What Role Do iBuyers Play in a Volatile Real Estate Market?

The growth of tech-driven “instant buyers” speaks to their potential, but Zillow’s recent exit reveals the algorithms’ shortcomings.

In September, Las Vegas–based real estate agent Sean Gotcher posted a TikTok insinuating that an unnamed iBuyer—an "instant buyer" that relies on technology and algorithms to facilitate quick real estate transactions—could be manipulating the housing market by artificially driving up prices. To date, the video has gotten 3.4 million views and stirred up a flurry of public anxiety, although those fears are largely unfounded: An outlier property with an inflated price tag would be dismissed as a bogus "comp," or comparable sale. When assessing the value of a new home on the market, appraisers, lenders, agents, brokers, and even real estate lawyers act as checks and balances for one another, helping to avoid the doomsday scenario of manufactured price hikes.

Although Gotcher didn’t name names, his video thrust companies like Zillow, Redfin, and Opendoor into the hot seat. The reality is that with under one percent of total U.S. home sales last year, iBuyers would need a lot more time, money, and market share to be able to manipulate housing prices in the way Gotcher suggests. Case in point: Zillow recently announced it would sunset its iBuyer service, Zillow Offers, as supply chain issues, labor shortages, and a slowdown in home prices have resulted in unsustainable losses. While the popularity of Gotcher’s TikTok may not correlate with its accuracy, the comment thread reveals a larger anxiety about how entities like Zillow and Redfin could hypothetically leverage data for nefarious purposes.

Zillow recently announced it would sunset its iBuyer service, Zillow Offers, as supply chain issues, labor shortages, and a slowdown in home prices have resulted in unsustainable losses.

For their part, Zillow and Redfin have been swift to respond to the public’s concerns. Redfin shared that its iBuyer program, RedfinNow, sold only 292 homes in the second quarter of 2021, representing 0.01% of all homes sold. "Intentionally overpaying for homes would be a terrible business model," the company tells Dwell. Moreover, in the same time period, 99% of homes sold by Redfin were done through its traditional listing service.

Similarly, a written statement from Zillow explained that the company’s selling and buying program was based on a business model designed to generate profit margins from convenience fees—typically around 5%—to sellers. "Because our margins are so thin, it’s critical that we price a home accurately. If we overpay—we’ll lose money on the resale. If we make too low of an offer—homeowners won’t use us," it read. Zillow Offer’s imminent closure exposes the model’s fragility.

A couple views a 3D home tour on Zillow.

Agents and brokers throughout the U.S. generally echo the companies’ defenses. The facts are that, at present, there’s no financial benefit for real estate tech giants to tarnish their reputation or attract the ire of regulators.

Greg Forest, senior global real estate advisor at Sotheby's International Realty in Palm Beach, Florida, says that iBuyers face extremely slim margins and much higher risk of capital exposure. "Purchasing homes online, with minimal eyes on inspections, assessments, and other issues that tend to arise during a real estate transaction, iBuyers often open themselves up to the liability of a small fluctuation in the market making drastic waves in their profits," says Forest.

He says that iBuyers are essentially wholesaling properties, but unlike traditional investors who target distressed properties, iBuyers hunt for those in popular neighborhoods. "They look for newer or renovated homes that are primed to sell for top dollar," says Forest. "Their entire model is based on purchasing the property at the seller’s net price." This would be roughly the seller’s proceeds after paying a real estate agent’s commission, had they used one. IBuyers purchase at this price and swiftly sell at the "retail" price, pocketing the difference. "Because iBuyers are not owning the property long enough, or moving into the property, I do not see them changing neighborhood demographics," says Forest.

Brady Miller, CEO of real estate brokerage Trelora, acknowledges that because iBuyers snap up homes before they go on the market, their presence can reduce available stock for individual buyers. However, says Miller, "since iBuyers don’t hold homes for the long run, they typically purchase homes that require minimal renovation before reselling," allowing traditional agents to match their clients with deals that an algorithm just won’t catch.

Before: a kitchen in a home sold by RedfinNow, the company’s iBuyer service.

After: the renovated kitchen of a home sold by RedfinNow.

Warner Quiroga, president and owner of Prestige Home Buyers, a real estate investment company in Long Island, New York, says that "I still believe that many homeowners would prefer to sell their house to a person that they meet and build rapport with, as opposed to just clicking a few buttons online and selling their house. After all, this is the biggest transaction of their lives, in most cases."

Along with the reasons above, the public’s healthy skepticism of web-based data collection seems poised to keep traditional brokers employed for years to come. While iBuyers would love to get an edge up on one another, none can afford to cast doubt on the very premise that tech-based decision-making is trustworthy, and none can replace the physical or emotional experience of an in-person home tour.

Related Reading: 

10 Critical Questions to Ask Yourself Before Buying a Home

Here’s Everything You Need to Know About Buying a Home, According to Three Experts

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