Desiree Bates’ third pregnancy was her hardest.
Morning sickness was worse. And her belly got bigger much faster than with her two older children, ages 4 and 7.
“Ha-ha, doctor,” joked her husband, Carson, during Desiree’s first ultrasound. “Is there two in there?”
“Well,” the doctor said, peering at the fetal monitor. “Yeah.”
Yeah, as in twins.
It was a gut punch that meant a whole lot more than an extra crib and more diapers.
Desiree and Carson would need a bigger house.
But like the vast majority of home shoppers, the Lake Elsinore family had to sell their house first. And with four children, two dogs, a pet tortoise named Turbo and a very busy career, Carson Bates wasn’t up to the challenge of cleaning, repairs, staging and holding open houses.
So instead of hiring a real estate agent, he went online and got an all-cash offer to sell his three-bedroom house to an “iBuyer.”
Bates netted almost $11,000 less than he would have using a traditional real estate agent, but it was worth it, he said.
“The convenience and the guaranteed sale of my house outweighed the savings we could get selling through a Realtor,” he said.
iBuyers like Opendoor, RedfinNow, Offerpad and Zillow Offers are a new, high-tech twist on an old investment model. Unlike the traditional fix-and-flip investors, these well-financed companies move quickly, scooping up cookie cutter homes and get them back on the market in weeks.
Housing trade-in
With user-friendly websites, real estate data and home-value algorithms, iBuyers say they’re reinventing the home selling process the way Amazon revamped shopping and Uber and Lyft overhauled the taxi business.
Their goal: To make trading in your home as easy as trading in your car.
“We’re evolving the real estate industry,” said Cortney Read, spokeswoman for Arizona-based Offerpad. “You look at every industry and how it’s changed to make it easier for the on-demand consumer. … We’re looking to make some of the same changes.”
And unlike traditional flippers, iBuyers maintain their business relies less on appreciation and more on fees — ranging from 6-12 percent — to make a profit.
The first iBuyers cropped up in Phoenix four years ago, spreading to almost two dozen metros.
The business is relatively new to Southern California, first appearing here two years ago, and gaining momentum in the past six months.
So far, the practice touches just a sliver of the overall market. Public records show iBuyers bought about 350 homes in Southern California in the past two years, out of nearly 480,000 total sales in 2017-18. Nationally, iBuyer purchases represent about 0.2 percent of all U.S. home sales — “a drop in the ocean,” estimated real estate technology analyst Mike DelPrete of Boulder, Colorado.
But analysts like DelPrete say the growth potential is big.
After examining sales in Phoenix, where iBuying is most prevalent, DelPrete predicted the new industry eventually could capture 5-9 percent of all U.S. home sales.
Brad Berning, a financial technology analyst for Craig-Hallum Capital Group LLC in Minneapolis, predicted iBuyers will touch 10 percent of U.S. housing transactions by 2022, either through direct purchases or by generating leads that can be sold to agents. Already, he said, as many as 70 percent of all sellers in Phoenix get iBuyer quotes before going to market.
That alone, Berning said, “is a significant fundamental change in the home seller user experience.”
Latest assault
Oregon resident Jennifer Hinson sold her Temecula rental house to an iBuyer after getting frustrated with her agent.
“It felt like as soon as (my agent) got me to sign the listing agreement, she didn’t make much more effort to help me,” the 31-year-old mother of two said. “I thought, let’s try Opendoor.”
The company, which launched last fall in the Inland Empire, responded three days later, offering $502,500 — just $2,500 below her target price. It deducted $35,000 in fees (vs. a likely commission of just over $25,000 with a traditional agent), plus $2,000 for repairs. She ended up netting about $10,000 less than she would have with a broker.
“Paying a little bit more with Opendoor was worth it,” Hinson said. The transaction “was short. It was streamlined. I knew exactly what to expect.”
iBuyers are the latest assault on the traditional home sales process — a process one Zillow executive likened to “getting a root canal.”
Traditional sales typically take about 30 to 60 days to complete once a contract is signed, followed by inspections, disclosures, repairs and additional negotiations. In the end, the seller pays a 5-6 percent commission to the agents who broker the deal — equivalent to about $25,000 on a $500,000 sale.
For Sale By Owners long have sought to bypass those fat commissions. Discount brokers later emerged offering cut-rate commissions. Auction companies moved in after that, arguing that live bidding — both on-site and online — gets the sale over with more quickly.
Nonetheless, nine out of 10 U.S. home sellers still used an agent in 2018, according to the National Association of Realtors.
Cutting the broker?
While iBuyer companies say they plan to work with agents, Matthew Harris, a partner with investment firm Bain Capital, called them a traditional broker’s foe.
“It’s the first innovation to attack the broker commission,” Harris said in an email. “Not just lower it, but totally cut the broker out of the picture.”
Some agents disagree, arguing there’s a place for the quick, easy sales iBuyers offer when homeowners don’t want the hassle of getting their home ready for market or having strangers troop through their bedrooms.
Since most iBuyers let sellers choose their closing dates, they also provide an easier way for homeowners to juggle the sale of one house while trying to buy another.
“Is there a time and a place … where it’s worth that extra 6 percent to 9 percent to get your home off the market?” said Stacey Onnen, a Phoenix-based vice president for Exp Realty. “For sure.”
Most brokers interviewed say iBuyers pose no more of a threat to their business than previous challengers.
Buyers still want to maximize their return, said Long Beach broker Dick Gaylord, a past president of NAR. And the way to do that is by exposing your home to the full market.
“In my 40-plus years in the business,” Gaylord said, “I have yet to meet a seller who didn’t want top dollar from their property.”
Convenience — at a price
Justin and Kayla McClure had to act fast when selling their two-story stucco house in Menifee to move closer to family in the Kansas City area.
“Time became an issue to have the money to put down on a new house that was going to sell very quick,” Justin McClure said.
So the McClures logged onto the RedfinNow website, filled out a questionnaire and solicited an offer.
An agent came and took pictures, then Redfin responded 48 hours later. The Seattle-based brokerage offered $414,000, less $49,000 in fees, closing costs and repairs that included new carpet, kitchen cabinets, landscaping and interior paint.
“They may find more (repairs) as they go along and nickel and dime some,” Justin said. But the McClures say they’re glad they sold to an iBuyer.
“If you are in a rush and don’t mind taking an extra hit, it is great,” Justin said. “You don’t need to prep your house for showing or worry about things going missing when your house is being shown.”
Real estate agents maintain iBuyers get discounts as high as 15 percent after deducting their fees and charging for repairs. iBuyers maintain, however, the cost of selling to them is about the same as the traditional route once you take into account repairs, agent commissions and carrying costs.
Can it work in slow times?
There’s an even bigger issue that could undermine the whole iBuyer premise.
The industry took root and flourished during a housing boom when reselling takes less work and less time.
What happens in a slump?
Public records show local iBuyers already are feeling the effects of a sales slowdown in the last half of 2018. A number of recently purchased Southern California homes are back on the market for less than what iBuyers paid.
“Whenever you buy enough homes, they’re not all going to be winners,” conceded Adam Wiener, Redfin chief growth officer.
iBuyers say there are many things they can do to ride out a downturn such as raising fees, buying fewer homes or unloading inventory by reducing asking prices.
With home sales slowing, 2019 could be iBuyers’ first real test, said Redfin’s Wiener.
“If iBuying shrinks, people will say, ‘This is a little more cyclical,’ ” he said.
Less stress, less cash
The Bates twins, Elleanor and Madelynn, are now 9 months old.
The family ended up buying a house in Murrieta that has two extra bedrooms, two extra bathrooms and an additional 1,400 square feet.
It was easier to buy, too, because their bid wasn’t contingent on selling their old house — a deal killer for many buyers.
They netted $323,050 from the sale of their home after deducting 9 percent, or almost $32,000 in fees and closing costs.
Had they gone with a traditional broker and gotten the same price, they might have shaved perhaps 4 percent off those deductions, putting about $10,650 more in the bank, the Bates said. But that would have entailed more work, with the risk the house would have taken longer to sell.
“It took the pressure off selling this house and buying another,” Carson said of the iBuying process. “And then they also allowed us to rent our house back for 30 days, which gave us the opportunity to get the house we just purchased painted.”
Will he sell to iBuyers the next time? Not necessarily.
“I’m hoping we never have to move from this house again until we have to downsize,” Carson said. By then, “I’m hoping to go through a Realtor because we won’t have to get the babies out the door.”