Real estate listings site Zillow is making moves into the “iBuyer” space.
The company announced Thursday that it’s expanding its Zillow Instant Offers program to the Phoenix metro market after launching a pilot program in Las Vegas and Orlando last year.
The expansion is the clearest sign yet that the real estate industry believes the iBuyer concept is viable, as Zillow says it plans to invest between $75 million and $250 million in 300 to 1,000 homes by the end of the year.
iBuyers work like this. A home seller answers a questionnaire about the condition of their home, and the iBuyer uses an algorithm to set a “fair market” price for the house and make an offer. Should the seller accept, the iBuyer would then repair and clean the house for the seller, and then ultimately sell the house on its website.
iBuyers streamline the home selling process so that a customers move-in and move-out dates lineup. In traditional real estate channels, the home selling process can drag on as offers are fielded, negotiated, and closed. This can lead to someone paying two mortgages for a month, or needing to find temporary housing for the gap between the move-in and move-out dates.
Opendoor launched the concept in 2015 and has been growing rapidly. It’s closing in on a $200 million funding round at a $2 billion valuation, adding to the $320 million the company has already raised from investors. Opendoor is currently in eight markets and could double that number by the end of 2018.
Other companies have followed Opendoor into the space. OfferPad offers a similar product. Knock has a slightly different model, where instead of buying a customer’s existing home, it buys the customer’s new home. Once they’ve moved into the new home, Knock repairs and cleans the old home for sale.
Traditional real estate players have also experimented with the concept. Redfin launched Redfin Now last year, and Zillow’s announcement on Thursday suggests it was pleased enough with the trial runs in Orlando and Las Vegas to put additional resources into Zillow Instant Offers.
Zillow thinks it can differentiate itself from other players in the space by leveraging its local real estate agents on both sides of the transaction, in addition to what it believes to be superior data and algorithms for pricing homes.
The iBuyer concept works because the model is setup around collecting a transaction fee, not necessarily capitalizing on home price appreciation gain in the time between when the company buys the home and sells it. However, because home prices are mostly rising, the companies do capitalize on this gain.
The big question for these companies is whether the concept still works in an environment where home prices are falling. They believe they can by accurately pricing homes and flipping them as soon as possible. While Opendoor says it’s been successful in markets where home prices have fallen, it has yet to be tested when falling home prices is the norm instead of the exception.