Recently there has been a lot of hype around a newer real estate technology trend referred to as “iBuying.” iBuyers, also known as institutional buyers, are taking up a growing share of home sales in key markets across the country. In early April, Zillow announced that it was expanding its foray into the iBuyer space it originally launched in May 2017. Other companies like Opendoor, Knock, and OfferPad are either engaged in the space or are testing services, but what does this mean for you as a homeowner thinking about selling?
As a Realtor and the founder of The Opland Group, my inclination when evaluating real estate technology trends is simple: What does this mean for the consumer?
What exactly is an iBuyer?
An iBuyer is a company that will make you an offer on your home within minutes (or days), sight unseen (based on a proprietary valuation model), with the intent to re-sell the home for a profit after making minor repairs and improvements. If you choose to accept the price, you can close in as little as a couple of days. The iBuyers tout the selling experience as quick and easy, but when would you consider selling your home this way, and who is likely to take advantage of the service? A few examples are if you need to move to relocate for a job, your home needs updates / improvements and/or costly repairs and you don’t have the money, time or desire to deal with renovating the home and effectively preparing it for market, you aren’t interested in dealing with the inconvenience and hassles associated with listing and selling a home, you are a distressed seller, or you’ve found your next home and want/need to act quickly.
This sounds great, but what’s the catch?
When selling to an iBuyer, the other side of the transaction is a company or an investor. Investors like to make money, and the quick and easy experience for sellers doesn’t come cheap. The iBuyer will typically charge a full commission, plus build in a discount to fair value to compensate for the risk they take by providing you with “instant” liquidity, on a property they haven’t even seen (as well as the time and costs associated with preparing the home for market and the additional real estate and transfer costs associated with the properties resale). Those who work in finance would call that a “liquidity premium” because the buyer has to use their own money to buy an asset. The iBuyer runs the risk of being unable to resell the property quickly enough, having costs add up, or being unable to sell the property for a profitable price. While there isn’t a lot of data available yet, some estimate that these costs can add up to more than 15% of the fair market value of a home compared to 5-6% in commissions with a traditional agent.
So what does this really mean for the homeowner’s bottom line? Most homeowners purchase their home with a mortgage. If you purchased your home for $400,000 with 20% down, you showed up to closing with $80,000 of your own money, which is also your equity. If the value of your home remains the same and an iBuyer offers you $380,000 for your home — a 15% discount to fair value — you will lose $60,000 on the value of your home, plus pay a 6% commission (an additional $24,000) for a total cost of $84,000.
This is a much higher transaction cost compared to selling your home on the open market for $400,000. More importantly, compare that combined $84,000 to your original down payment of $80,000 — you will be giving up all of the equity you put into your home partly for the convenience of a quicker sale.
Does the added cost make sense for the consumer?
It depends on your situation. If you’ve found a home you absolutely must have and if the seller isn’t willing to consider a home sale contingent offer (in this market few sellers are), or if your home requires thousands dollars in repairs which the iBuyer can complete at a cost well below retail (economies of scale and having access to discounted labor and materials come into play here as well). Unfortunately most iBuyers target mid-level homes that are in decent condition and only require minor cosmetic repairs allowing them to make a few quick low cost updates (the average is around $10,000) before relisting the home and selling it quickly.
But just how much do homeowners lose as a result of selling to an iBuyer? A 2019 MarketWatch investigation found that iBuyers’ offers “would net their customers, on average, 11% less than owners who choose to sell their homes on the open market, when fees and other costs are considered.” A separate 2019 analysis found that the “the typical cost to a seller appears to be in the range of 13% to 15%.” Unfortunately for iBuyers, a 2020 study found “an average seller is only willing to pay $9,000 to sell their house immediately” and thus for most the iBuyer model simply does not make sense.
It is also worth mentioning that the Federal Trade Commission appears to have its own suspicions, at least in one instance. In a February SEC filing, Opendoor disclosed that it planned to enter settlement negotiations with the agency, who believe some of “Opendoor’s advertising claims relating to the amount of its offers, the repair costs charged to home sellers, and the amount of net proceeds a seller may receive from selling to Opendoor versus selling in the traditional manner were inaccurate and/or inadequately substantiated.”
Residential real estate remains the dominant form of wealth for such families, making up roughly 70% of median household net worth, these iBuyers are well aware of this and your equity is what they are targeting.
Is there a better option?
In Columbus and Central OH there is… and that option is our first-of-its-kind Home Trade-In Program! The program was designed to help Central Ohio homeowners looking to avoid the hassle, inconvenience, uncertainty, and many of the costs (including the real estate sale commissions) associated with the traditional sales process.
Here’s how it works… we will send our Trade-In Representative to meet with you at your home to assess its value and prepare an offer that represents what we believe to be your property’s fair market value. You will receive an offer within days, there is no cost or obligation and you can accept or reject our offer.
We buy homes “as-is,” so there is no need to worry about costly repairs and updates. You also won’t have to worry about expensive bridge loans, double mortgages, home sale contingencies that reduce your negotiating leverage, being rushed to find your next home as soon as your current homes goes into contract so as to time your transactions and avoid the need for temporary housing while we work to find the perfect home for you. Furthermore, if you decide to accept our offer and agree to buy your next home through us (a service that is free to you as sellers pay real estate commissions), we will waive the real estate commissions associated with the sale of your current home!
Once you’ve accepted our offer we will then assist you in finding your replacement home. There are no limitations here and you have the option of considering: pre-owned existing homes, already completed new homes, or even building a brand new fully custom home. As it relates to builders and communities, again there are no restrictions as we work throughout the greater Central Ohio region and with every local builder. Once we’ve found your perfect home and negotiated the sale, we will coordinate back-to-back closings for your sale and purchase preventing you from having to worry about timing your transactions, or a double move and temporary housing!
Interested in Learning More… or Ready to Get Started?
Our Home Trade-in Program represents just the kind of innovation and vision that keeps us at the forefront of our industry. If you’ve been thinking of buying a home in Central Ohio, we’re here to help. We’re real estate experts in Columbus and it’s surrounding suburbs and can answer all of your questions about buying a home in our area! We have the resources and expertise to assisting you in making the best decisions through every step of the home buying process, and eliminate the doubt and frustration. Ready to get started with your search? Let’s talk. Give us a call at 614-332-6984.
