The BNPL revolution: What does it mean for real estate?

According to a 2020 blog post from Deloitte’s Nikolaos Nikoletopoulos, “this is just the natural process bringing an old concept into the digital world”. 

This old concept is called “factoring”.

Saurav Dutta, the head of school at Curtin University’s School of Accounting, has explained that, at its simplest, it will see a company selling its accounts receivables — or money it is owed for a good or service that has already been delivered — to a lender, typically at a discount.

It removes the risk for the business in the middle and provides the lender with a small profit margin once the initial outlay has been collected. By repeating this process over and over, you have a business model.

Managing to bring such a concept into the digital age, BNPL offerings like Afterpay have become a household name, and it’s a concept that’s growing in popularity across many industries.

With real estate agents being in the business of selling houses, and often providing any number of ancillary services to clients (that often cost a lot of money), it makes sense that they would be on the lookout for effective and straightforward financing options.

And it’s that consideration that hasn’t gone unnoticed by the growing number of real estate-focused BNPL providers. 

How does it work?

Traditional BNPL, which encompasses products such as Afterpay, Zip Pay and Humm, among a myriad of providers, is a way for a consumer to spread out their payments when they purchase a good or a service, much like “an instalment plan”, according to the Australian Finance Industry Association (AFIA).

It notes it as possible to “buy now, pay later” on a wide range of things these days, from small purchases in shops to services such medical and vet bills, and much more expensive things like home renovations or solar panels.

When the purchase is made using BNPL, the provider you have an account with pays for it on your behalf.

This money is then repaid over a set length of time and, traditionally, in instalments.

One way BNPL provider services do differ from more traditional forms of credit is that they will usually not use interest rates as a method of generating income from their service. Instead, they will impose a fee, usually on the retailer (for smaller purchases) or on the individual opting to buy now, pay later.

Its application in real estate

Recognising the popularity of BNPL with everyday consumers, a number of businesses have cropped up in the real estate space, in a bid to capture market share, and provide a more innovative option for financing in real estate, which was previously simply non-existent, cumbersome, or solely reliant on trust between agents and vendors. 

When it comes to the real estate industry, the general concept of a service provider paying costs on an individual’s behalf is much the same, but its applications do vary, with different terms and conditions influencing their use.

Some providers focus on the B2B sector, providing quick funds to agents and agencies to free up cash flow, while others focus on the consumer side of the coin, by providing cash to fund anything from pre-sale renovations to styling, photography, campaign and marketing options.

While cash flow options aim to do away with settlement period waiting times and payment of agents for their services, the pre-sale financing options are more targeted at improving property sale prices for vendors whose finances may be tight pre-sale, but their properties have the potential to benefit, value-wise, from certain projects that can be done quickly.

All in all, there’s a multitude of ways in which finance providers have decided to approach the real estate sector, and they all offer options that target different end users in different ways, whether that be for the agents and the vendors, and now even property managers and landlords.

What makes its application different to the retail/e-commerce options such as Afterpay or Zip Pay is that repayments are usually made on a “trigger point” such as a sale, or settlement, or the payment of commission to an agent.

And in a different manner to Afterpay, which will always charge retailers for the provision of the service (and late fees to users who miss a payment window), most real estate-focused BNPL service providers will consider their fees to come from the end user, which might be the agent in commission-type BNPL agreements, or drawn from the sale price — with the consumer taking the cost on in return for what is hoped to be a higher sale price. 

With so many options available, and all offering slightly different services or end results for users, the real estate BNPL sector can be a confusing one to navigate for agents. 

It’s often dependent on a number of factors — the functions of a service provider, the suggestions of an agent, and the need for cash flow or disposable income from a business or individual. 

It’s why we’re unpacking the major features of products that have hit the market, highlight their benefits and limitations, and hopefully provide some clarity to the sector that’s set to only increase in popularity as more and more consumers catch wind of what extra funds may mean for their sale potential, especially in a boomtime period, as we are already beginning to experience at the time of writing.  

What does the BNPL revolution mean for real estate? Read more below!

Part 2: Why pain points are so integral to BNPL’s recent success

Part 3: Who’s who? Revealing BNPL’s biggest real estate players

Part 4: 7 ways agents, vendors and businesses can all benefit from BNPL

Part 5: 5 reasons ‘the future is bright’ for BNPL