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Tech firms disrupt the property market

Sellers get speed and certainty. Estate agents may yet get the squeeze

SELLING a home is stressful and time-consuming. You must first put up with

estate agents admonishments about old carpets that need replacing, then with

intrusions by prospective buyers who find more faults. A good offer can take

months to materialise, only to fall through later. It s just not worth your

sanity, groans Anne Aviles, a schoolteacher in Atlanta.

To preserve her equanimity Ms Aviles turned to a firm called Opendoor. She

entered her property details on its website and received an offer of $298,500

in seconds. A few days later the company sent an inspector, who deducted $4,000

for a faulty air-conditioning unit and a shabby paint job. It offered Ms Aviles

$278,000, after knocking a further 5.5% off for its own benefit. This price was

a bit lower than listings for similar homes. But the hassle-free experience,

which took about a week, made up for it. She accepted.

Although listings services such as Zillow, a property portal based in Seattle,

began to supplant classified adverts in the mid-2000s, deeper disruption in the

property market has been slower to emerge. Individuals sell homes infrequently,

in what are the biggest transactions of their lives. They have little incentive

to rush or seek greater efficiency. But like Ms Aviles, many would like to

speed things along.

Enter instant buyers such as Opendoor. These companies, known by the

abbreviation i-buyers , try to do to property sales what Billy Beane did to

baseball. Just as the manager of the Oakland A s substituted software for

conventional talent scouts, i-buyers replace estate agents with algorithms that

crunch data on everything from the number of bedrooms to local crime rates, to

estimate what a property should sell for. They then buy it at a discount to the

computed price (as Mr Beane did with players), spruce it up and offload it.

Opendoor says its average fee is 6-6.5%, about the same cut as conventional

estate agents take on a sale.

Zillow announced in April that it would launch its own i-buyer, which began

operating in April in Phoenix, in June in Las Vegas, and this month in Atlanta.

It will shortly expand to Denver. Some shareholders in the firm were

unimpressed about its entry into a business which promised relatively low

margins, high costs and extra risks to its balance-sheet; its share price fell

by 9% when it outlined its plans. But venture capitalists see promise in the

approach, valuing Opendoor at above $2bn.

To be sure, there is a way to go before the promise of i-buyers is fulfilled.

Their algorithms are good at appraising identikit single-family units, but

struggle with idiosyncratic properties flats in city centres, say, or luxury

villas. For its part, Opendoor plans to expand from 16 cities today to 50 by

2020, but not to large, complex urban markets such as New York, San Francisco

or Los Angeles. Even for mid-range suburban homes, i-buyers still make up only

a thin slice of transactions. In the past year, 7,640 such properties in

Phoenix were bought and sold through i-buyers, accounting for 3.4% of

transactions, according to Mike DelPrete, an independent consultant.

That share will need to rise a lot before i-buyers make real money. In Phoenix

Opendoor earned 6% on average per home, before repair costs and fees to buyers

agents (who are paid by the seller in America and whom i-buyers have not

displaced). Zillow has told investors to expect a profit of only 1.4% per home.

Because around 85% of i-buyers purchases are financed with borrowed money,

rising interest rates may squeeze margins further. Falling prices represent

another risk. The potential market is massive, however. Spencer Rascoff, Zillow

s boss, estimates it at 2.75m homes in the biggest 200 cities in America

(about half of the country s 5.5m annual home sales). America has endless

suburbs lined with millions of homes, and armies of estate agents who are often

regarded with suspicion by buyers and sellers alike. If i-buyers can dispense

with at least some of them, and speed up home sales in the process, few would

grumble.

This article appeared in the Business section of the print edition under the

headline "Fixer-uppers"