Everything You Need to Know About iBuyers
and the “Instant Cash Offer”
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 are rapidly expanding into new territories, and now established players, like Zillow, are starting to get in on the action. Also known as Direct Buyers, these companies use computer algorithms to provide sellers with a quick cash offer to buy their home.
While the actual market share of iBuyers remains small, their big advertising budgets have helped create a noticeable buzz in the industry. This has left many of our clients curious about them and how they work.
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 risk and minimize carrying costs.
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
If the seller accepts, an in-person visit and inspection are scheduled. 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 kids and 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. 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
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
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. 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.
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Sources:
1. The Dallas Morning News –
https://www.dallasnews.com/business/real-estate/2019/07/11/so-called-ibuyer-real-estate-firms-pitch-programs-to-buy-your-house-help-you-hunt-for-another/
2. MarketWatch –
https://www.marketwatch.com/story/selling-your-home-to-an-ibuyer-could-cost-you-thousands-heres-why-2019-06-11
4. US News & World Report –
https://realestate.usnews.com/real-estate/articles/what-to-expect-when-buying-a-home-from-an-ibuyer