Technology is changing the way we do almost everything, and real estate transactions are no exception. In fact, a new crop of tech companies wants to revolutionize the way we buy and sell homes.
iBuyer startups like Opendoor, Offerpad, and Properly began expanding into new territories in 2019, and now established players, like Zillow, want to provide “instant offers”. These investors are known as Direct Buyers. They use computer algorithms to provide sellers with a quick cash offer to buy their home with a strategy to “fix & flip” or “buy and hold” to make their company profitable.
While the actual market share of iBuyers remains small, their big advertising budgets have helped create a noticeable buzz in the industry. Less than 3% of all real estate sold, was as a result of an iBuyer in 2020. This has left many of our clients curious about them and how they work. It’s quite tempting to choose a move out date, and cross the stress of marketing, showing or keeping a tidy home off of a Homeowner’s list of things to do.
In this article, we explain their business model, weigh the pros and cons of working with an iBuyer, and share strategies you can use to protect yourself if you choose to explore this new option to buy or sell your home.
FIRST, HOW DOES THE iBUYER PROCESS WORK?
While each company operates a little differently, the basic premise is the same. A seller (or seller’s agent) completes a brief online form that asks questions about the size, features, and condition of the property. Some also request digital photos of the home.
The iBuyer will use this information to determine whether or not the home fits within their “buy box,” or set of criteria that matches their investment model. They are generally looking for houses they can easily value and “flip.” In most cases, their ideal property is a moderately priced, single-family home located in a neighborhood with many similar houses. The property shouldn’t require any major renovations before listing.1 These qualities make it easier to assess value (lots of comparable sales data) and help to reduce their risk as well as minimize carrying costs before they resell.
Once the iBuyer has used their algorithm to determine the amount they are willing to pay, they will email an offer to the seller, usually within a few days. The offer should also disclose the company’s service fee, which is typically between 7% and 12% of the purchase price.2. GULP! There is a cost to convenience, so be sure and read the fine print before spending your equity.
If the seller accepts, an in-person visit and inspection are scheduled. Just like a traditional contract for sale, repairs are negotiated after a deeper look. Sellers should expect the iBuyer will ask for a reduction in price to cover any defects they find during the process. Once the sale closes, they will make the necessary updates and repairs and then resell the home on the open market.
WHAT ARE THE PROS AND CONS OF SELLING TO AN iBUYER?
Of course, the biggest benefit of selling your home to an iBuyer is convenience. For some homeowners, the stress and disruption of preparing and listing their home can feel overwhelming. And what busy family with multiple children, a dire illness or pets wouldn’t want to skip the hassle of keeping their house “show ready” for potential buyers? Additionally, many sellers like the predictability of a cash buyer and the flexibility to choose their closing date.
However, this added convenience does come at a cost. An iBuyer is an investor looking to make a profit. So their purchase offer is usually below true market value. In 2021 there may be more offers at list price, however with such low inventory cutting the public ability to bid or pick up closing costs, can still leave equity on the table. When you tack on service fees of up to 12% and deductions for updates and repairs, studies show that sellers who work with iBuyers net a lower amount than those that list the traditional way.3
Only in real estate can you expect to see a return on investment when you prepare a home properly for the market to bid or increase the listed “for sale” price. An experienced agent should estimate the expected return for any repairs, updates or disrepair before you set an opening sale price. An iBuyer is hedging a bet that you won’t do the work, which they can then mark up for profit. In fact, a MarketWatch investigation found that transactions involving iBuyers net the seller 11% less than if they would have sold their home with an agent on the open market.2
A house is the largest investment many Americans will ever own. If the same funds were tied to the stock market, no one would claim to watch a T.V. show then dive in or blindly follow a trend to improve financial standing.
WHAT ARE THE PROS AND CONS OF BUYING FROM AN iBUYER?
Buying a home from an iBuyer is a lot like buying a home from any investor. The pros are that it’s usually clean, neutral, and moderately updated. You’ll often find fresh paint and modern finishes. And because it’s uninhabited (no one is living there), you don’t have to work around a seller’s schedule to see the home.
However, there are some pitfalls to avoid when working with iBuyers. Speed is of the essence, so sometimes the renovations are rushed and the quality can suffer. Also, their investment margins don’t leave much room for negotiating a price reduction or additional repairs. That leaves buyers —who have already invested hundreds of dollars in an inspection—little recourse if any issues are uncovered.4
That’s one of the reasons we always recommend viewing properties with an agent. If the renovations were all trendy or cosmetic, you need to know what features an appraiser would assign value to the home for before you bid. During your visit, a real estate professional can point out any “red flags” at the home, provide background information about the neighborhood, and help you assess its true market value. That way, you don’t invest time and money in a high-risk or overpriced property. Safety is also a concern. Some companies allow buyers to access their homes via a smartphone app. While it may seem convenient, it provides an easy way for squatters and others to enter the home illegally.5
Luckily, since most iBuyers (and traditional sellers) pay a buyer agent’s commission, you can benefit from the guidance and expertise of a real estate professional … at no cost to you!
HOW CAN I PROTECT MYSELF IF I CHOOSE TO WORK WITH AN iBUYER?
While it may seem like the “quick and easy” way to go, working with an iBuyer can present some unique challenges. For example, they are notorious for presenting a strong initial purchase offer and then whittling it down with a long list of costly updates and repairs once they complete their inspection.2 And unlike a traditional buyer who is incentivized to make a deal work, iBuyers can easily walk away if you don’t meet their demands.
Just like you wouldn’t go to court without a lawyer, you shouldn’t enter into a real estate transaction without an advocate to represent you. Having a professional agent on your side can be especially important when negotiating with an iBuyer. Remember, they employ sophisticated representatives and a team of lawyers who are focused on maximizing their profits, not yours. You need someone in your corner who has the skills and knowledge to ensure you get a fair deal and who understands the terms of their contracts, so you don’t encounter any unpleasant surprises along the way.
Overall, we think the emergence of new technology that helps to streamline the real estate process is exciting. And if we believe a client can benefit from working with an iBuyer, we present it as an option. But there is—inevitably—a cost to the convenience. After all, most iBuyers eventually list the properties they acquire on the open market, which is still the best place to find a buyer if you want to maximize the sales price of your home.
EXPLORE YOUR OPTIONS
Do you want to learn more about iBuyers and other options currently available in our area to buy or sell your home? We can help you determine the best path, given your unique circumstances. Contact us to schedule a free, no-obligation consultation! WE LOVE TO SERVE.
- The Dallas Morning News –
- MarketWatch –
- Forbes –
- US News & World Report –
- Inman –