Advancements in technology are always transforming the way we conduct various activities, including how we conduct real estate transactions. Several tech firms, in recent years, have aimed to revolutionize the process of buying and selling homes. Among them, iBuyer companies such as Offerpad and Opendoor have grown rapidly and emerged as leading players. Although larger and more widely known companies like Redfin and Zillow initially entered the iBuyer arena, they eventually exited the space. Direct Buyers, or iBuyers, use computer algorithms to provide sellers with quick cash offers to purchase their homes. Other companies such as Seller’s Advantage and HomeLight seem to serve more as aggregators for individual investors or much smaller companies who buy homes for cash. Several other programs that aggregate multiple iBuyer offers for a home are also available, with some of these accessible via real estate agents and agencies.
Despite iBuyers' small overall market share, their considerable advertising budgets have created significant buzz in the industry, prompting clients to become curious about them and their operations. In this article, we explore iBuyers' business model, evaluate the advantages and disadvantages of working with them, and suggest strategies to safeguard oneself while considering this novel option for selling a home.
FIRST, HOW DOES THE iBUYER PROCESS WORK?
While some variations exist among iBuyers, the overall process remains the same. The seller or their agent fills out an online form, providing information about the property's size, features, and condition, and some may even require digital images.
Based on this information, iBuyers will evaluate whether the property matches their "buy box," a set of criteria aligned with their investment model or the standards of the investors they represent. Typically, iBuyers seek houses they can readily assess and "flip." Their ideal property is often a moderately priced, single-family home located in a neighborhood with similar homes that require no major renovations before listing. (1) Such qualities make it easier to appraise the value of the property, with plenty of comparable sales data, and help minimize risk and reduce carrying costs.
After using an algorithm to determine the amount they will offer, iBuyers will email the seller an offer, usually within a few days. The offer will also include the company's service fee, which typically ranges between 7% and 12% of the purchase price (though can be lower). (2)
Should the seller accept, an in-person visit, and inspection will be scheduled. During the process, the iBuyer will assess the property's condition and request a price reduction to cover any defects found. It’s important to note that, during this part of the process, the iBuyer can cancel the contract if that’s what they choose to do. If the sale does proceed and closes, post-closing, the iBuyer will perform the necessary updates and repairs before reselling the home on the open market.
WHAT ARE THE PROS AND CONS OF SELLING TO AN iBUYER?
Selling your home to an iBuyer arguably provides the ultimate convenience, which is its most significant advantage. For homeowners, getting their home ready for sale and listing it can be stressful and disruptive. Busy families with kids and pets can avoid the hassle of keeping their house presentable for potential buyers. Moreover, cash buyers provide predictability, and sellers can choose their closing date, adding to the convenience factor.
Nevertheless, this convenience comes at a price. A significant price. iBuyers are investors aiming to make a profit, so their purchase offer is often below the market value. In addition, service fees can be as high as 12%, and the iBuyer may deduct the cost of updates and repairs from the offer. (3) Research reveals that sellers who work with iBuyers receive less than those who list their homes traditionally. According to MarketWatch, transactions with iBuyers result in 11% less money for the sale than if they had sold the home with a real estate agent on the open market. (2)
While convenience is great, at what cost is it actually not so great? The companies that provide this service are in business to make a profit. It’s not hard to see where this profit comes from. As mentioned, these companies also seem to have significant marketing budgets as well. Must make you wonder where that money comes from, right?
WHAT ARE THE PROS AND CONS OF BUYING FROM AN iBUYER?
When you purchase a home from an iBuyer, it's much like purchasing from any other investor. One advantage is that the property is usually in good condition, with neutral decor and modern finishes. Since it is unoccupied, you don't need to work around a seller's schedule to view it, which can be a time-saver.
However, there are certain potential drawbacks to consider when dealing with iBuyers. You’re not going to get much in the way of seller disclosure because the seller (the iBuyer) hasn’t owned the property for very long, certainly hasn’t lived there, and really doesn’t have any history to disclose. Renovations may be done quickly, sacrificing quality for speed. Additionally, their profit margins are often narrow, making it difficult to negotiate price reductions or additional repairs. In the event of any problems discovered during the inspection, you may have little recourse after investing hundreds of dollars.(4)
That is one of the reasons why it is always advisable to view properties with an experienced real estate agent. During a visit, a professional can highlight any concerns about the property, provide background information about the neighborhood, and assist in determining its true market value. This can help you avoid investing in a high-risk or overpriced property. Safety is also a concern with iBuyers, as some companies allow access to their homes through a smartphone app, making it easier for squatters and others to enter the property illegally.(5)
Thankfully, most iBuyers (and conventional sellers) pay the buyer agent's commission, so you can benefit from a real estate professional's expertise and guidance at no cost to you!
HOW CAN I PROTECT MYSELF IF I CHOOSE TO WORK WITH AN iBUYER?
Although iBuyers may seem like a quick and easy option, they can pose some unique challenges. One of these challenges is that they typically offer a strong initial purchase price, only to reduce it significantly later on by requiring costly updates and repairs after conducting their inspection. Additionally, iBuyers can walk away from a deal if their demands aren't met, unlike traditional buyers who are incentivized to make a deal work.
Like going to court without a lawyer, entering into a real estate transaction without an advocate to represent you can be risky. It's especially crucial to have a professional agent on your side when negotiating with an iBuyer. They tend to sell their convenience and tout that there will be “no pesky agents involved” as a benefit, however, there’s really only a benefit to them if you, as a seller, are walking in without your own representation. These companies employ experienced representatives and lawyers focused on maximizing their profits, so it's essential to have someone in your corner who has the skills and knowledge to ensure you receive a fair deal and understand the terms of their contracts to avoid any surprises along the way.
The emergence of new technology to streamline the real estate process is exciting. If an iBuyer could benefit a client, we present it as an option. However, the convenience comes with a cost. Most iBuyers eventually list the properties they acquire on the open market, which is still the best place to find a buyer to maximize your home's sales price.
The programs that we can offer to improve a home’s appeal and maximize your profits (before listing it) are the programs that are typically more beneficial to home sellers. Realvitalize is one of numerous of these types of programs that we have access to. It’s always about applying the right tools and solutions to each individual’s scenario to arrive at the right fit.
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!
- The Dallas Morning News -
- MarketWatch -
- Forbes -
- US News & World Report -
- Inman -