Silicon Valley Is Coming For Your House
In today’s on-demand digital world, buying and selling a home remains stubbornly, painfully analog. Most sales still begin with a real estate agent (and a 6% commission). Most still end in an office, with the two sides signing page after page of legalese.
Silicon Valley wants to change that. Tech companies have begun to nibble away at the edges of the residential real estate industry, offering virtual open houses, digital closings and other services. Now they are coming straight for the real estate transaction itself through “instant buying,” in which companies buy homes, perform some light maintenance and put them back on the market.
Established companies like Zillow and venture-backed upstarts like Opendoor and Offerpad have raised billions of dollars on the promise that they can use sophisticated algorithms to predict the value of individual homes. They contend that those predictions, combined with old-fashioned economies of scale, will allow them to be far more efficient than traditional home flippers.
The companies and their backers say they are doing what tech is best at: bringing efficiency and convenience to a process not known for either. Silicon Valley has already upended the way we hail a cab and order takeout, they argue. Why not improve a transaction that even well-educated professionals find intimidating?
“You should be able to sell a home within a handful of clicks,” said Eric Wu, Opendoor’s chief executive.
But houses are not taxicabs. A bad Uber ride might set a user back $20 and make her late for a meeting. A house is the largest asset for most Americans and the most expensive purchase they will ever make.
At best, skeptics see instant buying, also known as “iBuying,” as an overhyped, capital-intensive business whose explosive growth will fizzle once investors tire of profit margins that Zillow itself calls “razor thin.” At worst, they worry that it could bring volatility and risk to an industry that has already brought down the American economy once this century.
Glenn Kelman, chief executive of Redfin, the online brokerage firm, said there was a danger in pouring huge sums into buying up homes “without having a clear idea of how you’re going to make money on almost every single home.” If that happens, he said, “you’re just putting the housing markets, the capital markets, at some degree of risk.”
Instant buying is a small part of the market, but it is growing at breakneck speed. Zillow bought fewer than 700 homes in 2018. It expects to be buying 5,000 homes per month in three to five years. Opendoor, the first big iBuyer, bought more than 11,000 homes last year and in the past year has raised more than $1 billion to step up its pace.
The companies typically aim to hold homes for 90 days or less before selling them, typically to an individual buyer. For the eventual owner, little changes about the process.
In Phoenix, instant buying accounts for 6% of all real estate transactions, according to Mike DelPrete, an industry analyst. And in a sign of how iBuying is reshaping the housing market, Kelman’s own company is getting into the game, buying homes in California, Colorado and Texas through a program it calls RedfinNow.
Even traditional brokerage firms like Keller Williams and Realogy, which owns Coldwell Banker, Century 21 and other brands, have announced plans for instant-buying programs. The trend is a threat to the brokers’ business model — but if it is going to happen regardless, they would rather get a piece of the action.
There have always been people who need to sell their homes quickly because of a lost job or a sudden move. But selling fast has come at a price, usually a steep discount. Instant buyers promise a much smaller discount, perhaps shaving only 1 or 2% off what a homeowner might get in a conventional sale.
For the right seller, that trade-off might be worth it.