In January, Keller Williams founder and CEO Gary Keller said that although he didn’t want his company to get into algorithm-driven real estate transactions, or “iBuying”, he feels like he has “no choice now.” The hesitation made Keller Williams a late entrant onto the scene, behind Opendoor, Offerpad, Zillow, and Redfin.
Today, the company announced its plan to catch up.
Keller Offers, the company’s new iBuyer program, will enter into an exclusive partnership with iBuying originator Offerpad in the Phoenix and Dallas-Fort Worth markets, with plans to expand the partnership to 10 more Offerpad markets by the end of the year.
“The partnership allows Keller Williams to expand quickly,” said Gayln Ziegler, director of operations for Keller Offers. “Our agents want this tool because their sellers want it.”
The partnership will work like this. Offerpad can make an offer on a seller’s home through a Keller Williams agent if the seller requests one. If they accept the offer, Offerpad will pay the agent a 1 percent commission. If Offerpad declines to make an offer, Keller Offers will present its own offer.
The announcement comes on the heels of Redfin announcing a similar partnership with Opendoor in Phoenix and Atlanta. Redfin has been slow to expand its iBuyer program Redfin Now, and like the Keller Williams and Offerpad deal, Redfin’s partnership with Opendoor allows them to enter markets where a number of iBuyers already operate without committing commensurate resources to it.
iBuyers—short for ‘instant buyer”—make offers on houses at a “fair market price” determined by an algorithm. They then clean and fix the apartment and sell it on the open market, collecting a fee from the seller along the way. This allows the seller to close on the sale in a matter of days so they can take the equity in their current home and purchase their next home.
The iBuyer concept has attracted its fair share of venture capital, startups, and headlines. Emerging in 2015 with Opendoor, the business model is still relatively unproven, particularly in a struggling housing market, which could very well be on the way as more economists are predicting a recession in the next two years.
Zillow, which is aggressively expanding its iBuyer program Zillow Offers, revealed in its last earnings call that the company makes just 0.5 percent per home sale, and after taking interest expense into account, the company actually loses money. Whether iBuying is a viable business remains to be seen.
It’s also an open question as to how much the home seller benefits. Home owners who sell to an iBuyer typically need to move quickly, and the convenience of the iBuying model allows them to do that. But Zillow Offers, for example, charges an average of 7.5 percent of the value on the house for its services. And because the home doesn’t hit the open market, the seller may be leaving money on the table by accepting the iBuyer’s “fair market price.”
In fact, a recent study by Collateral Analytics concluded that selling to an iBuyer costs about 13 to 15 percent more than selling on the open market. That may be worth it for people who need to move as soon as possible, but for everyone else, it’s a risk to take into account.