Here in Silicon Valley we like to be at the sharp end of the innovation curve. One of the new entrants into the real estate marketplace is the automated iBuyer corporation. These are companies like OpenDoor and in some areas Zillow, that make an automatic offer on your house, quickly spruce it up and then resell it in the marketplace. Typically iBuyer companies focus on markets with good inventory and median house prices in the 300K and under range such as Phoenix, parts of Florida and Las Vegas. Will these iBuyers make it to Silicon Valley?
iBuyers charge a premium to sellers (about 7%, called a Service Fee) which is 1-2% more than is charged on a typical transaction with a Realtor. The iBuyer corporation does incur the cost of the renovations, but, to make any profit at all, they need to purchase the home for less than market value, it’s simple economics.
iBuyers use an AVM- Automated Valuation Model to estimate the price of the home. In areas where tract homes have been built at a similar time, preferably less than 15 years ago, in a consistent neighborhood, these automated systems are quite good at estimating value. Here in the Bay Area, we have a majority of homes that have been built in the 50’s and 60’s many of which have been somewhat or completely renovated. Neighborhoods here also vary street to street which makes it very hard for algorithms like Redfin or Zillow to accurately assess market value.
A good example of this is a recent sale I had in the Waverly Park neighborhood of Mountain View (see link below). When I first went to meet with the sellers in July, Zillow listed the home’s value at $3.2M and Redfin had it at $2.72M. Previously, I had sold a home in the area at $3.470M and knew that this house could go for a similar price point but it would take the right preparation and marketing. Strategically, I listed the home at $2,998,000 and it ultimately sold for $3,475,000 getting a much higher price for these sellers than they would have received with an iBuyer. The difference was that we created a competitive bidding pool that pushed the value up to the high point that the market would bear. Today, Zillow shows the same house at $3.45M and Redfin has it at $3.467M. You can see that Zillow and Redfin just follow the market. Neither could predict that the true market value was $3.475M.
The iBuyer business model works best at scale: homogenous housing stock, less risk and economies of scale. Due to our extremely high prices and competitiveness, I don’t foresee iBuyers here in the valley in the near future. Until we see some major progress in Artificial Intelligence, our high price points, unique inventory and neighborhoods will make it quite hard for iBuyers to penetrate the Silicon Valley marketplace.
If you want to talk more about this and how iBuyers make money, give me a call. As always, if you or someone you know is looking to make a change, please don’t hesitate to reach out. I’m happy to help, and love to talk about all aspects of real estate.
Call me at 650-305-9490
Waverly Park in Mountain View
List at $2,998,000 | Sold $3,475,000
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