Could iBuyers Save Traditional Brokerage?

It is no secret that iBuying has caused a considerable amount of anxiety among brokers over the past three years. Brokerages and large firms have been entering the fray and offering copycat iBuyer deals, and hybrid models have proliferated.

Great real estate sales agents are also stepping up to the plate and discovering how to keep themselves near the center of the transaction by taking a neutral role with sellers and presenting iBuyers as one alternative to selling. That’s smart.

There is another reason why iBuyers may be just what the doctor ordered for real estate brokerage: They make the existing 5.5 percent average commission look like a bargain. For years, the industry watched commissions decline while commission splits have gone up, squeezing broker/owners to razor-thin margins. Discounters have been popping up like daffodils in springtime.

In November 2019 came the “Houston, we have a problem” moment, when the esteemed Houston Association of REALTORS® surveyed the sellers in their MLS and discovered that an astounding 49 percent would “consider” selling via an iBuyer. That study sent shudders through broker/owners’ Thanksgiving festivities, because the industry had surmised that iBuyers might only take 1 percent marketshare.

What is also surprising about the Houston study is that it shows how fed up consumers are with the whole transaction process, along with its lack of transparency and interruption of privacy.

Worse, past surveys by Google showed 67.5 percent of consumers don’t trust real estate agents, and Homes.com reports that one-third of buyers surveyed were brought to tears by the transaction process, and another 40 percent thought it was the “most stressful event of modern life.”

Any industry whose customers have such low regard for their service is ripe for disruption, and iBuyers jumped in with both feet and offered the convenience of a quick sale, but with a catch: a hefty discount from fair market value.

What the Houston study showed is that consumers were not looking for a discount, but instead would be willing to pay double the average commission to get out quick. With the 8 percent iBuyer base fee, on top of the often very conservative valuation and hidden fees, the real iBuyer cost to sell was 10 percent or greater.

Overnight, iBuyers made traditional brokerage look like a bargain. In reality, they may have also stopped the decline in commissions. Plus, with the panic on Wall Street and everyone hunkering down for what may be a year-long struggle with the coronavirus, the market is likely to soften and maybe even nosedive. Meanwhile, Wall Street has funneled hundreds of millions of dollars into iBuyers, fattening their checkbooks to engage in institutionalized speculation.

Now, those iBuyers are long on inventory and not likely to fetch the price they thought possible. Plus, their days on market will lengthen, eating into their profit margins as they pay Wall Street their carrying fees. If prices drop, the returns could be abysmal—and that means Wall Street heads for the exits, and fast.

If they survive, there is also likely to be the need to re-fatten their profit margins by bidding lower for properties and increasing the 8 percent base fee that puts the total cost closer to the 14 percent-16 percent they started with two years ago.

Before you know it, traditional brokerage looks like the best deal in town.

Finally, let no one be naïve about what is happening here. While iBuyers have a place in the market for those who need to sell fast and can sell cheap, for the average person, the iBuyer is raiding the largest pool of equity in America: the consumer’s home equity. Traditional brokers can now point to that raid, and the money consumers can save by purchasing traditional services at half the price with a little more inconvenience.

Traditional brokers may just want to keep the survival of iBuyers in their prayers.

David Michonski is a 42-year industry veteran and founder of Quigler, an application that helps agents earn consumers’ trust with transparency, process know-how, overcommunication and unprecedented accountability, while helping brokers more easily defend their value proposition.