Millions of dollars are being poured into the real estate industry through venture capital and much of that money is going into a segment called “iBuying”. IBuying is when a consumer sells their home to a corporation whose business it is to purchase homes using a streamlined process for a price derived by an algorithm, The sales transactions are cash purchases and can be completed quickly. In this article I will provide a high level overview of what it is, who is involved, the nuts and bolts of the process and the pros and cons of working with an iBuyer.
The concept isn’t new. We have seen homemade signs tacked to power poles and post cards offering to buy your “ugly house” for decades. The idea has always been to provide convenience to a small segment of the market who values the idea of selling their house quickly over getting every dollar out of the house. The logistics of how to get to your next house while dealing with the unknowns (time, price) of selling your current home are often a huge factor in the reason why people decide to stay put. Providing a method that simplifies that puzzle is a much needed service. But are the associated costs worth it?
The main entrants into the iBuying space are public companies (Zillow), venture capital backed startups (Opendoor, OfferPad, Knock), and brokerages like Keller Williams and Redfin. For these companies there are three possible revenue streams: 1) The return on buying a property for a discount and then selling it (sometimes at a much later date after renting it out or renovating it) for a higher price. 2) Fees collected as part of the transaction. These fees can run up to 10%. 3) The value of the name of the potential sellers who turn down the offer. Let me explain a bit more about each of these.
- Each company will generate an offer priced based on available data fed into their proprietary data stream. I can imagine that the algorithms include recent sales, forward looking market trends, assessor data, neighborhood statistics and more. After asking for an offer, the seller can expect an offer within 24 hours. There is no opportunity for negotiation. The price offered includes a discount for the liquidity provided and the risks to the company that include; condition risk and market risk (this hasn’t been tested in a stagnant or falling market). The price offered, while competitive is less than what the algorithm thinks that the house is worth. They are after all looking for positive investment returns and providing a convenience for the seller. They hope to buy as low as they can and sell later for a positive return.
- On top of the lower than market price there are fees associated with selling to an iBuyer. Reportedly these range between 7% and 10% of the agreed upon price.
- One figure I saw while researching this article said that as many as 90% of sellers turns down the offer. In today’s economy good data is money and qualified leads are money. These companies including Zillow realize that brokerages and individual agents will pay good money for a stream of seller prospects who have indicated that they are ready to sell. Like relocation companies who fund their services by charging hefty referral fees to Realtors, this data source will be an increasing source of revenue for the companies involved.
After requesting an offer from an iBuyer you can expect to receive a price within one day. If you accept the price and associated transaction costs in the offer you can then expect an inspector to visit your home to see if there are any repairs needed. If there are any repairs needed you can expect that the offer price to be adjusted to reflect the work needed. If the transaction proceeds past this stage you can expect to close as quickly as you need to.
Pros
Here are some of the reasons a seller may choose to work with an iBuyer.
- Fast closing schedule.
- Fewer unknowns, knowledge of what you are going to get up front.
- No showings. No prepping the house for showings.
Cons
Here are some of the reasons that a seller may choose not to work with an iBuyer.
- Not maximizing the sales price. Lower price given for a quick guaranteed offer. Just one offer, no supply and demand factors at work.
- Costs are typically 7-10% of the agreed upon purchase price. This is more than a typical commission.
- Not available for every home or in every market. Currently iBuyers are expanding quickly but are only available in 20 markets. They are not typically interested in luxury homes or higher price ranges.
In summary, iBuyers are expanding. It provides the seller with the peace of mind and convenience of a guaranteed offer and a flexible closing date. However, that convenience comes with a hefty price tag. It’s not for everyone but for those in a pinch it might be a good option. If you are considering working with an iBuyer it would be prudent to call a Realtor as well to get an opinion of price and an estimate of net proceeds after expenses. That way you will have the information you need to properly weigh your decision. Let me know if I can help in this manner.