Yesterday, Brian Brady pointed out that traditional real estate’s non-traditional career tracks create an opening for the iBuyers. To balance matters, here is an iBuyer vulnerability I have not seen discussed.
Except by me, of course. I’ve been studying pieces of this problem for a long time, and I’ve been talking about it in public since January. I’m going to divest myself of all of my findings in due course, but here’s a little taste of Thalia’s wisdom, just to get you hooked:
iBuying creates a retail real estate marketplace as an emergent phenomenon. That’s unprecedented, something truly new under the sun.
What else is new? iBuying’s retail real estate market does not have a discount rack.
Ew. The discount rack. Over there. In the back. Everything stacked willy-nilly, all on one rack – where people can see you. All marked with bright red tags – serviceable merchandise, but stigmatized.
The discount rack is the retailer’s way of shedding bad buys and shopped-over goods without undercutting his own regular prices. Every price is subjective and arbitrary, so why is this worth twice as much here as the same thing over there? Because that one is on the discount rack.
It’s marketing bafflegab all the way down, but it works: The overt anti-marketing of the discount rack induces everyone to go along with the pantomime – knowing all the while that it is a pantomime.
And iBuying can’t have that. There is no “over there.” The inventory is all right here. If you slash the price of 123 W Mulberry today – “Clearance! Priced to move!” – you will have to slash the price of 127 W Mulberry and 124 W Mesquite tomorrow.
And so on.
To get a poorly-marketed listing to move – and all the iBuyer listings I have seen are poorly-marketed – you will end up discounting, typically below Fair Market Value. You will also have to ignore that time is money – which real estate has always done but which bankrupts retailers. But when you cut the price below FMV, or when the listing ultimately closes below FMV, you have just ceded the same discount to all your other listings nearby – a lot of them.
And those discounts will occasion their own discount ripples, until your entire Active inventory – 371 houses for OpenDoor in Phoenix right now – is at risk of your own self-induced, self-reinforcing price-slashing cascade.
A real estate slashscade. This will also be an unprecedented phenomenon, should it occur.
Here’s what’s what:
iBuying is retail. It runs by retail rules – minus the discount rack. Retail is maximal turnovers on thin margins. The carrying costs on iBuyer homes are ~1.5% a month on the ownership side (funds, taxes, insurance, utilities, etc.) and ~.5% on the marketing side, as rough guesses. iBuyer listings are all over-priced in Phoenix, with the result that they linger on the market indefinitely. More than 10% of OpenDoor’s Active inventory is over 90 days-on-market. That won’t last: The downside risks from any delays in turnover will overwhelm any lucky-strike upsells, minus the slow-leak downsells, especially as margins thin.
The solution – for them and for the entire real estate market? List at FMV. Listing at FMV clears inventory – typically at or above FMV – in single-digit days-on-market. The iBuyers will get there eventually. Their lenders will lead them to reason, if no one else does. But you can slaughter them right now just by listing where they should be – at FMV.
Real estate retailers – steady-state marketers – cannot cut and run, since a deep-discount here is a cascading catastrophe everywhere else. The slow movers will have to move slowly, since being shopworn is the only even-remotely-plausible discount rack for iBuyers. Accordingly, buying with extreme confidence is how iBuyers will shed this problem in the long run.
Here’s what they have yet to figure out, from all appearances: Call the days from bought-it to sold-it DOOP – days-out-of-pocket – the days the funds are borrowed. DOOP matters more than anything else for iBuyers, because the carrying costs devour the upside with every passing day.
Here’s what matters: Real estate representation may be in flux, but housing is inescapably a brick-and-mortar business. If you’re looking for your future, let’s find it together.