Homeowners who don’t want to deal with the inconvenience of putting their home on the market — making sure it’s always tidy to be shown or haggling with potential buyers — can skip the hassle and sell to an iBuyer, which makes online cash offers for homes. iBuyers typically make an offer within 24 hours, and can schedule a closing date that suits the homeowner’s timetable.
What is an iBuyer?
The concept of iBuying started long before the internet, when companies would put up signs offering to pay cash for homes as-is and then flip them for a higher price, notes Owen Boller, a licensed real estate broker with Compass in New York City.
The practice has been revamped and streamlined thanks to technology. Homeowners can now fill out a form online or download an app and get an offer within a day or two.
This option can be attractive to sellers who want to close a sale quickly for various lifestyle or financial reasons, such as a death of a family member, a divorce or a job relocation.
If this almost sounds too easy, know that there are some drawbacks, not the least of which is you likely won’t receive top dollar for your home.
How does iBuying work?
While iBuying can alleviate many of the headaches of selling a home — such as coughing up extra money to make repairs or having the deal fall through at the last minute — these companies buy the homes quickly for a significant discount from the estimated market value, explains Ralph DeFranco, former global chief economist at Arch Capital Services, a White Plains, New York-based financial services company.
In exchange, homeowners receive flexible move-out dates and avoid dealing with frequent home showings.
iBuyers rely on big data and statistical tools, such as home valuation models, to make a quick offer to buy your home.
“They deduct a sizable fee from their offer price, which is larger than the 5 percent to 6 percent sellers typically pay in real estate commissions,” DeFranco says. “iBuyers are basically flippers on steroids.”
Homeowners start the process by filling out an online questionnaire and uploading photos. The iBuying company makes a non-binding offer, and some send inspectors to assess any needed repairs.
The homeowner, of course, can either accept or reject their offer. The price cannot be negotiated.
Any repairs are done by these real estate companies, but the cost is deducted from their offer for your home. The iBuyer then puts the home back on the market to sell for a higher price.
Some iBuyers offer a variation of this model by allowing you to effectively trade in your home. When the seller finds a new home, the iBuyer provides the seller with a cash offer to buy the home while the existing home is put up for sale. In the meantime, the seller might have to continue making payments on the previous home’s mortgage until it’s sold, rent the home until it’s sold or sell it to the iBuyer.
How did iBuying start? Where is it today?
The top iBuyers today include:
- Zillow Offers
Opendoor pioneered iBuying in 2014 when it set out to update the traditional real estate model.
“We’re working to take the pain and hassle out of the conventional home transaction,” says Beatrice de Jong, a consumer trends expert for Opendoor. Opendoor currently operates in 27 cities.
Today there are several such companies, and some real estate brokerages are even partnering with them. Redfin, for example, works with Opendoor.
Before you choose an iBuying company, shop around and see which one charges the lowest fees and gives you the best offer.
Keep in mind that iBuyers don’t operate in all areas of the country. In some cities, iBuying is popular because there is a large turnover of inventory.
“Dallas is one of the most thriving cities for this instant offer concept,” Boller says, adding that “in general, however, most homeowners would prefer the traditional methods of seller representation” through a real estate agent.
The biggest iBuyers bought 0.3 percent of the homes sold in the fourth quarter of 2020, according to a Redfin analysis of sales in more than 400 metro areas. This was down from the 0.8 percent marketshare they held in 2019. The pandemic has had an impact, but market conditions have also played a role. With inventory tight and demand high, iBuyers are essentially competing with traditional homebuyers.
Pros and cons of iBuying
- Convenience – The largest advantage of iBuying is convenience. The process is relatively quick and pain-free since there are no showings or open houses. “If a seller is in a hurry to move and is comfortable selling for less than the market value, iBuying is ideal for that,” Boller says.
- Fast cash – Home sellers who need the cash quickly — or are willing to accept less money in exchange for less stress and uncertainty — might prefer this process.
- No disappointment – “Anyone who has suffered with a difficult contingent sale in the past may also be interested in at least getting a quote,” DeFranco says. “It has a lot of appeal to the multitude of people that have suffered with a painful sale in the past.”
- Flexibility – Sellers can choose their closing date, which helps people avoid paying two mortgages.
- No agent commission – Since the house won’t be listed and you get a firm offer, there’s no need to pay a percentage of the sales price to a real estate agent.
- Less money from the sale – The largest drawback is that the offers homeowners receive from iBuying companies tend to be lower than what a potential buyer would pay. “It is almost certainly not the best offer you can get if you are willing to be patient and invest some time in the normal sales process,” Boller says.
- Potential disconnect on true market value – Since algorithms are determining the value, you won’t get a chance to find out what buyers in competition with each other would really pay for the property.
- Possible disagreements over repairs – You might get what seems like a strong offer, only to find out later that the iBuyer wants to knock thousands off that for items that it claims must be replaced or repaired.
How iBuying stacks up against traditional real estate sales
When John and Becky Schlatter needed to sell their Las Vegas home in 2018, they dreaded the idea of listing it on the market. The hassle of negotiations, showings and coordinating their sale with the purchase of their next home seemed too daunting for the retired couple.
John Schlatter was pleasantly surprised when he received a $295,000 offer from Offerpad (before fees) for their home.
“If I had sold with an agent, I might have netted a bit more but you’re locked into a set closing date,” Schlatter says. “We had to find our next home, and Offerpad allowed us to move our closing date a few times. They also provided a free moving truck. It was really convenient.”
Although you can also sell quickly the traditional way in today’s fast-moving market, there’s still the risk of the deal falling apart because the buyer isn’t approved for a mortgage, say, or due to a home inspection issue.
“You definitely are paying for the convenience, perhaps $10,000 or more,” DeFranco says. “Collateral Analytics compared sale prices to two iBuyers in the Phoenix metro to all other sales and found the iBuyers were consistently paying roughly 10 percent less per square foot over the past three years. This is why perhaps nine out of 10 people refuse the offer from an iBuyer.”
Some real estate agents see these platforms as a threat, but the numbers tell a clear story: Homebuyers and homeowners overwhelmingly use real estate agents to buy or sell a home. In fact, 90 percent of home sellers worked with an agent, according to the National Association of Realtors’ 2021 Home Buyers and Sellers Generational Trends Report.
If you’re considering working with an iBuyer, be sure to compare offers from a few iBuying platforms and consult with a real estate agent to get an estimate of how much your home is worth and how long it might take to sell. To accurately compare pricing, factor in closing costs, the commission or service fee, repair costs and potential overlapping housing expenses.