It’s not just #Zillow. The costs and risks of ownership mean every #iBuyer “investment” must lose money.

What’s the secret to old school, shoe leather real estate?

◊◊◊ Spanking the Phoenix iBuyers: OpenDoor, OfferPad, Zillow, The Bottom Line.

I think about things until they break. I’ve been working at this iBuyer knot for a year now, and the underlying pricing problem for coming on twenty. But it was only lately that I realized the secret to ‘testing the market.’

What is it?

Not telling the seller that time is money.

Maybe not even knowing it…

From the day a house lists, it’s no longer a residence, it’s an investment asset.

The carrying costs on that asset are around 2% a month: Utilities, insurance, taxes, HOA dues, debt service and the time value of the money locked up in equity.

That is to say, taking a chance on gulling a sucker into overpaying for a bread-and-butter production home costs the seller significant equity for every day of delay.

Most over-priced listings end up selling for less than FMV – after a long time on market. But even the rare lucky-strike upsell is likely to have been overwhelmed by undisclosed, undiscussed carrying costs – even ignoring every other risk to closing – and to the property – each of which accretes with time.

The solution? List at FMV. Velocity of turnover is everything for iBuyers – I’m not sure they know that yet – but FMV is every seller’s best chance of successfully closing at or above FMV.

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That much is easy. The problem is, once you factor in all the costs and risks of ownership, buying at FMV in order to resell at FMV must necessarily lose money as a real estate investment. iBuyers are not able to buy low, nor to sell high, so they must lose money on every deal. It seems unlikely to me that the fees-disguised-as-sales-commissions are enough to cover the shortfalls – and those margins will shrink drastically, going forward, in any case.

I don’t like to be dour, and I want for a more-frictionless real estate transaction to emerge. But despite all the MBA bullshit, the real estate numbers are so ugly that I don’t see any other inflows making up the difference.

To illuminate the problem, I did a pre-mortem on one of my own listings. (Nota bene: I list almost never, but when I do, I swing for the fences; my five-year average numbers are 7 DOM, 100.23% SP/OLP. I studied all three Phoenix iBuyers’ listings at length. What will you bet that none of them are studying mine?) The house we’re documenting hasn’t closed yet, so I’m forecasting the results. It sold in 3 days, all cash, so it’s at a very low DOOP, 36 days. I imputed a pre-rehab buy price, and we spent less than the implied $2,500 whipping it into shape:

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Ew, it’s selling at a discount. I don’t love it, but I don’t gamble with the other guy’s money, so when the seller says sign, we sign.

Here’s the bad news. Even this sale, far better than anything any of the Phoenix iBuyers is doing, would lose money as an iBuyer deal:

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Everything said by iBuyer executives presumes that they will get better at marketing real estate for resale, when there is no reason to believe that. The precursor to getting 1,000 listings right is getting one right – and knowing why it’s right. But even if they actually manage to improve, the real estate “investments” themselves will never show a profit.

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