Recent Shut Down of Major Online Marketplace Confirms Instability in Design
ST. PETERSBURG, FL / ACCESSWIRE / December 13, 2021 / This past November, yet another major real estate marketplace company announced they would wind down their online program and begin the process of exiting the technology-enabled home flipping business (referred to as “iBuying”). The move was based on concerns that its algorithm-driven business model could not accurately determine fair market prices for single-family homes. This exit from the iBuying marketplace comes with a loss of over $1B in the past 3.5 years. So what does their colossal failure flipping homes mean for today’s home sellers and homebuyers?
The residential real estate marketplace has historically consisted of homeowners selling their homes to owner-occupant home buyers. Over the past decade, as the real estate market has recovered from the credit market collapse of 2008 and the subsequent Great Recession, institutional investors have entered the residential real estate market, using their enormous access to capital to fund the purchase of thousands of single-family homes. Many investors have utilized a “buy and hold” strategy, where these assets become rental properties. Another category of investors has the “buy and flip” strategy to capitalize on the potential for profit by buying low and immediately selling at a higher price.
“There are very few ways an investor can earn a profit flipping a home,” according to Kevin Cahill, co-Founder, and CEO of REALean Real Estate, a growing national real estate brokerage headquartered in St. Petersburg, Florida. “The primary strategy these iBuyers utilize is to pay well below market value for a property and then sell it for fair market value to generate a profit, which most online-created frameworks are not able to do in this competitive market. There is too much competition from serious home buyers, so they can’t get away with making really low offers to home sellers. Home sellers need to be mindful that investors are looking to pay as little as they can to purchase a property.”
Most iBuying frameworks fail because they are forced to pay fair market value or close to it to acquire properties. They cannot generate profit when the labor costs, commissions, title expenses, closing fees, and carrying costs are factored into the business model.
Lisa Cahill, co-founder of REALean Real Estate and a Certified Public Accountant, says, “these investors also try to make money flipping homes by tacking on fees and transactional costs, above and beyond the typical closing costs a home seller would normally pay. As competition for homes increased, these iBuyers were no longer able to get away with charging ridiculous fees.” She adds, “the best way for home sellers to get top dollar when they sell is …….