What Is an iBuyer?
Depending upon who you ask, iBuyers are the “hot new thing” in real estate transactions, making the process of buying or selling “easier.” Reality check: any of these “virtual buyer” programs are significantly poorer options than working with an experienced and well-trained real estate professional. Before we take a deep dive into the controversial topic of using virtual real estate transactional services, let’s clearly define what an iBuyer service, sale or transaction involves.
Historically, there are three traditional methods to buy, or sell, real estate. They are:
- Real Estate Brokerage. By listing with a qualified real estate Brokerage and having an agent (or team) at the brokerage represent you and your interests.
- For Sale By Owner (FSBO, pronounced fizz-bo which is real estate industry jargon). Self-explanatory, this is when a property owner attempts to sell their real estate directly to a new owner or to allow a buyers agent to sell it.
- Corporate sale. Typically for an employee benefit when a company is relocating a high-value employee to a new geographical area. Some direct corporate sales do still occur, a lot of “wholesalers” are operating now (that’s another article altogether).
And now, a new option—iBuyer offers a fourth possibility. An iBuyer is a company that uses technology to come up with an offer for your home. The offer is calculated by a computer using a series of algorithms and public records of property values. The systems take the AVM (automated valuation model) of a property and then bases the offer on that. The caveat here—any AVM is based on a “norm” or average of properties, not taking into consideration improvements or deferred maintenance.
"The downside of an ibuyer program is that if your home is the best in the neighborhood you won’t see that in the offer, and if it is the worst, you will see the impact of that after the home inspection is completed and the offer is modified." —industry insider
The four most prominent iBuyer companies are OfferPad, OpenDoor, Redfin Now, and Zillow Offers. As of this writing, while those may be the four largest, none of them operates nationwide, so they may or may not be an option depending on the location of the home being offered for sale. The model performs best in homogeneous housing markets where their method of automated pricing is more reliable, think a lot of tract housing or subdivisions of similar properties as far as the eye can see.
Are There Advantages to Using an iBuyer?
iBuyers like to proclaim the “multiple advantages” of using their services to sell your home. In truth, it comes down to two basic factors: speed and convenience. Speed may be somewhat valuable depending on the circumstances of the property owner and their reason for the sale. After the prospective seller connects with the iBuyer online, he or she will typically get a preliminary written offer in one to two days. There’s no doubt that it could be faster than formally listing a property for sale with a REALTOR®, but you certainly are paying for the convenience.
We should note, most of the iBuyer companies’ advertisements overstate just how lightning-fast their purchase process actually is. After a seller receives the preliminary written offer, the home still has to complete satisfactory inspections. If the inspections reveal necessary repairs, the initial offer usually is reduced by the estimated (typically overestimated) cost of the repairs.
Depending on the type and extent of necessary repairs, you could look at 10-25%, if not more, reduction in the initial offer. That’s in the contract the seller signed as well, and without the benefit of a real estate agent or lawyer to review the terms. A seller who thought the first written offer was the final offer is now going to be disappointed at the very least, or financially devastated at the worst. We used reviews by actual customers of OfferPad and OpenDoor to report this information. Some reviewers have claimed repair estimates are far too high or downright fraudulent, that those companies tried to further renegotiate after closing documents have been finalized. It sounds “sketchy” and very predatory to us.
The supposed convenience of using an iBuyer is focused on the supposed “simplification” of the home selling process. It does seem to eliminate some of the steps, and potentially is a valuable option for someone with ample equity in their home who is seeking convenience and not concerned with a bottom-line profit. The other benefit, avoiding the stress of living through a house sale, showings, inspections, negotiations, open houses and such, which aren’t appealing to some sellers. We’ll touch on the subject of stress in the sale process a bit later in this article.
Are There Disadvantages to Using an iBuyer?
We’ve already touched on a few of the disadvantages directly or by implication. Now we will consider the other potential or real, disadvantages of using an iBuyer service in the sale of real estate.
iBuyers charge substantial fees. OpenDoor charges a service fee between 6-12% of the total sale price. Other iBuyer services charge comparable fees that are all higher than the traditional (and always negotiable) real estate brokerage commissions which are an average of 6% maximum nationwide. When you add on the exorbitant repair estimates together with the service fees, sellers receive on average 11% less than if they’d worked with a traditional realtor. Some pay close to 20% in fees and repair credits from the total sale. Ouch.
"There may be some potential for future litigation stating that the automated valuation based buying programs are predatory. People in desperate financial situations may fall victim to such a purchase offer without consideration for the psychological duress that the seller may be experiencing." —REALTOR® MEMBER
The iBuyer business model is promising when it is used as it was designed, to purchase homes that are in average or better share, and only have minor repairs needed to “flip” the property. We are talking about corporations who need to make a profit, they are not charities so don’t fool yourself into thinking they care about you or your financial needs. If your house is not in good shape or in need of more than minor repairs, you may find the iBuyers less interested in working with you or paying you what seems to be a fair price even if the home’s positive qualities are considerable.
iBuyers may also decline to buy a home if it’s outside their mini-max price range (often $150,00 to around $600,000), if it’s too old if it presents an odd or unique appearance, if it’s a condo, if it’s in a gated community, or if it has a septic system and/or well. The iBuyer companies are looking at the resale factors. Those become more difficult when you get above a certain price point you are dealing with “jumbo” mortgage loans which are more difficult to obtain in many areas, and other lending limitations related to condos or gated communities. These are all things a REALTOR® could explain to you.
Using a REALTOR®
You may have already picked up on some of the advantages while reading up to this point, but let’s put them all right out there for your consideration. We’ll take a closer look at the advantages of having a REALTOR® working for you.
While iBuyers methods of pricing rely on automation, REALTORS® price homes by using the same valuations, but add to that their personal experience, exposure to the comparable properties in the area and their area expertise. They can price a property much more accurately. This is apt to produce more appropriate prices, particularly in more heterogeneous housing markets and can lead to multiple offer situations and even bidding wars between qualified buyers.
To sell your house, REALTORS® use a system of comprehensive state-of-the-art marketing tools, and methods, such as those offered by Happy Grasshopper. This is the traditional method of selling real estate. Real estate agents have in-depth knowledge of the housing market in which they’re operating. The result is the best possible price because the effort generates leads who are interested in your house.
When your REALTOR® interacts with each prospective buyer, they establish a personal rapport and are perfectly positioned to present your property in all its glory to the buyer. establishes a personal connection and is perfectly positioned to extol the virtues of the property. A good REALTOR® can display your property so that the right buyer knows it is the perfect property for them from the first sight.
Don’t forget, of the total percentage taken from the final sale price, a real estate agent is far less expensive than an iBuyer, and also will get you a higher sale price in the end.
REALTORS® establish a personal connection with a seller. Most sellers interview a few REALTORS® before they select one to work with unless they have already worked together before. Your agent gets to know you, and your needs. They can help you with any problems or concerns you may have, or that might arise during the real estate transaction. Their presence, experience, and expertise help guide you through what can be a difficult process.
The role of a real estate agent to make the process look easy and feel as relaxing as possible means they did their job well. They are magicians of a sort, a lot behind the scenes work to give you the illusion of easy and carefree. The result of working with a good real estate agent is your netting more profit, not unduly feeling stressed and perhaps enjoying the process. If you use an iBuyer, you probably will be left wondering what happened and whether you made the best choice. Caveat emptor!
iBuyer vs. REALTOR®: The Bottom Line
Every home seller has unique needs and requirements, no one solution is right for everyone. So it’s difficult to imagine an automated impersonal system will fit that bill. When deciding what is best for you and your needs consider the pros and cons, and do your due diligence, read extensively, some resourceful articles we located are as follows:
- iBuyers Are Here But at What Cost? by Kyle Stoner via Real Trends.
- Why Wall Street Consistently Gets iBuyer Wrong, by Rob Hahn.
- The Cost of Selling to an "iBuyer," from CMG Financial.
- Selling your home to an ‘iBuyer’ could cost you thousands, by Andrea Riquier at MarketWatch.
- iBuyers: A new choice for home sellers but at what cost? from Collateral Analytics
We hope this article was helpful. We’ve no doubt that real estate agents are here to stay and for good reason too. We’re proud to offer services to that important community.
Happy Grasshopper provides REALTORS®, and Brokers, with a comprehensive and modern system for real estate marketing and lead generation, as well a the tools to keep in touch with all the important people in your database.