Exploiting the iBuyer - When to Use
To consider an iBuyer prudently, one needs to know (beyond the sales pitch) what they have to offer, the approximate cost of what they offer, and different ways they make money from acquiring your property. Providing an overview is the purpose of this post.
iBuyers may be able to purchase your property if it conforms to their process requirements and business model. There are situations where selling to an iBuyer may be prudent. However, there is a reason that 9 out of 10 consumers decide against their instant offer to rely on a traditional agent instead (According to research from Zillow for its iBuyer Instant Offers platform).
What Is An iBuyer?
Multibillion-dollar corporations awash in cash want to grow profits by moving into Real Estate as iBuyers (Instant Buyers), such as Opendoor, Zillow, Offerpad, Knock, Ribbon, and RedfinNow.
iBuyers are home buyers at a discount in exchange for speed and simplicity foremost, but do take advantage of additional profit through cosmetic fix & flip (new paint, carpeting, replacing old appliances, and minor repairs). They do this on a massive scale powered by tremendous amounts of available capital, technology, algorithms, and automated valuation software.
In 2018 iBuyers only represented 0.2 percent of the total market share at just over 25,000 transactions (15,000 purchases and 10,000 sales); however, they plan to ramp up quickly and to create profits into the tens of billions in the next three to five years.
How do sellers sell with iBuyers?
The iBuyers have smartphone apps and websites for sellers to obtain an “instant offers” on their property. They provide the offer within minutes or days, relying on their valuation software. After the seller accepts an offer, the iBuyer sends out an inspector to the property to evaluate the condition of the property. Significant problems found are itemized for the seller to review. The seller then has the option to repair the items or deduct the cost of repair(s) cited by the iBuyer from the original instant offer price. I’m getting conflicting information regarding the inspection by the iBuyer – Some tell me there is no inspection, but that seems reckless and crazy! It’s reasonable the iBuyer is going to ensure they don’t buy homes needing extensive repair given their limited margins, and they aren’t hardcore fixers and renovators. There may also be some variation in the process among iBuyers, and their methods of doing business are subject to change – so one needs to confirm the exact details of their services after receiving an instant offer.
When all the costs of an iBuyer service are realized (direct and indirect), the seller is sacrificing more equity using an iBuyer than an agent. Their selling point is using an agent, and marketing one’s property may take a bit more time and have a few more steps involved. In other words, you are buying a service. The total cost of their services will vary. From what I’m reading (Forbes, National Association of Realtors, Inman, and from my employing broker, Real Broker, LLC), the total service cost is between 9% and 14% vs. what traditional brokerages charge (agent commissions are negotiable). The national average for agent total sales cost/fees/commissions is between 5% to 6% (this fee paid by the seller, is most often split between two brokerages since two agents are typically involved; one representing each side of the sale).
Despite the (typically) higher cost of choosing an iBuyer for instant liquidity, there are some situations (hopefully, avoidable) where this service can be the best option for a seller; I discuss this at the end of this post.
Variations exist in how iBuyers work
There are variations to iBuyer platforms, and they will likely evolve. For example, the iBuyer, Knock, helps you by a new house first and then sells your home on the open market. Knock makes the necessary repairs before the sale (the repair costs factor into the net received from the sale proceeds). They do this by valuing your house with an automated valuation and after a telephone interview. Other’s use a standard list of questions on a form. The big difference is you get a credit-line based on your home’s equity so you can buy first using their cash for the purchase. Cash buying puts one in a strong negotiating position for purchasing. Since you still own the property you are moving out of when they sell it, this allows you the marketing time to realize the full market price on the sale. The costs incurred by moving into the house with the iBuyer “credit” are then reconciled upon the closing of the sale of your home.
The iBuyer, Ribbon, is similar to Knock but allows one to live in the new house by paying rent until closing on one’s house sale. Where financing is involved in addition to the sale proceeds, one can pay rent to live in the new house being purchased until the financing is secured; one can rent the home being purchased beyond the close date should it take longer to finalize the new loan.
The selling point of these two iBuyers, Knock and Ribbon, is they focus on eliminating the need for housing (or negotiating a post-occupancy after closing on one’s sale). In this process, one purchases first and then pays rent to live in the purchased property temporarily while processing the home-sale and financing. Purchasing first is more attractive in markets where the buy-side will likely take the most time while selling one’s house should go quickly, such as in a seller’s market.
Your house can’t be the jewel or the shack of the neighborhood – middle-of-the-road wins the iBuyer’s attention.
The iBuyer business model is heavily reliant on automated valuations (like a Zestimate) in formulating their offers. These statistical valuations are only sufficiently reliable where the housing stock is very uniform, and the house to be purchased is very representative of what’s common in a neighborhood. Some high-end neighborhoods are built with custom homes, so there is no such thing as a common or typical home. So, if a seller doesn’t live in a house that is typical for the area, an iBuyer won’t be an option.
How do iBuyers make their money?
iBuyers make their money in a way that depends upon their business model; from the seller (directly with fees, possibly rental fees, and indirectly from an offer price that is below the market price where the house is sold first). If it is sold first, then they benefit from the resale by selling higher after refreshing the home’s appearance, such as fresh paint, new carpet, and new appliances.
A few examples when an iBuyer might be advantageous.
I do believe there are situations where an I-Buyer may be the right choice for a particular seller, even though such situations should be limited.
Example 1) Imagine you, the seller, have found a home to buy, you are under contract, and must use the proceeds of your home’s sale to fund the purchase of the replacement home (this is a prevalent scenario in real estate). The closing date for your purchase is set with little or no flexibility to change due to the other seller’s situation. The buyer of your home has a contingency – they must sell their home to buy your home. Within days of your contract’s closing-date, your buyer’s sale falls through because their sale fell through. Assuming there are no other plan B’s possible given your financial situation, and a lack of time to reactivate a listing, get a new buyer and go through their due diligence process, this may be where I would recommend an iBuyer as a backup plan.
If my seller were in a similar contingency situation, to reduce their risk by having a “plan B,” upon my seller’s approval, I would obtain an offer from an iBuyer(s) for them to use in case of such an emergency. It is also common for sellers to see if they can get iBuyer offers before deciding on an agent, in which case they would already have that as a backup when listing with an agent. Executing this backup plan should provide the opportunity to keep everything moving ahead as planned, justifying the additional costs.
Example 2) Having completed coursework in assisting those facing foreclosure, I see a potential benefit where the owner is still in the pre-foreclosure period with homes that only need minimal cosmetic repairs, and where the lender, despite negotiation, won’t leave enough time to market the property for sale. Sometimes owners in the preforeclosure period act too slowly before contacting an agent using up limited and valuable time. An iBuyer may be an alternative when there isn’t time left to market the property, acquire a buyer, and allow that buyer to go through the process to consummate a purchase in a traditional sale with an agent. However, quite often, extra time can be negotiated by the agent and owner together. Once the buyer is under contract, the lender will often honor that purchase contract given the sales price, and other terms of sale fit their guidelines (which the agent would need to ascertain at the very beginning of negotiations).
Example 3) Where the house needs some cosmetic work to sell near its highest price, but one doesn’t have any funds to fix-up the property or want to go through the process of getting an equity loan to do so. In this case, it may be worth it to use an iBuyer such as Knock and Ribbon.
The conclusion of my iBuyer blog-post
It may be prudent to see what an iBuyer can offer you, and I would be happy to participate in the process in getting quotes (full disclosure – yes, they may pay me a referral fee if you decide to use the iBuyer service I referred). They provide a tangible service, and so it is reasonable a seller will pay more for their service. However, I will also be competing with them to be your agent for the sale and buy (if the home to be purchased is out of state, I can offer a referral to a reputable agent).
My job is to make the process of home selling and buying an uncomplicated and even enjoyable experience that maximizes your sale proceeds and minimizes costs on the buy-side. My mission is keeping you informed of all the details that will be important to you along the way and after purchase and sale (understanding what an iBuyer can offer you is now part of my job of keeping you informed).