‘Price-Distorting’ iBuyers Like Zillow Hurt U.S. Homeowners, Rivals Say

High-tech “iBuyers” like Opendoor and Zillow have burst onto the housing scene in hot U.S. markets with a seductive promise: For a fee, they will buy your home for cash, let you pick your move-out date, and help you avoid the irritating process of showing your home.

The iBuyers are, naturally, attempting to scale up rapidly in order to win market share and brand recognition, throwing their current hopes for a profit out the window in a 2020s reprise of the rideshare wars. The companies have started to gain unwanted attention in the process; earlier this month, one TikTok went viral after pushing conspiracy theories about the iBuyers’ end goals.

The criticism of iBuyers is not limited to internet users. Competitors and local real estate agents are starting to voice concerns about the core tenets of the iBuyer model as well.

“These are price-distorting entities,” Vishal Garg, the founder and CEO of Better.com, an online lender, told Motherboard. “They harm our customers.”

Got a tip for the reporter of this article? Using a non-work phone or computer, you can contact Maxwell Strachan securely on Signal on 310-614-3752 or email maxwell.strachan@vice.com.

iBuyers say they primarily hope to make money through the convenience fees they charge when you sell. Zillow says its fee is typically around 5 percent nationally. Opendoor’s fee typically comes in around 5 to 8 percent. After you move, they make some light repairs and resell it on the market quickly.

In Garg’s mind, such a model plays into the worst aspects of industry. “I don’t like it because it means that consumers are going to lose money,” Garg said. “That money is going into some silly Valley venture capitalist’s pocket or some hedge fund or the bad dot com guys at Zillow.”

Garg’s company, Better, is a fast-growing digital homeownership company that offers an alternative to both the iBuyer model and the traditional real estate system. The company buys homes on people’s behalf for them without charging a commission. The company claims to have gotten the average cost of transaction down to almost 0 percent, compared to the industry average of around 10 percent. Instead, Better makes money on the financing and insurance.

Garg said he spent time with the Zillow team when the Seattle-based company tried to buy Better a few years ago, but ultimately came away unimpressed with what he saw. “They’re like a broken, bad dot com,” he said. “The customer became the product.”

“We’re trying to change the system by empowering the consumer to compete against the iBuyer,” Garg said. “We think that eventually every house in America will be sold for free.”

When Sean Black started Knock.com in 2015, he said, he wanted to create certainty, convenience, and transparency for homeowners without “buying their old house at a discount.” He and his co-founder developed a business where they could help people buy their new home with cash, move, and then sell their current one while still only making one mortgage payment.

Black, the co-founder and CEO of Knock, said iBuyers helped create liquidity in the market, but did so at an unnecessary “cost to the consumer.” He compared the iBuyer industry to Hilton Hotels and Knock to Airbnb, saying his company was open platform, doesn’t own the real estate, and is consequently less capital intensive and lighter on its feet.

“We’re able to pass all of that savings on to the consumer and still make a good healthy business while having consumers get a better deal,” Black said.

Nevertheless, it’s iBuyers who are winning the war for public attention. David Chol, a real estate agent and Texas division sales and operations manager for Marketplace Homes, in Austin, Texas, works with iBuyers frequently, he said. He estimated roughly 60 percent of his clients now come in wanting to know more about iBuyers, and said he’s seen a “massive uptick” in the number of people choosing to go with iBuyers this year.

He has a simple explanation: Zillow offered fees as low as one percent when buying homes this year, he claimed, which Chol called “pretty shocking.” “It’s easy to sell something when you’re giving away everything,” he said. Zillow is trying to essentially break even as it scales up its iBuyer business, the company recently told Motherboard. Chol believes appreciation from the market has allowed the company to keep its fees low as it has, and that the company will face challenges in selling the benefits of convenience as soon as it raises them.

When a few Zillow offers recently came with a steeper 8 percent fee, he said, the non-financial benefits didn’t seem to matter all that much.

“If the only way to do that is to give away the house, how is that sustainable?” Chol asked. “How do you retain market share when you can’t give away the house on every deal?”

On the whole, Chol believes companies similar to Knock are overlooked nationally, even though they offer the same benefits to clients at sometimes even more “affordable” prices. “Maybe they’re overlooked because it seems too complicated,” Chol said. Black agrees with Chol’s assessment, saying the iBuyer model was easier to understand.

Garg compared the iBuyer model to ticket scalping, noting that iBuyers tend to be most active in hot markets like Phoenix and Raleigh. “Should you be buying slices from somebody who just went to the pizzeria before you did?” Garg asked.

iBuyers aggressively dispute the notion they are house-flippers, claiming any profit they earn on the resale is incidental and not core to the business model. The companies target mid-level homes that do not require heavy repairs. But Garg said the mere action of buying and selling homes could have a price-distorting effect as the company gets larger over time.

“They create both artificial surpluses and artificial deficiencies in housing supply,” Garg said. “That means that you have speculative behavior and speculative behavior in property markets usually ends up negatively impacting homeowners and the people who finance homes.”

“Opendoor would have performed a social and economically useful function if they were buying houses, renovating them, fixing them up, selling them and then warranty-ing,” Garg continued. “’We fix old houses dot com.’ That would have been a worthwhile thing.

Earlier this month, Sean Gotcher posted a TikTok theorizing about an unnamed online real estate company that people used to search for homes. The Las Vegas-based real estate agent wondered aloud if such a company might end up using a combination of data and inventory in the future to manipulate housing prices. The TikTok went viral, and Zillow said in response that the video was born out of “misinformation and falsehoods.

Motherboard asked Gotcher over the phone whether he believed his hypothetical scenario could become reality, noting many people considered it conspiratorial.

“Call it a conspiracy. I hope it never comes true,” he said. But, he added, “But I’ve been told a lot by these big companies until something does come true. Then they say, ‘Oopsie, I’ll pay a fine.’”

Garg watched Gotcher’s video. While he took issue with some of the details, he approved of the general sentiment. “People can feel when they’re getting fucked,” he said.

Black worries what will happen to the iBuyers should the market turn cold, leaving them with thousands of homes worth less than they bought them for. Garg said it took 10 years for Americans to trust in the housing market after its late-aughts collapse, and he fears the industry hasn’t learned from its mistakes.

“If we fuck up the American dream, what are we doing?” Garg said. “It’s gonna be like credit crisis 2.0.”

“It’s just a bad direction,” Garg added. “Our customers should hold on to their home equity. It’s 60 percent of their wealth. It’s just wrong.”

This post has been read 13 times!

0 0 votes
Article Rating
Like Love Haha Wow Sad Angry
Not Optional
Inline Feedbacks
View all comments