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Amanda Kramer: Welcome to the Leeds Business Insights Podcast, featuring expert analysis to help you stand out from the herd. I am your host, Amanda Kramer. We are thrilled to be discussing iBuying in the state of the real estate industry with Mike DelPrete, scholar in residence at the CU Real Estate Center at Leeds. Welcome to Leeds Business Insights, Mike. And thank you so much for being here today.

Mike DelPrete: Thanks for having me. My pleasure.Ìý

Kramer: Wonderful. Well, we're excited to learn from you. Let's start here. What are iBuyers? And why are they an important part of the real estate industry?Ìý

DelPrete: In short, iBuyers are a new type of company that buys homes directly from consumers. So, if a home seller wants to sell their home, an iBuyer will purchase their home. They fix it up really, really quick, kind of like within two weeks. And then they resell it on the open market. They're an alternative to selling a home the traditional way. And they offer people speed and certainty in that process. Because if you're a home seller, you could get an instant offer, you know, within 24 hours. And then, you could sell your home within fast as a couple days, right? And move out when you're ready. So, it's a new model that brings certainty to the traditional real estate transaction process.

They're important, because I think for a couple reasons. First off, there's a lot of venture capital being funneled into residential real estate technology right now. There's a lot of companies that are saying, "Hey, this, model has not changed in years." You know, the way that people buy and sell homes is the same as their parents or their grandparents did 50, 100 years ago. Not a whole lot has changed. Maybe, I can sign my documents electronically, but other than that, the whole system is still exactly the same. So, let's try to change it. How can we change the industry?Ìý

And out of all those different models, I think iBuying is the most radical, the most disruptive. And at this point, it's getting the most traction. There's iBuyers that are buying and selling thousands of homes a month. Opendoor, the largest iBuyer head around like 1.3% market share. That's a small number. But the U.S. residential real estate market is huge. So, 1% market share is pretty significant. That's tens of thousands of houses every year. So, it's worth paying attention to, not only for consumers to say, "Hey, there's another way I can buy and sell houses," but for business folks and entrepreneurs and industry professionals and investors, just to understand, this is a new model in this space, it's worth paying attention to, to see how the industry may change.

Kramer: And speaking of the industry changing, one question that maybe on a lot of our listeners' minds, is there still a role for real estate agents? Or, do we see that potentially changing with trends in real estate tech?Ìý

DelPrete: It's a great question. Let's consider, like right now is a point in time. And I can answer what's happened up to now using data and evidence. So, there's no opinion involved, right? So, up until now, if you look at the percent of consumers, if you look at the percent of home sellers that use an agent right now, it's at an all-time high. It's been high for a number of years. And it's stayed high. And it is still high. It's like 90% of people still use an agent.Ìý

And this is over the past 20 years when new digital services have come out to suggest to consumers that, hey, there might be a different way to do things. You know, Netflix, Uber, Airbnb. You have Zillow. I don't need a real estate agent to show me houses. I can just find them on my own. But still, over 90% of consumers are still using a real estate agent.Ìý

So, that's the trend, right? The evidence suggests that real estate agents are still a trusted local expert advisor that home buyers and home sellers want to keep working with. So, I would find it hard to believe that we're on the cusp of a massive shift where more and more people are willing to do this on their own and not use an agent. That just doesn't make sense. Like, the evidence doesn't really support that, yet. I think, for real estate, which is a consumer's probably their largest transaction in their lifetime, they're going to want someone to hold their hand, right? It's like, if you want brain surgery, you're going to go to the best brain surgeon. If you want to find a dentist, you want to find a really good dentist. You want a really good lawyer, right? You want to find a really good higher education institution. You don't necessarily want the discount way or the DIY method for life's biggest transaction.Ìý

Kramer: That's great, Mike. Really appreciate that explanation. And so, real estate agents are here to stay. Are there other ways in which the home buying process has changed recently, either through impacts by iBuying or otherwise?

DelPrete: Yeah, there's another thing that's happened, which is another group of companies that I call power buyers. So, whereas, iBuyers are focused on the seller, right? If you want to sell your home, you consider an iBuyer. If you want to buy a home, you consider a power buyer. And these are companies that are trying to empower home buyers with more superpowers to be able to get the home they want.Ìý

And they do that through two methods. One is cash offers, and the second is buy before you sell. So, a cash offer basically turns anyone's offer into all cash. So, you can remove financing contingencies and effectively increase the likelihood that you will win a competitive bidding process by saying, "Hey, I'm all cash. There's no financing contingencies. It's all cash." That's pretty powerful, especially, over the past year during pandemic craziness where housing supply was really low and buyer demand was through the roof. Five, 10 people bidding on a home. Being able to offer a cash offer was a real competitive advantage.Ìý

And then the other model there is buy before you sell. That's kind of interesting in any market, but that gives consumers the ability to buy their new home before they sell their existing one. So, find your dream home, buy it using someone else's money, move into it. And then, they sell your old home for you on the open market. And then, once that's done, you kind of settle up. That's another new method that, again, is changing how people buy and sell houses.Ìý

And similar to iBuying, it's really predicated on this idea of cash. Cash is a superpower. How could we solve problems with money, right? If we had $1 billion, what could we do? Oh, we could just buy houses from people, right? Or, we could just let people use our money to buy their next home. And then, we'll kind of float the difference, like a bridge loan, because we have access to so much capital as a company, as opposed to an individual. So, I'd say that's the other answer as to the new interesting models that are changing how people buy and sell real estate, that would be the other one.

Kramer: And Mike, are we seeing that nationwide or just in markets that have been hot to date, like Denver?Ìý

DelPrete: Yeah, it's nationwide. The largest iBuyer company called Opendoor, they're in 50 markets in, I want to say, maybe 40 states. So, where everybody starts is the Sun Belt. You know, Phoenix is kind of ground zero for iBuying and new real estate models in general. It's just such a great market for them to operate in. From Phoenix, they've kind of expanded West and East, right, West out to California and East over into Texas and Florida and the Carolinas, the Sun Belt. So, that's where they've all started. And that's where they're biggest. So, these are in general, you know, good markets, hot markets, a lot of activity. The price point is kind of the national median. So, they're not super expensive. They're not super cheap. They don't really have winters. There's not a lot of homes with basements. You avoid kind of a lot of the standard housing got-you, like freezing pipes, snow on the roof, things like that.Ìý

The reason those markets are so good for these new models is they're homogenous. The housing stock is all the same. The house across the street has the same layout. The reason that's important is because these companies need to operate in markets where they can value houses with a high degree of predictability. So, if you have a homogenous market where all the houses are the same, you can really, with a high degree of certainty, benchmark what a home might be worth today and three months from now.

But at this point, they have expanded into other markets. You know, iBuying is active in a cold, wintery market like Minneapolis. It's in a less homogenous market like San Francisco and New York. It's getting bigger and bigger. And I think you'll be able to find it in more and more places.

Kramer: Great. So, we've got Opendoor, a big name in iBuying. And we used to hear about Zillow, but we're not hearing about Zillow anymore. Tell us more about what happened here.

DelPrete: Yeah. So, after three and a half years in the iBuying business, Zillow exited in late 2021. They folded. They ended up losing over $1 billion over three and a half years. And they kind of had a catastrophic pricing failure in 2021 that precipitated their exit. The market right now is very volatile. Prices are going up and down at very rapid rate. The same thing was happening last year in 2021. Prices were skyrocketing, and then they were dropping, and then they skyrocketed again.Ìý

When you're buying thousands of houses a month, you need a really great pricing algorithm and you need conviction to ride those waves. You will end up overpaying for some houses. It's a bell curve. That means you're fundamentally going to overpay for half the houses and "underpay" for half the houses as well. It's real estate, it's hard. So, Zillow had had this catastrophic pricing failure where they just... they were trying to catch up to the market leader, Opendoor. And they thought the market was going to keep going up. So, they ended up, in their words, unintentionally overpaying for houses. And they did that to the tune of hundreds of millions of dollars, where they overpaid collectively.Ìý

And they sat back after that and they said, "This is just not for us. This is too risky. It's too capital." Zillow has a whole other part of its business that is quite successful. It's very popular with consumers. They have brand considerations. So, Zillow just pulled the plug. And that happened in late 2021. So, really, Opendoor is left as the undisputed category leader. They're about four times bigger than the closest competition, Offerpad. And there's really just those two companies, those two iBuyers.

Kramer: So, Mike, we've been talking about these trends as related to residential real estate. Do we see these trends moving into other forms of real estate as well, such as industrial, commercial, retail? If not, are there trends that we're seeing in those areas of real estate?

DelPrete: Residential real estate is really the tip of the spear for innovation in this space. At least, that's what I've seen and that's what I've found. Residential real estate is attracting the most venture capital investment. The total addressable market is exponentially larger than any other segment. Residential real estate is many trillions of dollars more than commercial worldwide.

With that said, I haven't seen a full-on rush of innovations in residential going to other real estate market segments. You know, there's not an iBuyer for commercial real estate or retail real estate. There is a group doing it for farmland. So, that's kind of interesting. There's a lot of smart people across those industries, and they're looking at the big innovations and thinking, "Okay, how can this apply in my space? How could this apply for industrial or retail? What can I learn about consumers and product market fit and all of that? And how can it apply here?" So, we're still early days in terms of those innovations being syndicated out into other segments. But there's a lot of smart people looking at it and trying to figure out, okay, how can we make this work? Is there's something here that we want to bring to the table in this other segment.

Kramer: So, we've talked about the fact that real estate agents aren't going anywhere, but their role may look different in the future. What do you see the future role of real estate agents being? What will that look like?Ìý

DelPrete: Yeah, it's a great question. The role of an expert advisor is fundamentally not going to change. Home buyers and home sellers want someone to hold their hand through the process. But what that person does is changing. It is evolving. And if you're a real estate agent and you're not evolving with the times, you do face the possibility of going extinct, losing business to other real estate agents. And I think the key there is understanding the new disruptions, the new models with different ways to buy and sell.

A real estate agent's job is not to help somebody list their home for sale. A real estate agent's job is to help a homeowner understand all the options for how they can sell their home and to help them with the option that is right for them. So, there could be a traditional sale on the open market. You could sell it to an iBuyer. Or, you could work with a power buyer where you actually just buy a new home first and then sell your old home. There's some equity sharing models where you could just stay in place but unlock equity in your house in an interesting way. There's home affordability solutions where, if you want to get into a new place, but you can't afford it now, there's different models to do that.Ìý

So, there's literally like dozens of new ways to buy and sell houses right now. You can't expect consumers to understand all that. That's a full-time job. I spend most of my time doing that, and I don't really even understand it all. But that's the job of the real estate agent, that expert advisor. They should know all the options on the table. It's like working with a financial advisor. If you have a financial advisor or a wealth manager that you work with, they understand all the financial instruments, right? ETFs and mutual funds, and if you want to buy Bitcoin and all of that. The investors isn't expected to understand that. It's the wealth manager's job to understand all the different ways you can invest your money. So, it's really similar with real estate agent. You need to have an understanding of everything that's going on and what's happening in the space and be able to guide people, or else you're just going to move on and find somebody who does understand all those different options.

Kramer: So, what are some key learnings or commonalities across some of the successful real estate tech models that you've discussed thus far?Ìý

DelPrete: There's a couple. The first is money, having the access and raising a lot of money. Real estate is big. It's complicated. It's expensive. It takes a long time to gain traction. So, the companies that are getting the most traction have also raised a lot of money. I'm talking like $1 billion from investors or from the proceeds from an IPO, a billion plus.Ìý

So, raising a lot of money doesn't mean a company will be successful, but it's very difficult to be successful without raising a lot of money. There's plenty of companies that have raised money and failed, or they haven't reached escape philosophy yet, but there's not a lot of examples of companies that just didn't raise any money and kind of bootstrap their way to success. So, having a lot of capital and, basically, spending it on advertising. We have this new product, this new service, we need to get it in front of people. We got to run TV ads and direct mail and radio. That's expensive, tens, hundreds of millions of dollars.Ìý

The other component is really around technology and then psychology. So, the most successful businesses in real estate tech are smartly combining technology and people. It's not just tech. It's not just an app. It's not getting rid of agents and replacing it with an online workflow. It's actually really intelligently marrying technology and people. Because people want to work with people. Whether it's a real estate agent in the field or a call center where you're talking to a live human being, you need something there. And then, you need to add in the technology, whether it's intelligent technology to value a home at the touch of a button or a technology to just streamline the real estate transaction, make it easier, sign documents electronically, share everything in a dashboard so everybody can see where the transaction is at 24 hours a day, seven days a week. But combining it with people. And that's what we see with the most successful models out there, is that smart combination of people and technology.

Kramer: Are there any potential downsides or unintended consequences of these models that we've been talking about?Ìý

Delprete: There are. So, what happens when you have a company like an iBuyer, like Opendoor, a for-profit entity backed by Wall Street investors, and they're buying and selling homes, they make decisions differently than people like you and me buying and selling homes, right? If I'm thinking about buying or selling a home, I'm thinking about when my kid's school starts, "Oh, I can't really have two mortgages at the same time." But if you're buying 3,000 houses a month or 50,000 houses a year, you're decision criteria is totally different. You're thinking about, how do we maximize profit? How do we minimize the amount of time that we're holding onto a house, right? It kind of comes down to the dollars and cents. You're not thinking about school districts.Ìý

So, the decisions are different. And that leads to some unintended consequences. So, one of those is the iBuyers are selling a certain percentage of their homes directly to institutional investors. And that's kind of anywhere from 10 to 20% of their home. So, they're sucking up houses from the market. They're buying them from people who want to sell. And then, they're putting some of those back on the market, but they're also selling some of them directly to institutional investors, which are Wall Street companies who are renting those out.Ìý

That's a decision that's been taken away from homeowners and communities as to what kind of people do we want living here? Do we want folks renting or owning? That decision has been taken away. And now, a for-profit Wall Street company is making that decision. And for them, it makes a lot of sense to sell houses to institutional investors because they can save a lot of money by not putting it on the open market. But that is one unintended consequence. And that's something that, I think, should be kind of vested in the local community and not necessarily a for-profit entity.Ìý

The other potential downside, it's kind of built on this idea of exclusive content. So, again, with iBuyers, they're buying homes and then they own the home. So, what Opendoor has started doing is they've started offering that as exclusive content on their platform. So, the only way you can see the homes that they're selling in a couple markets in Texas is to go to opendoor.com. So, that content is exclusive to opendoor.com for two weeks, and then they put it on the open market.Ìý

That's not good for consumers, that's good for the company. They control the inventory. And we're talking tens of thousands of houses. They can decide who they sell it to. They can keep it off the market, make it exclusive. They could just send an email to everybody on their mailing list and say, "Hey, we've noticed you've toured an Opendoor home in the past. Here's a house for sale." Who doesn't get access? Everybody else, right? And we're kind of creating these walled gardens of content of who has access to see which homes are for sale and who's making those decisions.

So, I think those are some really important points that we should keep an eye on going forward, because it does affect the free flowing nature of the housing market. Again, it's shelter. It's where somebody lives, you know. So, every, house that's sold directly to an investor, that's one family who loses an opportunity to live in that house.

Kramer: Every episode, we have an LBIdea or a key takeaway. And the key takeaway here is that, in the residential real estate market, you need to be an informed consumer and informed seller. There are dozens of different ways to buy and sell your home. Gone are the days of just listing your home and going through a traditional real estate buying or selling process. And we've talked about some key considerations today in terms of looking at the disruptors in the market and making sure that you are working with someone that clearly understands all of the options on the market.

DelPrete: Yeah. I think that's right on. As you say that, I think, you know, but still, with all this disruption and all the change and everything we're talking about, something like 98% of people still sell their home the traditional way. So, it's early stages. And this is the tyranny of percentages, because that just instantly makes it sound like all this new stuff doesn't matter. But the real estate market is so big, like 1% of this market is a huge multi-billion dollar business. And this is also this key takeaway or learning, like you have to be really careful about how you think about it. Because if you're just thinking about percentages and you just miss anything less than 10%, you're going to get caught out, right? You will get left behind here. It is small, but it is growing and it is the new interesting stuff that you got to pay attention to so you're not caught flatfooted in the future.Ìý

Kramer: Absolutely. That's great. I really like what you added there, Mike, putting that in context for our listeners. And I think another takeaway, as you kind of mentioned, is you can sell or buy your home the traditional way, but there are a lot of other options out there. They're new. They might seem scary. But there's information out there. And they may be interesting options for some of our listeners.

Delprete: Mm-hmm. As human beings, we like to understand the options. For every 100 people out there that might be interested in iBuyers, you know, I think only 10% of them, only 10 of them end up selling to an iBuyer. The other 100, they still want to understand it. They want to go through the process. They want to see what's on offer. And then that makes them even more confident to go the traditional way. It is part of this kind of self-fulfilling cycle where consumers want to see the options. They need a choice. And then they feel confident to be able to make the choice. If you say like, "No, no, no, there's just one option," well, wait a minute. No, there isn't just one option. I know there's other options there.

Kramer: We're getting into a little bit of consumer psychology and the fact that information is power.Ìý

DelPrete: Mm-hmm, you know, the name of my course is real estate technology. But I think real estate psych, real estate psychology is just as important, because there's a lot of psychology at play that's driving a lot of the innovation in this space.Ìý

Kramer: Oh, Mike, I'm intrigued. Can you go into that in a little bit more detail in terms of what we might see within consumer psychology that's driving real estate technology?Ìý

DelPrete: Yeah, yeah. Real estate is probably the largest transaction that somebody will undertake in their lifetime. So, you have this idea of loss aversion, which is that, as human beings, we are wired to be conservative. We experience more pain from a loss than pleasure from a corresponding gain. As a human being, I'm wired to avoid losing $5 rather than making $10, just because the pain of that loss of $5 is so great. That's loss aversion at work.Ìý

So, when you think about how that affects people and their decisions, you think about what the potential downside or loss is. So, if you want to try new video streaming service like Netflix, I want to try it out for a month. Maybe, my first month is free, or it's like $12. If I don't like it, what did I lose? Either nothing or 12 bucks. Not a big deal. I want to try out the new coffee shop. I buy a coffee for five bucks. Don't like it. What's the downside? $5, not a big deal.Ìý

Now, go all the way to the other side of the spectrum, real estate. What's the potential downside of making a mistake of buying or selling a home? It's tens of thousands of dollars, monetarily. But not just that. It's kind of all the Maslow's hierarchy of needs things, shelter. "Oh, my kids are not in the right school district. I'm not living near my family. This place isn't safe. We don't have easy access to the outdoors." The potential downside of choosing to purchase the wrong home or selling your existing home the wrong way is huge.Ìý

So, when the downside is really big, that's when they want kind of insurance to someone to hold their hand through the process. That's why there's divorce lawyers and M&A professionals for acquisitions. These are people that just do transactions that are generally really infrequent. But that's all they do, and they do it all the time. So, they have an expertise in that. So, from a psychological perspective, real estate is perfectly positioned and real estate agents are perfectly positioned to be in the right place and continue to help people out to circumvent this loss aversion component of buying and selling real estate.Ìý

Kramer: That was fantastic. That brought it all together, Mike. Thank you so much for joining us today on Leeds Business Insights.

DelPrete: My pleasure. Happy to be here.Ìý

Kramer: Thank you again for listening to Leeds Business Insights. Don't miss a single episode, subscribe to Leeds Business Insights wherever you get your podcasts. You can also find more information about our podcast series at leeds.ly/LBIpodcast. We'll see you next time.