Market Analysis

The Problems with Selling to an iBuyer

Recent years have seen the rise of a new participant in the real estate market; the iBuyer. The iBuyer is usually a large company with considerable financial resources that uses an algorithm to price homes and make offers. If the offer is accepted, the iBuyer will pay cash for the home allowing the seller to quickly move on buying their new home.

Make no mistake, the iBuyer is an investor who is looking to buy an asset cheaper than they sell it. Unlike house flippers, however, who normally target homes that need a lot of work before they can be resold, an iBuyer is looking for a quick resale and for that reason they want homes that are in excellent condition.

The benefits to a seller of using an iBuyer may seem obvious and numerous. A quick sale and fewer hassles with agents, potential buyers and the sometimes lengthy process of selling a home. Selling quickly for cash may also give an individual more power and flexibility when buying their next home.

If it seems that using an iBuyer is too good to be true, that may be correct. The appropriate old adage would be, “if it seems too good to be true, it probably is.” That does not mean that iBuyer is not right for some people, just that using an iBuyer means paying for convenience. There will be sellers who, because of their specific circumstances, find that iBuyers provide an attractive option.

Obviously, no company is going to risk their assets unless there is a good probability of profit. iBuyers are no different than any other business. They will need to buy at a price low enough to enable a sale at a higher price in a reasonable amount of time. The price they are willing to pay must protect the iBuyer against market moves, bad estimations by the algorithm, and compensation for carrying costs. In addition, unlike normal contracts, some iBuyers have recently backed out of offers because of the Coronavirus.

Here are some iBuyers and a brief description of their business model:

Opendoor – uses an algorithm to value a home and then makes an offer. The commission will be 7%, which is more than a typical realtor would charge.

Offerpad – there will be an offer within 24 hours. The seller chooses when they want to close. Offerpad will pay moving expenses within a 50-mile radius.

Zillow Instant Offers – provides an offer to the seller based on the Zestimate of value combined with facts a seller provides and nearby comparable sales.

Knock – when someone is buying and selling at the same time and timing is an issue, Knock will purchase the home so the seller can move into their new home. Knock will then represent the owners in selling the home. After the sale, Knock makes the necessary transfers and charges a 6% commission.

Redfin Now –has a presence in eighty markets across the United States. Redfin uses an algorithm to determine price. Home inspections normally take 30 minutes and a seller can get an offer within 24 hours.

Other iBuyers:

  • Perch
  • SellHouseFast
  • iBuyer.com
  • webuyuglyhouses

Finally, below is a list of positives and negatives associated with iBuyers:

Positives:

  1. Save time and energy of preparing or staging home
  2. Save time and energy of showings and open houses
  3. No repairs – they buy as-is
  4. Closings are quick – a couple of weeks
  5. No arduous negotiation process
  6. A less intrusive inspection process
  7. No waiting or uncertainty of a buyer mortgage process
  8. Sales won’t fall apart because a buyer lost their job or other unforeseen event taking place

Negatives

  1. Higher real estate commissions – iBuyer fees generally are 1% to 10% of the sales price versus the usual around 5% for real estate agents
  2. Algorithmic valuations may be inaccurate and may be too low
  3. The iBuyer price will usually be below market as the iBuyer need to make a profit in a short timeframe. This could be thousands or tens of thousands of dollars.
  4. The same outcome can be achieved by just pricing the home aggressively when it first comes to market.
  5. iBuyer is only available in limited markets.
  6. Recently, iBuyers have shown they will cancel the contract if there are extreme circumstances (Covid-19).
Jeffrey Sloane

Jeff Sloane is a former Wall Street trader who now provides institutional research for banks and hedge funds. His most recent projects are focused heavily on emerging technologies in the real estate market.

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