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.
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.
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
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!
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.
Send us a message HERE to schedule a free, no-obligation consultation!
- The Dallas Morning News -
- MarketWatch -
- Forbes -
- US News & World Report -
- Inman - https://www.inman.com/2019/09/11/police-arrest-couple-found-squatting-in-opendoor-home-with-their-kids/