iBuyers and AI Solutions Are Disrupting the Real Estate Landscape

There's no question that new real estate business models based on application of AI algorithms are having a big impact on the infamously fragmented industry. But it's also become clear during recent months that innovative technology can't compensate for a fundamentally ill-conceived strategy, or just plain bad timing.

Using algorithms to appraise the value of properties -- sourcing mostly publicly available data -- these companies made hundreds of thousands of instant cash offers to buy homes in the last couple years, typically sight unseen.

Unfortunately for this new breed of AI-dependent home buyers, when Federal Reserve interest rates started climbing in March and the market began to cool, prices for a large percentage of properties on iBuyers' balance sheets suffered.

Now, many iBuyers are stuck with assets on their books that they're anxious to sell at a loss.

Their hyper-aggressive buying activity, along with that of private equity firms like Blackstone, helped drive prices up during recent good times -- and has contributed to the severe bite they're now feeling on the downside. Opendoor reported a loss of $928 million in the third quarter and Redfin announced it was getting out of the iBuyer business altogether, with Zillow reportedly following suit.

The old trader's adage that "you can't fight the Fed" apparently still holds true, regardless of what kind of computational horsepower a player brings to the fight -- or however innovative their algorithms might be.That said, some AI startups with resilient business models appear poised to succeed in this huge market during relative good times and bad.

Antifragile AI Business Models

Other participants in the real estate market that are leveraging AI to streamline the traditionally complex home buying and selling process -- without assuming balance sheet risk themselves in the process -- are faring far better than the iBuyer crowd.

Unreal Estate, founded in 2018 by serial entrepreneur Kyle Stoner, develops algorithms that supercharge the house-hunting process online and match sellers with buyers far more efficiently than was ever possible previously. It has successfully served over 36,000 home sellers to date.

Without completely cutting out real estate agents from the process, Unreal Estate's AI-based platform typically reduces seller commissions by 50% or $11,000 on average, introducing new efficiencies at every step of the process -- from property searches to mortgage shopping and settlement closings.

"If the market cools and prices decline, we're not vulnerable to any drop in asset valuations," Stoner said. "We can weather a downturn because our business model is transaction based and scalable as property prices move in either direction."

According to Stoner, Unreal Estate has processed $25 billion worth of real estate deals on its platform to date, saving home buyers an average of $2,140 in closing costs. Sellers and buyers find each other through the company's algorithmic models three times faster than the industry average, he said.

AI Fintech With a Human Touch

The fully digital loan origination company Rocket Mortgage has doubled its transaction volume in 2020 and increased it by another 30% in 2021. Rocket is the single biggest mortgage lender in the U.S. currently.

As with Unreal Estate in the home buying-and-selling space, Rocket doesn't eliminate access to live experts during the mortgage process. The company's combination of AI-based algorithms with live customer support  has made Rocket the top-ranked mortgage lender for customer satisfaction 11 years in a row, according to J.D. Power.

"Higher rates have walloped the mortgage lending market, but there is more to the struggle than even that massive force: the market is now dominated by digital lenders," according to Garret Reich, of The Financial Brand, a publication that focuses on strategic marketing issues in the retail banking sector.

"However," Reich added, "traditional lenders can match the fintech competitors by integrating the same advanced AI technology, if they use it effectively."