A Brief History of Verified Buyers

‘We Buy Ugly Houses’ and other property fix and flip business models have been around for decades, typically for sellers of distressed homes that need some significant repairs or updates to sell on the open market who can’t afford the expense and time to do such themselves. The ‘ugly house’ buyers made their profits by buying properties quickly, often for cash, and at low enough prices that even with the calculated repairs, they could confidently turn around and sell the home for a nice profit.

Buying houses to fix and flip was how I was initiated into the real estate industry. Good times.

The term iBuyer or instant buyer was coined not too long after OpenDoor launched back in 2014. They evolved the Ugly Houses model using an algorithmic property valuation model that analyzes 145+ features per home combined with real-time market data and historical underwriting information to qualify and buy non-distressed property from homeowners at (less of) a discount plus a service fee. They then properly merchandise the property compared to its former owners living conditions to resell quickly and at a higher price for a tidy profit. The assumption was that consumers would take justifiably less $ for their home in exchange for the certainty and convenience of a guaranteed sale on their timeline compared to the inefficient logistical gymnastics oft associated with listing and selling on the open market.

To date, the discounted pricing + service fees (+ agent commissions) associated iBuyer offers have been prohibitive for most sellers. While only 3% – 5% of instant offers are accepted compared to selling on the open market, considering today’s housing market that is critically short in supply, those aren’t insignificant numbers. It has been proven that sellers prefer the instant offer model if they can afford it. Traditional iBuyers are improving their offer strength to align closer to prevailing open market values as they get comfortable with how the pandemic has affected local housing markets and their algorithms mature a bit. They’re lowering their service fees, too—more on this below.

This sector has continued to evolve to the point there are now multiple types of iBuyers, differentiated by their property acquisition/disposition strategies and internal processes. So, for clarity and simplicity, I’m going to call these qualified institutional level instant cash buyers- Verified Buyers, and further delineate their descriptions by the type of model(s) they employ, condensed into acronyms because we all know how much real estate loves their acronyms.

Examples of other Instant Verified Buyer’s (IVB’s) include national companies like Zillow Offers and Offerpad. There are also lesser-known localized IVBs in almost every market across the country. Differences between the IVB’s tend to be what types of property they’ll buy, the condition of the property, min and max price ranges, and min to max days to close for the consumer to choose from… these qualification requirements are often referred to as ‘buy-boxes.’ Different IVB’s will offer different terms and fees on the same property, so if the IVB model fits a consumer’s needs, shopping and comparing all offers to each other as well as to the open market is very prudent. That said, it’s an excellent idea for a seller to work with a real estate professional with IVB experience to help aggregate and detail all options vs. the open market.

Newer to the scene is Bridge Verified Buyers (BVB). Without getting too far into the weeds, they will work with qualified homeowners to secure and move into their next home before having to market and sell their current home. BVB’s will secure a homeowner’s next home with a cash offer and rent it back to them over a short term, usually up to 90-120 days (the Bridge). Once out of their current home, it’s prepped, listed, and sold on the open market for full market value. When the current home sells, the seller uses the unlocked equity (and typically executes on a mortgage for the remaining proceeds) to secure legal ownership in their ‘next’ home (that they’re already living in) from the BVB. BVB’s charge a service fee in the ~1.5% to ~3% range.

BVB offers are gaining popularity over IVB offers because:

• They unlock homeowners who may be hesitant to sell their current home out of fear they won’t be able to secure the next home they want due to offer killing contingencies.
• The service fee can often be made up in whole or part by using their all-cash offer to negotiate a better sales price than offers with financing contingencies. 
• No need to worry about stressful ‘double moves’ and other such logistics because the current and next homes are prepped, bought and sold on customer dictated timelines.
• Agents can represent the homeowners they procure on the sale of their existing homes and the purchase of their next home at full market value.

Examples of BVB’s include Ribbon, Homeward, Knock, EasyKnock, and Homelight. They also have their own unique buy boxes, and their operational models vary in complexity, which makes BVB offers more difficult to compare than IVB offers for the uninitiated. These companies tend to have smaller service area footprints as the subjective market expertise provided by local real estate professionals is required to assess algorithmic property valuations further and execute on the detailed logistics of these programs since they’re dealing with two independent transactions that are still very dependent on each other. Expect BVB’s to expand service areas as their models mature a bit and more IVB’s to expand their services to make Bridge offers. Again, it’s an excellent idea for a seller to work with a real estate professional with IVB and BVB experience to help aggregate and detail all options vs. the open market.  

New Entrants and Traditional Real Estate Industry Bias

The traditional real estate industry really doesn’t like innovative new entrants that buck the status quo. Bias against alternative brokerage models has run deep for as long as I’ve been around the industry (20+ years). Many discount, low fee, rebate, stratified pricing for services, and other alternative brokerage models have been bastardized to blackballed over the years. The evidence lay along the bloody road of perdition to the graveyard of insolvency. For every cornerstone like Redfin, there is a wall full of PurpleBricks.  

IVB’s are certainly no exception. They’re frequently dismissed by incumbent practitioners as rip-offs to be avoided at all costs compared to listing a home on the open market. IVB’s are often perceived as purchasers of only low-mid priced homes in a given market, making them irrelevant in many practitioners’ eyes. I’ve witnessed BVB’s services get dismissed because they’re perceived as complicated, different, and/or something ‘most of our agents probably wouldn’t want to use.’ 🤦🏼

Many incumbents howled in delight as almost all Verified Buyers dialed back their purchasing during the onset of COVID-19, pointing to their retraction as another ‘I told you these wackadoodle companies with newfangled models and their VC money don’t understand real estate and wouldn’t survive a downturn!’ moment. Well, depending on what market you’re in, overall transactions were down 20-30-40%, and months of inventory was/is measured in weeks for everyone. They weren’t marched down the road to perdition. No one folded. They waited, watched, planned, and are now back, positioned to expand. OpenDoor openly plans to be in ~100 markets over the next couple of years, others will follow.  

At this point, it’s fair to say: ‘So fckng what? These Verified Buyers only work for maybe 3% of consumers because of their inferior offer strength and additional fees. Inventory is low, and listings are being sold before they hit the MLS… why should I worry about losing listings to these companies?’ Glad you asked. It is hard to see the forest for the trees. 

More Competition Commeth 

The incumbent institution that is the association based residential real estate industry has been embroiled in a couple of anti-trust lawsuits and settlements with the Department of Justice (DOJ) over the past 10 years. The first settlement (in 2008) essentially opened listing information and other property data to the masses. That resulted in important innovations and new companies that fostered greater transparency and competition, benefiting the consumer and the professional who learned to leverage the same. The settlement arguably fueled the rise of Zillow into the consumer brand of real estate. 

The most recent National Association of Realtors (NAR) and DOJ anti-trust lawsuit settlement (11/2020) detailed three requirements to further improve competition and transparency for the consumer:

1. Require listings in MLS feeds to prominently display the buy-side commission negotiated by the listing agent for consumers to see. 
2. Stress agents cannot explain to buyers that their services are ‘free’ and avoid any semblance of steering based on commission rates. 
3. Require any licensed real estate agent to show property listed in the MLS, even if the agent is not a member of the NAR or the MLS. 

I believe that settlement will act as a lever to hold open a legal Pandoras Box that would require home sellers to negotiate listing commissions with a listing agent while home buyers would be required to negotiate buy-side commissions directly with a buyer’s agent. In my previous post, I wrote about the implications of divorcing buy-side and sell-side real estate commissions and how that would usher in a new landscape of competition from multiple angles… please check it out; it will make everything else you’re about to read more believable 😉  

In that post, my second most impactful (potential) implication: The proliferation of alternative business models and transaction services. Specific to Verified Buyer models:

Collectively, these ‘Verified Buyers’ and the services they provide address many of the issues consumers loathe when buying and selling and home. They offer safety, certainty, and convenience at levels well above the traditional transaction route. Consumers will not only pay for these tangible benefits but will come to expect them when choosing which brokerage/agent to work with. If an agent wants to compete and charge a premium for their services, the services (plural) offered better be premium. 

“But they still low ball offers and have excessive fees!” you say. Look closer. IVB’s are dropping their service fees. According to zavvie’s Seller Preference Report Q3 2020, OpenDoor announced they would cap their service fee at 5%, where 8%++ was the norm not that long ago. A couple of other interesting stats from the report:

I expect IVB’s to return to pre-COVID offer strength numbers by mid-2021, if not sooner, and further drive their service fee’s down, close to zero eventually. Why, how? A core aspect of their competitive strategy is to monetize the more profitable affiliated settlement services and other business units, i.e., mortgage, title, insurance, home services, etcetera. 

OpenDoor and Zillow Offers also now offer traditional real estate services(!), hiring licensed agents as full-time employees, which gives them far more top-down control when it comes to referring consumers to their ancillary business units (amongst other relevant upsell opportunities) compared to the independent contractor model employed by most brokerage businesses today where capture rates for affiliated business units typically range from decent (25%-30%) to poor.

BVB’s have similar plans. Keep service fees low to zero, increase the capture rate on highly profitable affiliated businesses with greater lifetime values (LTV’s) per customer than real estate brokerage services. Compared to IVB’s, they solve for the most painful and inefficient parts of an open market sale plus the subsequent need to purchase a new property: financing contingencies that require a homeowner to sell their current home before they can buy their next home. While it is a great time to sell, it is also a real challenge to buy the next home you want. These companies are solving for that conundrum.

HomeLight, a company that deploys real estate product and service offerings to match competitors remarkably fast, has recently entered the BVB space in California and Texas. They directly tie the usage of their mortgage company to the fee for their Trade-In program:

When you use HomeLight Home Loans for your new purchase, the HomeLight Trade-In fee is 1.0% for the first 30 days HomeLight owns the property, and 1.0% for every 30 days thereafter. If you do not use HomeLight Home Loans on your new purchase, the HomeLight Trade-In fee is 3.0% for the first 30 days HomeLight owns the property, and 1.0% for every 30 days thereafter.

https://www.homelight.com/trade-in

Expect both the number, type, and service areas of Verified Buyers to expand through 2021.

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Your margin is my opportunity.

~Jeff bezos

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A pandemic, pending legislative changes, shifting consumer expectations… turbulent times in general… is when resilient companies realize they can’t continue to skate by on their inherent strengths alone. The question becomes whether their weaknesses are manageable. Who has balance? Which companies have multiple ways to win business? Does yours?