materials. NYC condos will take much longer to renovate naturally due to various permissions needed and potentially longer lead time for materials.

Btw, I am not defending their model, just describing my understanding of it. I think it works in a market with tight inventory and rising prices. Also Reno needs to be fast.

I think the business model fails unless they can find a way to profit in a downturn. Seems a funny time to be launching a business like this when most markets are near peak IMO so I suspect they have a strategy to pivot depending on market conditions. I can see banks and S&L's liking them as they are more institutional. Maybe they can asset manage and help lenders funnel ORE out the door as quickly as possible but they would be competing with distressed note buyers who have a business model all their own.

You could say " no selling broker commissions if sold to direct buyer" about any listing. But also wanting to sell quickly and only wanting to sell direct can be working across purposes, especially in the markets they appear to be doing business in. If they want to sell direct it means they can't even work with "disruptive" buyer's broker's giving a discount to purchasers. And they still have to pay salaries of their employees even if they are not paying selling broker's fees.

As far as working in a rising Market, that's a dangerous strategy for the long term for a company. What happens when you have geared yourself up to buy a thousands of units a month and then the market turns? You lose everything you have ever made and then some. I've seen it happen many with flippers who were working on much higher margins. It's also what killed MJ Raynes: Marty Raynes was buying buildings to convert to coops where the deals only made sense assuming 25% appreciation by the time the conversion process was done. He didn't even need prices to go down to kill his business - all I had to do was remain level or oligo up slightly.
https://mobile.nytimes.com/1990/09/19/business/new-york-developers-feel-a-chill.html

Yes, 30. That is the problem with taking equity risk. Starwood made the same mistake 10-15 years ago when they decided to buy hotels instead of staying with a strict franchise/management model that worked pretty well for Marriott. Much worse strategy for a developer given the much longer lead times from planning to sell out. But that's what traditionally happens just before the market crashes. Today, it's the Chinese in particular who are at great risk. Excell et al are much more sophisticated at downloading their equity risk to junior partners. What chance does a service company like Zillow have?

And it's not just a real estate concept. Look at what happened with Long-Term Capital Management: they made millions of trades making an incremental profit on each one. But then what happened?

Wall St has a long and storied history of under estimating downside risk.

And although they certainly were not flippers, look at what happened to Olympia & York underestimating the downside risk of Canary Wharf.

All great stories. Slow and down real estate is a big risk to this model.

Wall Street ignored downside risk because they thought they would clear it real fast. But yes they got greedy and starting warehousing debt and equity. Lesson is not the be long anything and to hedge whenever risk possible. Zillow has a pretty good business model so I wonder why they would take more risk. Maybe they are full of themselves like LTCM.

Another issue with flipping, especially on small margins:
Your estimated sales price is rarely going to be spot-on. Sometimes it will be a little low sometimes it will be a little high, but not as often will be a lot low or high. When your estimate is low, confirmation bias will probably have you pricing it too low, selling it quickly and congratulating yourself on what a great trade it was. But you ended up leaving a pile of money on the table. OTOH, when your estimate is high, you put it on the market for too much money, it stays on the market for a long time, and you end up not only getting less than you anticipated but incurring much more in carrying costs.

As a result, when you are wrong in one direction you end up not making as much money as you should have, but when you are wrong in the other direction the market won't step in and save you so you end up losing every last nickel that you were wrong by.

Re: clearing fast - real estate is not a fairly liquid asset like stocks or bonds. If the market starts to tank you can't just put in a "sell order", dump it, and cut your losses. Usually by the time anyone realizes the market is actually on the way down, the number of sales crawls to a standstill and there is no "market" number to sell at.

Which is why I think Wendy Silverstein's strategy with New York REIT is spot on.

Anyone know if this article is accurate in stating these firms are charging sellers 6% to 13% in fees to buy their properties?
https://amp.businessinsider.com/zillow-opendoor-buy-house-sell-house-quick-2018-12

It is unclear how much of the fee is to adjust for renovation needed. I am guessing anything above 7-8 percent is reno related as the sellers otherwise wouldn’t sell to them. Buying company’s reno cost may be half of the incremental discount above say 7-8 percent they get due to reno needed. Then who can say what the market price is precisely.
“But there's a catch for homeowners. A typical real estate agent may charge a commission fee of 5% to 6% of the purchase price, whereas Zillow commands 6% to 9%, Khouri wrote. Fortunately, that fee includes the cost of any repairs or necessary adjustments made to the home after closing.”

But it also seems like the article is saying they pay 2 brokers commissions: 1 when they buy it and one when they sell it.

Seems like smoke and mirrors to buy property and then charge commissions to the seller at the same time. Just sounds sleazy, no? Also, it shouldn't matter whether all or part of the commission is used for renovations that are related to a subsequent deal when they flip it to a new buyer. Charging commissions to credit against the purchase price makes the gross price seem higher than it really is, no? especially if the commissions are above market for a traditional seller agent.

If iBuyer is supposed to be a transparent service to property owners who look to sell very quickly and therefore are willing to leave some money on the table, that's one thing. But this smells more scammish. Legal, I assume but time will tell.

Remember the books and seminars in the 1980's that told people how they can make quick money in real estate? Different kinds of scams but all with the same basic strategy - talking some naive or desperate person into a bad deal.

Remember, if you don't know who the sucker is, its you.

Between iBuyer and Premier Agent, I do not know which business is more risky to Zillow but neither seem fully transparent. And the more money Zillow makes from either, the more questions will be asked.

In any case, Zillow is veering far from their traditional line of business - third-party property information services - which seems like a pretty safe business. Their greed may get the better of them.

30, You mean they (Ibuyers) receive? I would say only 1 when they buy from owner (or this is just a discount the original seller takes for selling directly to Ibuyer; legally it may not be brokerage commission) as they are the owner themselves when they sell and they would be paying the commission themselves.
"But it also seems like the article is saying they pay 2 brokers commissions: 1 when they buy it and one when they sell it."

Ximon, Leaving aside risk and economic viability, I do not think there is remotely anything illegal about it as long as they are not acting as a broker with fiduciary responsibility to either the original seller or the final buyer. It is up to the original seller to get competing list price via other brokers and list it with one of them.

ximon,
I basically agree with everything you just said, but I'll also add that in practice I think it's going to be difficult for ibuyers to come up with an unbiased "market" price when they solely benefit from lowballing that number.

300,
I'm saying it looks like they are paying 2 commissions because the article states " Real estate agents are still a part of the process, but they're handled and paid by Zillow, not the homeowner" on their purchase, plus obviously they're going have to pay plus obviously they're going you have to pay at least the buyer's broker when they sell.

I'm also wondering how NYS Dept of State will handle this if/when ibuyers come here because they have made abundantly clear that they want both sides of the transaction to have professional representation and from what this article is saying it seems that the ibuyer's side is stacked with pros and the seller's side gets none.

Yes, 30. That's part of the problem. Also, the potential lack of transparency in an industry whose regulation is based on the concept of fair dealing. Does "let the buyer beware" apply here? Something tells me no but its really the AG who will make that decision and then eventually the courts.

Just not sure why Zillow is taking this kind of risk. Makes it look like they know their traditional business model is a failure.

Lets keep watching their stock price and the reaction to their new business lines.

30, On paying two commissions, I understand what you are saying now. They are probably paying a very low commission unless they have a broker’s license themselves and are hiring fixed salary salespersons.

..and just wait until people see just how they determine the offer price. How does it compare to Zillow's Zestimate? Does it give the same result for both buyers and sellers? Can't imagine why it would. How long do you think Zillow can keep this methodology a secret?

Well the sellers are pretty smart. They will talk to many brokers besides Zillow or Ibuyer. The brokers will likely tell them they can sell 10-15 percent more than Zillow’s final price just to get the listing. After that it is upto the seller. I think that some one being a ready cash buyer is indeed a welcome option for many sellers and they know that they will have to take a discount for convenience, speed and guaranteed close. I think main question is whether it makes financial sense for IBuyer. We can not have both the seller and Ibuyer be screwed in the same transaction.

I agree 300. If it is a transparent process and sellers are not taken advantage of, this could be a very useful service to many owners. My worry is that it will not be transparent and seller will not be adequately represented. Who will act as a fiduciary to the seller? In the iBuyer model, i looks like no one. Will Zillow permit the involvement of a buyer broker or will it be discouraged? Who will pay the commission?

Re:"Z Estimate" see my first post in this thread 8 months ago. I don't see how they can both be a transparent provider of data, valuations, etc and also making offers/purchases without running into conflicts.

"The brokers will likely tell them they can sell 10-15 percent more than Zillow’s final price just to get the listing. "
It seems like you are saying Zillow will be telling sellers that they are making them offers at market minus 6% to 13% but really making them offers at 16% to 28% below what they will have in there files at their own broker's opinion of what market value is.

What would people think if Kelly's Blue Book went into the car buying/selling business, told people they would be buying cars at a slight discount to "book" value (say 6% to 13%) and then secretly changed their valuation methodology to discount it's published "market" values by 10% to 15%?

Real estate and cars are not securities where research needs to independent due to a lack of ability of an individual to easily evaluate security - hence the security laws. Kelly Blue Book is free to do what you are saying. The only argument against that would be monopoly related as in they used their monopoly (if they are deemed one) on car price opinion to harm consumers. Zestimate is certainly not a monopoly with so many appraisers in existence.

Zillow could claim that they trust their estimates so much they are willing to put their money on it after adjusting for transaction cost. A consumer is free to get their own representation and I am sure and would hope that Ibuyer buying agreements have a language which makes the seller aware of that option and that Ibuyer has no obligation to act in the seller’s interest.

Consumers are not babies who have to be forced to get a guardian - a broker.

If Zillow was transparent and told sellers how they calculate the offer price say by taking the zValue and deducting transaction costs or whatever you want to call it, this might be fair. But something tells me they will never tell you how they come up with offer prices. Also, I strongly disagree that home owners are not babies. That is actually a good description of most, the sophisticated Manhattanites excluded. Brokerage laws are in fact based on the assumption that “let the buyer beware” is bs.

If Zillow was transparent and told sellers how they calculate the offer price say by taking the zValue and deducting transaction costs or whatever you want to call it, this might be fair. But something tells me they will never tell you how they come up with offer prices. Also, I strongly disagree that home owners are not babies. That is actually a good description of most, the sophisticated Manhattanites excluded. Brokerage laws are in fact based on the assumption that “let the buyer beware” is bs.

If the NYS Dept of State believed that "Consumers are not babies who have to be forced to get a guardian - a broker" why would they have instituted the various mandates for disclosure and pushed so hard against "dual agency" deals which had been the norm since, like... forever?

And just to be clear, they aren't just throwing out offers to sellers and saying "but you should make your own evaluation", they are pushing the "we are offering market price minus a small fee" narrative (with the implication that they are experts on what market price is). They are even making it known that they are verifying their number with a local broker. So if you are correct that they are taking the number from either their own estimate or the local broker, discounting it by 10% to 15%, and then representing to the seller that new number as an expertly verified market value, then in my opinion that is an intentional misrepresentation of fact. And as far as I know in just about every place that is contrary to Real Estate law whether or not you have a fiduciary duty to the party that representation is being made to. Brokers have even been found liable for passing along such representations by sellers if they "either knew or should have known" the representation was dubious.

So, it is all a question of what the disclosure and the legal agreement says about “buyer may not act in the best interest of the seller and the seller can get their own representation if they would like to pay the cost - say appraiser or a selling broker”; not so much the business model (aside from profitability for Ibuyer).

Also the issue with “dual agency” is that the both parties believe they are represented by a broker but it is unclear who the broker is really representing. In the case of IBuyer transaction, the seller is certainly not being fooled into believing that they have a broker representing them.

http://apkmetro.com/los-angeles-might-become-a-city-for-house-flippers/

https://www.marketwatch.com/story/this-new-trend-in-house-selling-could-cast-a-cloud-over-americas-property-market-2019-12-11

"Zillow is officially a New York brokerage. But listing platform says it’s not what you think"

https://therealdeal.com/2020/02/03/zillow-is-officially-a-new-york-brokerage-but-listing-platform-says-its-not-what-you-think/?utm_source=internal&utm_medium=after_article&utm_campaign=related_article

https://therealdeal.com/2020/03/18/redfin-pulls-plug-on-ibuying-program/

Redfin pulls plug on iBuying program
RedfinNow, which generated 40% of the brokerage’s Q4 revenue, was suspended amid coronavirus crisis

Discount brokerage Redfin Corp. is suspending its instant home-buying program amid economic turmoil sparked by the coronavirus pandemic.

The Seattle-based firm, led by CEO Glenn Kelman, made the announcement Wednesday, according to the Wall Street Journal. It had stopped buying ads for the program earlier this month. Like other iBuyers, RedfinNow used an algorithm to buy homes, before renovating them and quickly selling them for a profit. The growing business represented 42 percent of Redfin’s $233 million in fourth-quarter revenue, according to the company’s financials.

https://therealdeal.com/issues_articles/is-anyone-still-ibuying/