Are iBuyers Too Good to Be True?

By Steve Udelson

Posted on December 3rd, 2019

In today’s digital, on-demand culture, consumers have come to expect that they can get what they want, when they want. This mindset not only applies to being able to order virtually anything from Amazon with increasingly short delivery times (sometimes even same-day) or watch shows and movies on their own schedule through streaming services; it’s also increasingly extending into the real estate industry.

Are iBuyers Too Good to Be True?

In particular, home sellers now have the option to quickly sell to instant buyers, better known as iBuyers. To do so, sellers simply submit a few details about their home to an iBuyer online, receive an offer via an algorithmic process that determines what the iBuyer considers a fair price, and then complete the entire sale at the convenience of the seller. The seller can close almost instantly, taking a lengthy process of going through the listing and showing of the home into a pared down version that only takes a few days. In addition, if the seller wishes to stay until a particular date, the iBuyer scenario often provides more flexibility.

But what does this convenience cost the home seller?

Analyzing the Fairness of iBuyer Offers

While there’s no doubt that iBuyers are faster and more convenient than the traditional home-selling process, many real estate participants assume that iBuyers are too good to be true in the sense that sellers have to take a steep discount on the sales prices in order to unlock the equity in their homes. However, a recent study by global real estate tech strategist Mike DelPrete concludes that iBuyers are making less and less over time on the gap between buying and selling a home, and they are now conducting the transaction at close to fair market value.

DelPrete reaches this conclusion by analyzing data from the two largest iBuyers — Opendoor and Zillow — which he notes account for 86% of iBuyer transactions. He analyzes a few different metrics including:

● iBuyers’ purchase prices compared to what an automated valuation model from First American Mortgage Solutions determines to be a fair property price.

● The price appreciation between what an iBuyer purchases a home for and then resells the property for.

● The difference between an offer from an iBuyer that gets rejected by the seller and what the seller then sold the home for.

Looking at this data, he determines that while there are some variations based on location and outliers that may indicate otherwise, iBuyers are generally not low-balling offers. Overall, once you take renovation and repair costs into account — which the iBuyer covers and manages — the average discount to market value on an iBuyer offer is only around 1.3%, meaning the seller foregoes $3,500 on a $270,000 house, finds DelPrete.

Digging into the Gap

While the gap between what iBuyers pay for a home and what they sell may seem relatively small on a percentage basis and arguably fair based on the convenience they provide, not every seller will determine that accepting the lower iBuyer offer is worth it.

For those in situations such as where they have enough capital to purchase a new home while waiting for their current home to sell, or where finances are too tight to accept anything less than a certain selling price, then they may decide that an iBuyer isn’t right for their circumstances.

The more noticeable difference, though, can be in the amount paid in fees. DelPrete’s study notes that while iBuyers’ average fee of 7.5% is higher than the typical 6% real estate sales commission, this gap is essentially negated by the seller not incurring the holding costs that accrue during the months the seller waits to find a buyer, such as maintenance and taxes.

However, the rise of flat-fee models and discount brokerages is already putting pressure on the traditional 6% commission, which means that iBuyers’ fees may be too costly for many sellers. Redfin currently offers a discounted 1% seller’s agent commission, bringing the total commission paid by the homeowner down to 4%. Home Bay’s flat selling fee is less than 1% and also negotiates down the buyer agent commission, further lowering the rate to under 4%. On a $270,000 house, Home Bay’s flat-fee commission would only cost $2,500, whereas the 7.5% charged by an iBuyer would equate to over $20,000. That gap generally increases as the price of a transaction goes up, meaning that sellers could be paying significantly more for iBuyers in exchange for convenience.

Consider All the Choices in the Market

In addition to considering any gap between an iBuyer’s offer and fair market value, as well as potential fee differences that can add up to significant sums, sellers should consider why some iBuyers may be willing to forgo profit on flipping houses. DelPrete’s study also concludes that in the long term, iBuyers seem like they will be able to make money by offering complementary services in areas such as mortgages and title, and having too much of the real estate industry controlled by iBuyers could be limiting for real estate participants.

Consumers will have to decide whether the price of convenience in using an iBuyer is worth any additional costs or losses in choice. Technology is making the real estate industry more efficient all around, so iBuyers are not the only option for consumers looking to improve the speed of transactions and related services.

Instead, consumers may decide that leveraging a flat-fee or discount brokerage, especially ones that utilize technology to increase efficiency, may be a better fit. Consumers can also speed up other parts of the real estate process like title and escrow by using services like Home Bay that have fully integrated ancillary services to expedite the closing process.

Ultimately, when homes need to be sold in a matter of days and sellers don’t mind paying a premium, iBuyers can be a viable option for some consumers. And while iBuyers may not necessarily be too good to be true in the sense that they generally don’t result in lowball offers, the total costs of using an iBuyer may not be worthwhile for all consumers. In an industry that charges commission as a percentage of the final sale price, the gap in fees grows significantly with higher value homes: a $1M home sale in Southern California might pay $35k more in fees with an iBuyer. It is worth considering your circumstances, weighing your options and comparing all the costs before diving into this new home selling category.

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Posted in Buying a Home, Real Estate & Technology, Real Estate Investing, Real Estate Market