Today's residential real estate market is a tough one to navigate. That applies to general homebuyers as well as real estate investors looking to add income properties or short-term rentals to their portfolios.
Many buyers are expressing frustration over sky-high home prices. But are companies like Zillow to blame for them? One real estate agent seems to think so, as he rants about in a viral video.
Are iBuyers manipulating the market?
Recently, a TikTok video lashing out at iBuyers went viral, and the core complaint is that they're skewing home prices upward, thereby shutting more traditional buyers out of the market. iBuyers are companies that work directly with sellers, providing cash offers to purchase homes outright.
There are pros and cons to working with iBuyers. The primary upside? A quick sale. The downside? iBuyers charge their own fees that can negate the savings sellers reap by not having to pay real estate agent commissions. And sometimes, working with an iBuyer means getting less money in the course of selling a home. iBuyers commonly purchase homes at a discount and improve them to raise their value and command higher prices at resale.
There are a number of different players in the iBuying space. And Nevada real estate agent Sean Gotcher is convinced that iBuyers like Redfin and Zillow are tracking search activity to see where potential buyers want to purchase homes and then using that information to go in and swoop existing properties out from under them, all the while raising their prices.
Specifically, Gotcher argued that iBuyers will purchase a good 30 homes at a given price within a specific neighborhood and then purchase a 31st home at a higher price to drive comps in the area up. Comps refer to prices on nearby properties, which appraisers take into account to calculate the value of homes for sale. By raising comps, iBuyers can, in turn, command higher prices for the remaining properties in their portfolios.
It's certainly an underhanded strategy. But it's also one that may not actually be getting utilized.
Debunking the rant
Both Zillow and Redfin have stated that Gotcher's accusations are completely unfounded. In fact, a Redfin spokesperson went as far as to say that even if the company had the desire to manipulate the real estate market, it doesn't have enough market share to do so.
A recent report from Zillow corroborates that notion. It found that the four largest players in the iBuying field, Zillow Offers, RedfinNow, Offerpad, and Opendoor, accounted for just 1% of all home purchases nationwide -- representing a record high
In fact, raising home prices is a tactic that just doesn't make sense for iBuyers -- namely, because it makes their own purchases cost more. Plus, rapidly rising home values could lead to a real estate market collapse. And that certainly wouldn't benefit these companies at all.
So then why are home prices so high?
A recent report from CoreLogic found that as of August 2021, home prices were up 18.1% on a year-over-year basis. But the reason for that has little to do with iBuyers and a lot more to do with two key factors: low inventory and low mortgage rates.
Realtor.com recently reported that the housing market is short 5.2 million homes to meet buyer demand. Meanwhile, buyers are eager to take advantage of today's mortgage rates, so they're continuing to pay up for homes because financing them is so affordable.
The result? Prices are spiking, and until more inventory hits the market, they're unlikely to come down. And so blaming iBuyers for rising home prices makes little sense.
Not only do iBuyers account for a very small share of the market, but they may want things to stay that way for a while so that they'll be subject to less scrutiny. And while iBuyers may have the goal of scaling their business models, whether they have the capacity to do so is yet to be determined. But if anything, you'd think higher home prices would make scalability more challenging for iBuyers, not less.
The Millionacres bottom line
All told, real estate investors shouldn't spend too much time worrying about iBuyers and whether they're contributing to higher home prices. Instead, they should keep tracking mortgage rates and inventory levels to see when the housing market might take a turn for the more affordable.