It’s been clear for a while now that iBuyers are changing the landscape of the real estate market. But new information coming out suggests that these changes are even deeper and more dramatic than anyone realized. iBuyers are allowing small investors to purchase bargain homes and convert them to cash-generating rentals, but they’re also feeding large institutional investors’ demand for inventory, which will have far-reaching consequences for years to come.
What are iBuyers?
First, some basic definitions. iBuyers are big, high-tech companies that use tools like algorithms and data analysis to quickly assess properties and extend near-instant offers. They have huge cash reserves, so they’re able to quickly buy homes in markets across the country. Essentially, they’re the 21st century, Silicon Valley version of the individual cash buyer.
Leading iBuyers like Offerpad and Opendoor have been radically streamlining the selling process, making it faster, simpler, and easier for people to sell their homes. That’s had its own effects on the market, as iBuyers have very quickly grown to the point that they bought nearly 10% of all U.S. homes sold in 2018. But iBuyers have made even bigger waves by changing who’s buying homes in America.
The Individual Investor
Individual investors are still buying most of the housing stock being sold by iBuyers, and their jobs have gotten a lot easier since the emergence of iBuyers. That’s because investors can buy properties from iBuyers that are ready to rent on day one: iBuyers buy homes in good condition, freshen them up, and quickly sell them. And since iBuyers make their money on service fees, and not resales, they’re selling at market value, instead of trying to squeeze every last cent out of the buyer.
While house flipping still offers a bigger profit margin than buying from an iBuyer and renting, it’s much more time and cost-intensive. House flipping requires a lot of capital investment on the front end, savvy market analysis, and relationships with trustworthy contractors. It’s also a big risk; if the market declines before you can flip your property, you could be left owning an underwater mortgage.
So iBuyers have been mostly good news for the small investor. Although individual investors are, in some sense, competing with iBuyers for the same properties, iBuyers have acted as a market buffer, helping more individuals invest in real estate by increasing inventory, and offering safe, reasonably priced investment properties.
The Big Institutional Investor
This is where things get interesting. A recent report from ATTOM Data Solutions
found that almost one in ten of Opendoor and Offerpad sales in 2018 were purchased by a few huge bulk investors. According to the report, the top three purchasers were Invitation Homes, which owns 80,000 rental homes, Tricon American Homes, which owns 17,000 rentals, and a company linked to the private equity firm Cerebus, which manages 18,000 rentals through FirstKey Homes.
Together, these three companies bought at least 743 homes from the two leading iBuyers in 2018. And consider this trend: in 2016, 3.9% of iBuyer sales were to big institutional investors, a percentage that increased to 6.6% in 2017, and took another big jump to 9.6% in 2018.
What’s this mean? Well, one interpretation is that iBuyers are streamlining the buying and selling process on both ends: they make it easier and simpler for sellers to sell, and they do the same when it comes to buyers. It makes sense that large corporate investors would be drawn to iBuyer stock, as iBuyers, by their very business model, tend to act as a filtering and vetting mechanism. After all, unlike more downmarket cash buyers, iBuyers tend toward newer properties that are in good shape. For institutional investors who want move-in ready inventory, iBuyers represent a way to save time on due diligence and groundwork. It’s no wonder these investors are buying iBuyer properties in huge batches of ten or more.
The Trickledown Effects
It’s too early to say how, exactly, the large-scale acquisition of housing stock by huge institutional investors is going to affect the market, let alone individual renters and buyers. But the move makes sense from an investor standpoint; with Millennials and Generation Z delaying homeownership or even eschewing it entirely, rentals are going to be a growth market.
But while we can’t say what
the effects of this market change will be, we can say where
those effects will be felt. That’s because iBuyers prefer to buy new, relatively affordable homes in good condition whose values are easily assessed, and it happens that suburban “tract” style homes that fit that description are concentrated in a few geographical areas
of the country.
Opendoor and Offerpad both began operating in Phoenix, which has one of the largest and most modern inventories of suburban housing in the country. From there, they quickly expanded to Texas cities like Houston and Dallas-Fort Worth, and on to Las Vegas, Denver, Atlanta, and up to Carolina cities like Charlotte and Raleigh. These cities all offer modern homes that don’t need much work to resell, strong economies, and a growing population of potential renters. They’re also, consequently, the cities where big institutional investors are becoming landlords. Keeping an eye on these markets might be the best way to track the long-term effects of iBuyers, for sellers, buyers, and tenants alike.
Related: Homeownership the Expensive Frontier of the American Dream