iBuyers and the real estate revolution

13th January 2020  

by Ruggero Calamai

In recent decades technology has conquered the world, from production to sales channels. But despite its influence some realities have remained more static: the main example is the real estate. This sector has remained the same for a long time - and its operators have continued to use the same strategy that they used for centuries - because the market did not yet seem to need innovation. Recently, however, the real estate sector is also seeing strong changes that are revolutionizing all its components. This change has been called PropTech. The reality of PropTech was born in the eighties but never received much media attention until the last years. Divided into 3 phases (PropTech 1.0, 2.0 and 3.0), PropTech technology was born initially focusing on data and marketplace. A company that has been the protagonist in this first phase, which lasted until the early 2000s, is AutoDesk, today listed with a capitalization of 34 billion of dollars. The second phase, in which we are today (PropTech 2.0) is seeing a much more drastic change involving more fields than the first; it is a real revolution not only in technological areas but also in the way in which houses and buildings are rented, bought and furnished. The next phase, PropTech 3.0 will be determined by technologies like Virtual Reality, Internet of things and Blockchain and will bring changes that will be protagonists of our future lifestyles. Today, within PropTech 2.0, a new reality has developed which is having an exponential growth and which aims a very well defined need: the iBuyers, operators who buy homes through algorithms and other technologies with very short decision times and then resell the properties on the market at a higher price. Although these companies operate in very traditional and static environments, they have managed to modernize and transform the process of selling houses for those who want or need to sell their property urgently. The iBuyers sector already has a unicorn (OpenDoor) and other large companies like Zillow are entering the market with determination. Another smaller but growing reality is Casavo, an Italian startup.

An iBuyer beats the competition by buying houses in a few days, usually 5-6 days, instead of in a few months as happens in the world of traditional real estate transactions. On average it takes 180 days to sell a house in Europe, 300 in Italy and 60 in England. This process is too long for an individual who want to change home but first he needs to sell his current home. There are also those who look for a simpler service and do not want to receive multiple visits from strangers in the house. It is in this market that the iBuyers have decided to operate.

How it all began

Everything was born in 2003 by Keith Rabois, one of the members of the so-called PayPal mafia, who wanted to create an automated system to sell houses, taking inspiration from American dealers who already used computer systems to evaluate cars. Unfortunately, it was the wrong time because the Dot-Com bubble was bursting and he couldn’t find the $20 million to get the project started. Seven years later, in 2010 at Y Combinator, Rabois met Eric Wu who was presenting his start-up, Movity, again in the real estate field, and Rabois told him about his project to automate the purchase of houses. Three years later, after Wu had sold Movity, he saw Rabois again and decided to realize the project that had been proposed to him three years before. So OpenDoor was born, a company that is today a leader in the iBuyers sector with an estimate of 3.4 billion and about 1,300 employees. In 2018 the total value of houses bought from OpenDoor was around 2.5 billion with an average purchase of a house every 34 minutes.

The structure of iBuyers

The OpenDoor Business Model is the most standard offered in comparison to its competitors and offers two monetization opportunities. OpenDoor earns a fee on the house purchase which varies from 8% to 9%. This fee is paid to OpenDoor by those who sell the house and despite being higher than the average of 6% required by the real estate agents, many sellers turn to OpenDoor because the sale is certain and almost immediate. The second monetization option is through the revaluation of the property that is then sold. Often OpenDoor and other iBuyers buy houses that need renovation that once made re-evaluate the house. In general, OpenDoor had a 5% appreciation on each house sold in recent years. On average 90 days pass from the purchase of the property to the sale.

After the success of OpenDoor several players, such as Zillow, have entered the market and today in US the reality of iBuyers is growing fast, even if currently less than 1% of sales are made through this kind of operators. At the moment the market is dominated by four companies and they are all Americans: OpenDoor, Zillow, Offerpad and Redfin. Opendoor is the absolute market leader since it sells more than three times the number of houses sold by Zillow, the number two in the industry. In general, in the iBuying industry there are three different types of business model. The first, used by OpenDoor, Zillow and many others, consists in buying the house, make changes or adjustments when necessary and then resell it. The second system is to carry out the same process, but as a broker: the company has investors or buyers interested and finds them houses suitable for their needs. The purchase process has the same timing as a traditional iBuyer. The third system, used by a few companies in the UK, offers to the home seller a guaranteed purchase at a predefined price and then the iBuyer undertakes to sell the property, also operating as a broker. With this system the seller can make other purchases with the certainty of earning from the previous house, while the iBuyer does not need to invest money initially.

A promising but risky model

Despite this market is growing and is seeing the entry of many players from the real estate world, the business model of iBuyer is rather risky due to abnormal and unpredictable economic cycles to which the real estate market is particularly sensitive. Companies such as OpenDoor and Zillow in the US are trying to prevent this risk by hiring multiple people from bank risk management departments and diversifying their houses portfolio as much as possible.

iBuyers often have a whole department that monitors the market to control adjustments. A last factor that has the scope to minimize the risk of a recession and to the consequent difficulties in the sale, is the possibility to rent.  Although there are ways of reducing the risks involved, these companies have rather low margins and a possible market adjustment could easily eliminate them.

The European ecosystem and Casavo

Looking instead at Europe, the leader in the European market is Kodit.io, a Finnish startup born in 2017 that has already raised about 13 million of euros from major investors like FJ Labs. Another interesting reality is Casavo, an Italian startup. Casavo was born in 2017 and now operates only in the domestic market, but plans to enter the Spanish, Portuguese and French markets in the coming years. The model of Casavo is slightly different from the other iBuyers because not only assures to the sellers the purchase of the house but also offers to buy a part of the property as a partner, for those who do not have the necessary conditions to take out a loan. The Italian market is extremely complex and it is increasingly difficult for young people to save enough to buy a house. For this reason Casavo offers itself as partner in the purchase, thus decreasing the percentage of the debt assumed by the young buyer and putting itself in the conditions of being able to earn from the appreciation of the value of the house.

A future determined by different factors

This new reality is drastically changing the process of buying and selling houses by offering a net value to sellers and speeding up the process of buying and selling. Despite the fact that it has so far mainly developed in America, it is also growing in Europe, generating more and more interest.

The future of this business will be determined by several factors: the development of underlying technology and the trend of the global economy in the coming years. Moreover, once the competition will grow, there will be a fight on the margins that could put the sustainability of the business model currently used in difficulty. But risk-free, this is likely to bring about changes and greater dynamism in the housing market.