What it means for investors if iBuying is the bridge between Main Street and Wall Street.
What happens when Main Street real estate investors are pitted against Wall Street behemoths backed by billions? It’s easy to imagine gun-slinging cowboys at opposite ends of a ghost town waiting to draw. Whether a duel is destined remains to be seen, but it’s important to understand the landscape.
What We Know
Investors who purchased at the courthouse steps discovered during the downturn that Wall Street buy-to-rent companies like Colony American Homes, Invitation Homes, and Starwood Waypoint Residential Trust could easily outbid them. Buying properties to rent meant they didn’t need as much of a discount. This squeezed Main Street foreclosure investors into dangerously small profit margins or forced them to exit the strategy altogether.
Now, Wall Street and technology companies like Opendoor, Knock, Offerpad, Zillow, and Keller Williams will be duking it out as they actively compete with Realtors® and investors via iBuying in many of the same markets. They all offer similar strategies: Shiny corporate branding combined with advanced technology to create fast, flexible, as-is and low-pressure sales. It’s the CarMax model applied to real estate.
The bulk of these companies are launching in large metro markets and are focusing on the first-time homebuyer category. Price point and inventory type will vary depending on the company and metro.
Opendoor purchased over 100 properties in the Inland Empire in California from November 2018 to the end of May 2019. From a two-bedroom, two-bath property in Hemet to a seven-bedroom, four-bath property in Murrieta, it’s difficult to spot a formula. Estimated values also vary greatly from the low $200s to over $1 million according to PropertyRadar. Only a handful have sold in the past seven months.
2019 will be the year to watch as existing iBuyers expand to new territories and new entrants like Zillow Offers and Keller Williams challenge incumbents. Not all their deals are making money, so it will be interesting to watch as they bid against each other and how their resales perform.
The Friend Zone
“Scale” is key for most iBuyers. This means they won’t have time to handhold a seller through a tough personal situation nor will they elect to deal with old or difficult inventory. This is where Main Street and Wall Street will find common ground.
Wall Street would be wise to partner with local investors on leads they get that don’t fit their formula. I was able to speak to an Opendoor team member at the International Builder Show in Vegas and asked if they’d consider selling leads to local investors on deals that did not fit their formula. Branding and reputation is crucial to their success, so it didn’t seem this level of partnering with locals was in the cards, at least for now.
However, it doesn’t mean Main Street investors can’t offer inventory to iBuyers. Wall Street could greatly benefit from “wholetail” deals. The higher the stack of junk or the more complex a title issue, the more likely Main Street will need to step in to get the deal done.
“I’ve sold to Opendoor a few times,” says Tim Manke, a Sacramento real estate investor. “They were deals where the sellers would have been weary of an iBuyer and wanted to deal with someone who would sit down with them, understand what is going on in their life, and give them honest options.”
Don’t expect iBuyers to tackle hoarder houses, burnouts, foundation issues, mold, or historic properties. As a Main Street investor, understand this is where more deals will be found moving forward.
Another huge way iBuyers could cozy up to Main Street is by investing funds to advocate for landlords and investors. Realtors® – sometimes begrudgingly – often advocate for investors who aren’t always members of professional associations that lobby for the real estate industry (NAR, NAHB, MBA, Appraisal Institute, etc.).
Created in 2014, the National Rental Home Council (NRHC) is a nonprofit, nonpartisan trade association featuring some of the biggest Wall Street landlords, iBuyers, technology companies and support sectors in the “professionally managed single-family rental industry.”
The NRHC’s agenda could align with Main Street investors. With deep pockets and access to savvy lobbyists and data collection, the NRHC could take the lead on conversations at the local and national levels on topics such as rent control, technology in housing, trends in housing, and lend evidence-based examples how local policies directly affect affordable housing.
iBuyers as the Enemy
As iBuyers spend hundreds of millions buying properties, there’s a fear that local investors will be squeezed out of the market.
It’s safe to assume investors will have “I buy houses” in yellow letters tossed when pitted against massive corporate branding beasts with seemingly unlimited marketing budgets. Investors currently operating in competitive iBuyer markets (i.e., Phoenix and the Inland Empire in California) are witnessing firsthand impressive marketing campaigns including radio, video, social media and direct mail campaigns. They can easily outspend even well-funded national “we buy” brands.
Investors also need to understand some of these iBuyers are making money in other places. Zillow, for example, may close a fraction of offers submitted but can immediately sell turndowns to one of their Zillow Premier Agents. Considering Zillow’s other investments in Dotloop (2015) and Mortgage Lenders of America (now Zillow Home Loans as of April 2019), the aim is to vertically integrate the entire transaction allowing a consumer to complete a transaction without ever leaving the Zillow ecosystem.
If iBuyers don’t work with local investors by buying investor deals or selling deals they don’t want, then investors will need to decide to adjust their models or exit the business.
To be sure, these companies are not recession-tested. The majority of these iBuyers have only been around for a handful of years, and they’ve enjoyed nothing but an increasing market. If we enter a recession, no one knows for certain what the game plan will be.
What to Do
Keep a close eye on the inventory local iBuyers are chasing. When possible, build relationships with their local representatives and see if there’s a way to work in tandem. Sharpen those skills to tackle uglier rehabs, add square footage, and focus on creating value. The easy stuff is likely gone. If Wall Street decides not to work with Main Street, it’s time to get scrappy and creative. Plan on it.