These companies will buy your home instantly. Here's what that means for a red-hot real estate market

Cosmos and Charisma Onyeyiri weren't looking to sell their home. But skyrocketing home prices in Austin this summer had them curious: What would the home they bought for $360,000 two years ago sell for now?

"We just had a baby. It was going to take a lot to get us to move," said Cosmos Onyeyiri. But, he said, a pie-in-the-sky offer of $600,000 or more would be motivating.

A few months later, that's exactly what happened. The couple sold their home for $616,700 -- without ever putting it on the market.

But it wasn't a typical homebuyer who made them their dream offer. It was Zillow.

Over the past couple of years, real estate giants like Zillow and Redfin moved beyond online listings of available homes for sale, and started buying and reselling homes. But last week, Zillow announced it is getting out of the business, partially because it bought homes at higher prices than the company estimated it could sell them for in the future. The company said it was concerned about its ability to forecast prices and operate at a large enough scale to be profitable.

Known as iBuyers -- Opendoor, RedfinNow and Offerpad are some of the biggest -- these companies use technology and data about a home and its market to make a cash offer on a property. After buying the home directly from the homeowner, the iBuyer makes some minimal repairs and updates and then sells the home on the open market.

"IBuying is appealing to a surprisingly large amount of people," said Mike DelPrete, an independent real estate technology strategist and scholar in residence at the University of Colorado Boulder. "The pitch is speed, certainty and convenience. You don't have to worry about the uncertainty of the market and how long it will take to sell, getting the house ready to show, which agent to choose."

While sellers typically pay more for the convenience of using an iBuyer, the fees in competitive markets have been lower than the fees that traditional sales agents charge, said DelPrete. And the companies have been known to pay above-market prices for homes.

But while iBuyers can be appealing to sellers, hopeful homebuyers who are already being priced out of real estate markets fear the corporate competition and how it might further push home prices higher.

How iBuyers work

While iBuying has grown significantly over the past few years, it accounts for only 1% of homes sold in the US, or roughly 60,000 sales annually, according to a report from Zillow. But in some fiercely competitive cities like Phoenix, Atlanta and Charlotte, the share is more than 5%.

The largest iBuyer in the US is Opendoor, which launched in Phoenix in 2014 and now operates in 44 cities. The company bought 8,494 homes last quarter and sold 3,481. Zillow was a distant second. It launched Zillow Offers in 2018 in Phoenix and Las Vegas and most recently operated in 25 cities across the country.

Zillow has said it is not going be able to sell many of the homes it owns for a profit. Part of the problem, Zillow said, was forecasting what it could sell the homes for in the future given that the rapid increases in home prices that occurred during the past year have started to slow. In Phoenix, the 250 listings Zillow had at the end of October were priced at a median of 6.2%, or $29,000 less than what they were bought for, according to research from DelPrete.

But Zillow's exit is not necessarily a knock on the industry. It's more of a Zillow problem than an iBuying problem, said DelPrete.

"I've seen the other iBuyers make adjustments in this market," he said. "They have changed their fees, or are changing what they are offering for homes, kind of reacting to the market. But I saw Zillow just barreling down."

Opendoor, for example, is boosting its iBuying business by extending its partnership with Realtor.com and putting a "real-time offer" button on the real estate listing site so that some homeowners can see an immediate offer in cities where the company operates.

"Consumers want more visibility into the value of their home, and more choice when deciding how to move forward with their home sale," said Marissa Mierow, vice president of product at Realtor.com. "We're excited to bring these offers to even more consumers through our My Home dashboard and offers on off-market properties."

Offerpad said it is not slowing down either, moving into seven new markets this year, with more coming in 2022. While iBuying relies on algorithms to make an offer, there is a human element to the pricing process, too, said Brian Bair, Offerpad's CEO and chairman.

"The market will always change. You don't win in residential real estate by only perfecting your algorithm. Your ground game is equally as important," Bair said. "I believe iBuying will continue to grow and shape the future of real estate."

The upside for sellers

The Onyeyiris were thrilled with the price they got for their home and the money they saved in sales commissions.

"Zillow definitely overpaid for our house, based on the sales in our neighborhood. I don't think it will sell for more than what they paid us." he said, although the home has not come back on the market yet. "They had a much cheaper fee, too. Real estate agent fees are 4% to 6%, but our service fee was 1%."

While Zillow didn't offer the level of service that a real estate agent might, Onyeyiri said the deal was well worth the lack of hand-holding.

"The Zillow Offers agent, once she had gotten our agreement, she fell off the face of the Earth," he said. "No email, no calls. That was not super helpful. But for the money they were offering, I was willing to put up with a lot."

Onyeyiri also liked the anonymity of the appraisal process. Earlier in the year, the couple received a home appraisal they believed was way too low.

The Onyeyiris, who are black, had read about black homeowners getting low valuations on their homes because of appraiser bias, and they were skeptical.

"Using an iBuyer was appealing because it was an algorithm," Onyeyiri said. "Algorithms have a degree of bias, too. But it would not be based on what the person who was assessing the house thought of the value of the house. It is based on data about the house, the comps, the market, numbers."

What it means for buyers

The rapid growth of iBuying has sparked some controversy, however. Many homebuyers fear that these large corporate buyers will push already sky-high home prices even higher and that their financial muscle in the market gives them access to moves that typical buyers don't have.

One real estate agent's critique of the iBuyer industry, which described how big companies buying homes could potentially manipulate the market, went viral on TikTok in September. While the agent did not name any specific companies at the time, Zillow responded with a statement.

"Unfortunately, the internet can also sometimes be a source of misinformation and falsehoods -- as is this case," Zillow spokesperson Viet Shelton said in the statement, which was issued before the company announced it would unwind the Zillow Offers program.

The scenario the agent outlined could actually play out, say industry experts. It's just not happening right now.

"Though they aren't responsible for the current state of the housing market, some of the common practices of iBuyers do warrant scrutiny," said Jacob Channel, senior economic analyst at LendingTree. "It is possible that as their market share grows, iBuyers could eventually have enough power to manipulate the market, drive prices up and keep middle class borrowers from buying a home."

Currently, the share of iBuyer-owned homes is too small to move the overall market, but it is having an impact in areas where iBuyers are very active. Channel said this could also happen in smaller communities, where there aren't as many homes for sale.

However, Zillow's exit from the market is a sign that it wasn't making big profits from soaring real estate prices.

Many Zillow-owned homes are now selling for less than the price they were purchased for. In fact, the company took a $304 million inventory write-down last quarter as a result of buying homes that exceeded their estimated resale price.

"Even if an iBuyer does buy a home with the hope of reselling it at a higher price, their plan wouldn't work unless they could find a buyer willing to pay that price," said Channel.

While Redfin's president and CEO Glenn Kelman said his company has no plans to exit the iBuying market, it is a reluctant participant. It offers its RedfinNow service in 29 markets as an option for homeowners who want a no-hassle sale and aren't shooting for the highest price imaginable.

He said Redfin is not interested in holding the homes it buys any longer than it takes to get them to market.

"It is hard to express how much pressure we are under to sell the house as quickly as possible," said Kelman. "We want to fix it and put it up for sale. Any time we are holding a property longer than that, we view that as a calamity."