Importance of Property Analytics Grows as Line Between SFR Firms & iBuyers Blur

Converging trends suggest the symbiotic relationship between iBuyers and SFR investors could hit turbulence in 2022—underscoring the importance of next-gen property analytics to this booming sector of the real estate market.

Over the past 18 months, SFR firms and institutional investors competing in the frenzied US housing market have turned to iBuyers like Zillow, Redfin, Opendoor and others as a key channel for acquiring off-market properties. According to Bloomberg, Invitation Homes, FirstKey Homes, and others have acquired thousands of properties from iBuyers this year.

It makes sense. iBuyers purchase homes directly from homeowners before they hit the open market—reselling them at a profit after making minor renovations. So it’s not surprising that institutional landlords have emerged as lucrative customers for iBuyers looking to move inventory. With billions in capital on the hunt for homes and historically low inventory on the market, SFR firms and institutional investors such as REITS can account for as much as 20% of iBuyer sales.

If transaction volumes continue to grow in the year ahead, iBuyers and SFRs will only grow more reliant on one another. But as we mentioned in a recent post, a shifting competitive landscape could come with a few landmines.

 

From iBuyers to iLandlords?

It’s certainly true that iBuyers have been growing quickly in recent years. Accounting for 1% of all home sales nationwide, iBuyers have contributed to higher percentages in specific markets like Phoenix, where their market share is 5.7%.

But as Vox recently reported, iBuyers’ profit margins can be pretty narrow. Zillow and Opendoor have posted sizable losses in recent quarters. And while Offerpad and others may be posting modest profits, much of that comes from record HPAs—which, after increasing 20% year over year rate in the third quarter, could be slowing down.

By comparison, growth in rental pricing may have more running room. According to data from Zillow, rents are rising at the fastest pace on record in all 60 of the largest markets, with growth only accelerating. And Invitation Homes, Tricon Residential, and American Homes have posted growth of more than 37% through Q3 2021.

What’s to stop large iBuyers from seeking to get in the action? What if they start setting up their own SFR operations as a way to create cash flow from existing inventories?

 

SFRs: From Customers to Competitors?

After 15 straight months of positive growth, home prices aren’t going to come down anytime soon. But that doesn’t mean they’ll keep going up at the same pace. Through 2024, home prices are expected to rise somewhere between 5% and 13%. While strong, this could still create some challenges.

For iBuyers, already narrow margins could get tighter. There are already signs that some iBuyers are paying above market rates as it is. After buying a record number of homes earlier in the year, Zillow sent ripples through the industry in October when it decided to pull out of iBuying completely. Today, it’s seeking to offload 7,000 properties to institutional investors in an effort to recoup $2.8 billion in expenditures.

What if margins shrink to the point that more iBuyers start to freeze their operations—or, as we mentioned, keep inventories and become landlords instead? What if SFR firms can no longer rely on these players to reach target volumes?

REITS are already stepping up direct investments in iBuyers, which could essentially become the acquisition arm of institutional investors instead of just a resource. What if iBuyers find themselves competing against SFR firms that were once their best customers?

 

Better Property Analytics: Critical to Growth

The rise of iBuyers and large-scale SFR firms has been predicated on technology, including PropTech solutions that help them identify the best markets to target. But moving forward, modern property analytics solutions will become an increasingly critical component in the tech stack on either side of the equation.

Today’s most robust solutions leverage high-resolution aerial imagery and computer vision to deliver up-to-date property condition data on more than 100 million unique properties nationwide, instantly, on-demand, to enable smarter, faster acquisition decisions. With more players going after the same houses, the ability to instantly separate the wheat from the chaff will be key.

But there are other factors to consider as well. iBuyers, for instance, gain an inspection-quality understanding of dozens, hundreds, even thousands of properties in seconds—eliminating the need for inaccurate, incomplete BPOs at far less expense. And instead of paying above market rates on properties requiring pricier rehabilitations, they can zero in on the very best opportunities. The same is true for SFR firms and other institutional investors seeking to buy quality, not just quantity—and identify strategic divestitures—boosting profitability along the way.

Bottom line: This kind of clear view of property condition could soon separate the winners and losers in the residential real estate market, no matter how far the line between SFR firms and iBuyers get blurred.

 

To learn how property analytics solutions can help you grow your business and improve your investment strategies, request a demo at capeanalytics.com