Why is Intermediating Houses so Difficult? Evidence from iBuyers

76 Pages Posted: 24 Jun 2020 Last revised: 16 Dec 2020

See all articles by Greg Buchak

Greg Buchak

Stanford University Graduate School of Business

Gregor Matvos

Northwestern University - Kellogg School of Management

Tomasz Piskorski

Columbia Business School - Finance and Economics

Amit Seru

Stanford University

Multiple version iconThere are 2 versions of this paper

Date Written: March 30, 2020

Abstract

We study the frictions in dealer-intermediation in residential real estate through the lens of “iBuyers,” technology entrants, who purchase and sell residential real estate through online platforms. iBuyers supply liquidity to households by allowing them to avoid a lengthy sale process. They sell houses quickly and earn a 5% spread. Their prices are well explained by a simple hedonic model, consistent with their use of algorithmic pricing. iBuyers choose to intermediate in markets that are liquid and in which automated valuation models have low pricing error. These facts suggest that iBuyers’ speedy offers come at the cost of information loss concerning house attributes that are difficult to capture in an algorithm, resulting in adverse selection. We calibrate a dynamic structural search model with adverse selection to understand the economic forces underlying the tradeoffs of dealer intermediation in this market. The model reveals the central tradeoff to intermediating in residential real estate. To provide valuable liquidity service, transactions must be closed quickly. Yet, the intermediary must also be able to price houses precisely to avoid adverse selection, which is difficult to accomplish quickly. Low underlying liquidity exacerbates adverse selection. Our analysis suggests that iBuyers’ technology provides a middle ground: they can transact quickly limiting information loss. Even with this technology, intermediation is only profitable in the most liquid and easy to value houses. Therefore, iBuyers’ technology allows them to supply liquidity, but only in pockets where it is least valuable. We also find limited scope for dealer intermediation even with improved pricing technology, suggesting that underlying liquidity will be an impediment for intermediation in the future.

Keywords: Fintech, Proptech, iBuyers, Real Estate Market, Housing, Liquidity

Suggested Citation

Buchak, Greg and Matvos, Gregor and Piskorski, Tomasz and Seru, Amit, Why is Intermediating Houses so Difficult? Evidence from iBuyers (March 30, 2020). Available at SSRN: https://ssrn.com/abstract=3616555 or http://dx.doi.org/10.2139/ssrn.3616555

Greg Buchak

Stanford University Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
6507214004 (Phone)
94305 (Fax)

Gregor Matvos

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Tomasz Piskorski

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Amit Seru (Contact Author)

Stanford University ( email )

Stanford, CA 94305
United States

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