iBuyers Remorse Pt.1

January 2, 2020

My Dear Reader,
As I have mentioned before, I often enjoy driving around Tennessee on the weekends and in my personal downtime.  The landscape and rolling hills really let the mind wander and so long as you have a full tank of gas, the back roads can provide a respite from the heavy trafficked areas of Nashville and Franklin.  As always, I have the radio on for white noise and occasional insight from the local talents on a myriad of different topics.  While I was driving home over the weekend, I happened to catch local real estate experts Monte Mohr and Carey Ann Cyr.  I’ve personally had the pleasure of meeting Carey Ann, and have a great respect for Monte. So naturally, I listened intently to the tail end of their show.  Monte brought up the recent and growing trend of iBuyers in the real estate market and their encroachment on the Nashville market.

What stood out to me was the fact that Monte reported that 92% of all of Open Doors transactions in the Nashville market was done so without the local MLS. What this means is that these purchases are happening off of the market and without a Realtor.  Now this is a great deal for the company, they get to charge a higher rate to the consumer for the sale of their home, and then through marketing, resell the home with little or no fees paid on the sale, because there was never a Realtor involved.  Monte and Carey Ann dive deeper into the effects of this on the real estate side but I believe that there is another unfortunate side effect to this market development.

Part of this change has to do with the automation of the sales industry, and I’m not so sure that development is a good one. For instance, in 2018 Australia outright banned selling commissioned products over the phone. (Source here) While this may at first seem to be a good way to deter the commission and fiduciary conflict, I believe it actually hurts more people than it helps.  First and foremost, commissions are the best way of quickly telling who knows what they are doing in a certain market.  Of course, there are those who game the system, or who are unscrupulous, but those people don’t last.  Like both Monte and Carey said on Sunday, in order to make the type of commissions that make a sales job attractive, it is imperative that the client receives exemplary service.  Obviously, this is a huge boon to the consumer, as people like Monte and Carey fight with others in their industry for business, the client gets better and better service.  However, a salaried salesmen doesn’t need to nearly abide by the same quality standards.  Their paycheck is only dependent on transactions, not repeat business or even reputation.  This could lead to an apathetic sales environment and have a negative impact on all types of business in general.

Money wise, the rise of the Ibuyer also strips the deals away from local wholesalers in the real estate market.  Wholesales are sometimes seen as bird dogs and are sometimes disparaged by the local media. However, their efforts and risks actually drive much of the smaller contractor and construction companies who employ those of a lower social-economic status.  The jobs that wholesaling and real estate investment create actually propel communities in a local manner.  The problem with a large, privately held company encroaching on this territory is that they will most likely bring in their own construction companies if needed, and who knows where those employers are based?

Lastly, should these companies become common place, it could contribute to what Simon Black has called, “upside down capitalism”.  I’m afraid that this explanation takes up more space than we have for today’s note, but the second part is available here. In the meantime,

To your creation and potential,

Kevin Prendiville