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iBuyers Want to Replace House Flippers

2023 Edit: I’ll admit when I’m wrong. OpenDoor and other iBuyers are burning through their cash reserves. iBuying is a failed model. Job openings at OpenDoor are heavily focused on finding other models that work. Can they pivot and survive? Time will tell.

The inevitable death of noob house flippers begins in Phoenix Arizona in 2014, a city best known for a sketchy for-profit online university, and being really hot. The Phoenix metro area had a population of just under 4 million at the time and averaged about 25 thousand active residential listings throughout the year. Since then there’s been some ridiculous growth. Post pandemic, the population stands at 4.8 million across 1.4 million single family homes, and housing starts have tripled in that time to try to meet the demand, but inventory is at a historical low of under 8 thousand. This city has been a house flipper’s dream, and thanks to the pandemic and incoming migration, it is literally and figuratively one of the hottest seller’s markets.

Now stay with me here because this is where the story gets juicy… Part of the reason why Phoenix has become hyper competitive is that it was the first city where Eric Wu launched the iBuyer, OpenDoor. Eric had the perfect mix of experience and drive to create the concept of iBuying. As a sophomore at Arizona State, he bought a house with his $20,000 scholarship and rented out two rooms to classmates, and in a couple years he owned 25 houses. After launching two real estate data startups, he introduced iBuying to the world by starting OpenDoor, raising money from Softbank, Andreesen Horowitz, and the founders of Uber, Reddit, and Y Combinator among others. That’s the ultimate FOMO investor list. And it’s not just investors that hopped on the iBuying train. Since then, OfferUp, Redfin, and Zillow have joined the iBuying market. (2022 Edit: and Zillow has ungracefully exited).

How Does iBuying Work?

iBuyers are extremely well capitalized companies that buy homes from sellers, sight unseen and all cash within 2 weeks. Then they’ll quickly do necessary repairs and list the homes on their own brokerage platform. They collect fees on both the purchase and sale transactions, and aim to make profits on the flip as well.

Although iBuyers only do very light flips right now, they are clearly encroaching the turf of house flippers. But there is a distinct difference in mentality between the Eric Wu’s of the world and house flippers. Eric is constantly thinking “How can I flip 10% of the houses in the country? And how do I expand from there?” or “How can I make every house flipper’s job easier and take a piece of their transaction?”

On the other hand, first time flippers are entering an increasingly competitive and risky market without the requisite experience. They’re following thousands of social media gurus doing the exact same thing. Millions of noobs competing against each other in an arena swarming with super aggressive and well capitalized iBuyers isn’t going to end well. (As of 2022, both sides have casualties. As of 2023, iBuyers are hurting the most). So my first tip to noob house flippers- Don’t restrict yourself to a pattern. Learn how to adapt because the market is changing.

By the end of 2018, iBuyers had amassed a ridiculous 7% of the single family home listings in Phoenix. And they’ve accounted for over 3% of listings in about 20 markets across the country.

What happens when iBuyers expand their purchase criteria?

Even though it’s insane that 3 or 4 companies own a few percent of the listings in some markets, they’re not anywhere near the majority of transactions… yet. As of now, iBuyers do have minimum criteria for homes they’ll purchase. OpenDoor for example will only purchase homes built after 1960 between $125,000-500,000. Which is already a gigantic segment of the entire US market.

But imagine iBuyers expand to the top 100 metros and decide to widen their criteria to say, homes built after 1900, between $50,000 and $2 million dollars. Most house flippers are going to be operating in the same market as iBuyers.

Except iBuyers are going to have a few billion dollars more cash in their war chest. Because as of last week, OpenDoor is getting a $1B injection of capital by going semi-public through a Special Purpose Acquisition Company, or SPAC. Zillow has stated a goal of purchasing 5,000 homes a month within 3-5 years. OfferUp and Redfin have multi billion dollar valuations as well.

And as they grow and start doing more complicated repairs, they’ll get bigger discounts on construction materials and labor contracts than you can ever hope for. And don’t forget that companies like Zillow have petabytes of proprietary market data with predictive power to drive their decisions. Did I mention iBuyers are their own brokerage firms too? So they don’t have to pay half the broker fees that you do. They get paid for it instead. And they’re starting to offer financing too. How is a 1st time house flipper supposed to compete with that??

Even Bigger Amibitions

But hold up, it gets even worse for house flippers. OpenDoor recently announced that they’re partnering with an Andreesen Horowitz-funded home-building startup Mosaic to build 400 homes in Phoenix. So even experienced flippers buying vacant land or doing knockdowns aren’t safe.

What iBuyers are ultimately trying to do is make the housing market closer to economics-textbook-level market efficiency. They want to reduce purchase and sale transaction times and vacancies to 0. And in a world like that, house flippers simply don’t exist, let alone noob house flippers. So, tip #2: Hedge your investment by buying a little of their stock. If you can’t beat them, join them.

Don’t worry, there are some silver linings. The inevitable march of technology may create barriers to entry, but it can also knock them down by empowering individuals. One of the reasons I love real estate development is that no two plots of land are identical. Use your individuality and creativity in your home designs to offer something truly unique to your market.

And stay on top of proptech trends by subscribing to my YouTube channel to see how you can improve on the experience of living in the home. Figure out how to be more efficient and offer something better every time you start a flip. And don’t forget, you don’t even have to flip to make money in real estate. Nobody’s going to disrupt you out of buying and holding.