Will iBuying Transform the Way We Buy and Sell Houses?

iBuying, or the business of buying homes directly from sellers, completing some repairs, and then selling them directly to buyers, has grown dramatically in the past few years. Companies like Zillow (Z 3.41%) (ZG 4.02%), Redfin (RDFN 4.87%), Opendoor (OPEN 3.46%), and others are buying and selling thousands of homes each quarter. 

While this still makes up a small minority of the U.S. housing market, one of our experts thinks iBuying could play a much bigger role in the future. In this Fool Live video clip, recorded on June 29, Millionacres senior real estate analyst Matt Frankel, CFP, and editor Deidre Woollard discuss what the future of real estate could look like and where iBuying might fit in.

Deidre Woollard: I think I'm a little more bullish on brokerages than you are. I think you're seeing not the end of real estate agents, but you're seeing them be phased out a little faster than I am.

Matt Frankel: I think in 20 years, iBuying is how we're going to buy and sell houses. Right now, the current pace of existing home sales in the U.S. is 5.8 million a year. Based on the median existing sale price of $350,000, I never thought I'd see the day when the median existing home price is $350,000 -- not for a while anyway. But based on that, that means about $2 trillion of existing home sales volume. I think that will be mostly iBuying within 20 years. I think this is the future of the way we buy houses. I think they'll perfect their algorithms like we just said, and if it's as simple as clicking on your Zestimate, and getting a cash offer in your house, and then being able to go to Opendoor, and Redfin, and Offerpad, and etc, and getting competing offers and picking the best one, if it's really that easy to get a cash offer and control, the closing time frame and free up your equity, I think that's absolutely how we're going to be buying and selling houses in 20 years. If people can figure out how to do it profitably. If they can't figure out how to do iBuying profitably, the industries could go away.

Woollard: Well, that's what Rich Barton said in an earnings, I think it was Zillow's last earnings call, with that they weren't concerned about profitability at this point because they were more concerned about scale. So they weren't focused on the individual house. But I think what you said is is really interesting there because there's an opportunity that I think some of the brokerages are starting to get into, which is that idea of aggregating the competitive offers, because in the beginning, you had one iBuyer, maybe two iBuyers in the market, but now you're having two, three, four. There is going to be at some point here, the Kayak of iBuyers or something like that where you have the different offers all laid out for you.

Frankel: Yeah. I think that's really where you're going to see the turning point, is when in 100 of the biggest real estate markets in the country, you have five different offers on your house that are all cash iBuying offers that are fair market values because the Zestimate is designed to be the fair market value of your house. It's not designed to be a bargain-basement price. The iBuyers make their money in other ways. I mean, Opendoor charges a 7% fee. Zillow's average fee is 5%. Redfin charges 5% to 13% for an iBuying transaction. So they're making their money. That 5%-7% percent even above $350 thousand average home is not a small margin. If they can just make that their profit margin if they can get it to that point, that'd be pretty impressive. Scale is important, yes. These companies are trying to establish their dominance, which is where I think Rich Barton was going with that. They don't want to lose the race, in other words. But at some point, you're going to show a path to profitability because no one has found it yet. Most of them are running something like a negative 7%-10% profit margin on these, and that's a lot of money when you're talking about houses.

Woollard: Yeah. But the other place they are planning to make money and everyone is trying to be the be-all, end-all platform. So a lot of them are looking at those ancillary things. They're looking at title, Offerpad just announced they're now licensed as a mortgage broker in a couple of places. Opendoor is in loans. Obviously, Zillow and Redfin also are expanding their mortgage and title, and Glenn Kelman of Redfin has absolutely said that in his opinion, they can't expand mortgage fast enough, like they are trying to keep up with the demand in trying to open more offices as fast as they can.