Paper title: “iBuyers: Liquidity in Real Estate Markets?”

Abstract: We study the benefits and limits of dealer-intermediation in residential real estate through the window of “iBuyers,” real estate companies with online acquisition platforms that buy and sell residential real estate. iBuyers provide liquidity by purchasing houses almost immediately. This allows households to bypass a lengthy listing process. In exchange, they buy at a 3.6% discount relative to comparable homes and earn a significant spread when selling. We show that iBuyers rely on a remote valuation technology and that they avoid transacting in houses where this valuation technology is less precise in expectation, suggesting that adverse selection is an important consideration for dealers in this market. Armed with these new facts, build a structural search model featuring adverse selection to quantify the economic forces underlying the tradeoffs of dealer intermediation in residential real estate. Our model suggests that dealers’ primary value to homeowners is the enhanced speed of transaction. Additionally, adverse selection is a major impediment to intermediation, and counterfactually endowing intermediaries with a perfect valuation technology would quadruple the fraction of dealer intermediated transactions. The fact that intermediated houses are left unoccupied during the transaction is not quantitatively important. We next use our model to show that iBuyer technology, as opposed to merely having a balance sheet, is key in their growth. Finally, our model highlights an important limitation of iBuyers and real estate intermediation more generally: that while they provide liquidity, they mostly provide it in already liquid markets because their business model relies on reselling the houses quickly.

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