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Arizona is ground zero for iBuyers, but seller beware

Posted at 11:41 AM, Aug 14, 2019
and last updated 2019-08-14 14:41:29-04

Step into the nearly new headquarters of Offerpad just north of the Chandler Airport, and you'll find one of the fastest-growing businesses in Arizona. Quickly gobbling up a 40,000 square foot space, employees clack away at laptops and take ping pong breaks in an office that seems to be challenging the perks of Silicon Valley.

Offerpad is not shy about its goal. "When you buy a house, when you sell a house, we're changing how all the rules work," said spokeswoman Cortney Read. Indeed, Offerpad and its competitors, including Opendoor, Zillow, and Knock, aim to disrupt the real estate market in much the same way as Amazon changed retail.

They're called iBuyers: companies flush with cash from Wall Street investors, looking to turn a profit in what many call an untapped $23 trillion residential real estate market in the U.S. Phoenix is by far the most active market for these companies, and experts admit, that also means the Valley is a bit of a guinea pig for a business that's barely five years old.

Here's how it works. Offerpad will make you an offer on your house at a guaranteed purchase price. You don't have to show the home or fix it up, and you can decide when you close. You might think, the company will "lowball" you on an offer, giving you far less than the home is worth. Offerpad says it doesn't work that way. There's too much competition.

"Consumers are really educated. They're not going to go with us if we come in at a significant low offer," Read said.

Offerpad says its offers are typically 1-2 percent below fair market value, but the company also charges service fees, which range between 5-10 percent of the home's value. Homeowners typically pay some of the cost of repairs and renovations, which are usually done after the owner moves out.

Offerpad admits, the process will likely cost the seller more than a traditional sale. The companies are banking on consumers paying for convenience. "The majority of our customers have already sold a home 2-3 times in the past, so they've already experienced the hassles and the headaches and the stress of selling the traditional way," said Read.

"There's a difference between a supermarket and a convenience store," said Patrick Lewis, president of the Arizona Association of Realtors. "A convenience store is very convenient. You can run in and buy a gallon of milk but it's still going to cost you twice as much."

Lewis said realtors don't see iBuyers as a threat to their business, as many of them are traditional, registered brokerages. He urges caution for sellers, and that means, do your research. "Interview more than one company. Understand who is representing you in that transaction. Understand exactly how the fees break down," he said.

Lewis said consumers can even bring in their own realtor, who will take a small fee to represent the seller to an iBuyer.

University of Colorado Professor Mike DelPrete tracks iBuyer sales across the country. According to his research, Offerpad makes about $33,800 per home, a margin of less than five percent. In 2018, DelPrete reports Offerpad did 3,500 home sales, with net revenue of $118 million dollars.

So why is Phoenix "ground zero" for iBuyers? DelPrete calls the Valley a "homogeneous" market. Weather is consistent, and so are many of the homes, making it easier to predict market trends using the proprietary algorithms that make the business possible.

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"They need to know that if they buy a house, they can turn it around within a couple of weeks, and sell it at a certain price within a certain period of time," he said.

There are concerns about what happens in a market downturn. Because most of the companies are less than five years old, they've never had to respond to a bursting real estate bubble. The iBuyer market share in Phoenix is already close to six percent, according to DelPrete, nearly doubling between November 2017, and February 2019.

If prices begin to fall, DelPrete predicts some companies will slow their buying, or hold properties and rent them to maintain cash flow. Unlike traditional homeowners, however, they will react differently to changes in the market.

"As opposed to families or the homeowner that lives in the home, they're driven by financial decisions," he said. "They're going to be looking at an inventory of thousands of homes and making a decision purely based on the bottom line."

What's clear: iBuyers are here to stay. Online real estate giant Zillow just entered the iBuyer market in May, but already has a 3-5-year goal of $20 billion in revenues, and 60,000 homes sold, according to DelPrete's research.

Some traditional brokerages are already attempting to branch out in the iBuyer market. Long term, Offerpad says it seeks to be a one-stop-shop for buying and selling a home, providing services for title, appraisal, and mortgage to buyers who are willing to pay for the convenience.

So what about complaints? We checked and both Offerpad and Opendoor have A+ ratings from the Better Business Bureau. Both companies are also registered brokerages in good standing with the Arizona Department of Real Estate, with no complaints or disciplinary action.