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 and haggling with potential buyers — can skip all the hassles and choose to sell to iBuyers, or real estate buying companies that make online cash offers on homes.
The iBuying platforms, with the help of computer algorithms, give homeowners an offer without inspecting or viewing the home, simplifying the process. iBuying firms will make you an offer within 24 hours and schedule a closing date that suits the seller’s timetable.
The convenience is attractive to sellers, especially those who want to close a sale quickly for various lifestyle and financial reasons, such as a death of a family member, a divorce or a job relocation. If this almost sounds too easy, there are some drawbacks, not the least of which is you may not receive top dollar for your home.
What is iBuying?
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, says Owen Boller, a licensed real estate broker with Compass in New York.
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.
The main iBuying companies are backed by well-funded venture capital firms who have invested hundreds of millions of dollars and include Opendoor, Offerpad, Zillow Offers and RedfinNow, among others.
How did iBuying start? Where is it today?
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 now operates in 20 cities and has served over 55,000 people, both homebuyers and sellers, she says.
Today there are at least seven such companies, with some newer ones, such as Knock, Perch, and Felix, entering the space. Traditional real estate companies are partnering with the iBuying companies; Redfin is now working with Opendoor, while Keller Williams, the real estate company, recently partnered with Offerpad.
Before you choose an iBuying company, however, shop around and see which one charges the lowest fees and gives you the best offer. And keep in mind that these companies 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. “In general, however, most homeowners would prefer the traditional methods of seller representation” through a real estate agent who solicits offers through a multiple listing service.
The entire iBuying market is an estimated 0.50 percent of national home sales. Merrill Lynch estimated this could rise to 3 percent of national sales by 2030, says Ralph DeFranco, global chief economist at Arch Capital Services, a White Plains, New York, financial services company.
“I think it has the potential to do better than that, but time will tell,” DeFranco says. “For comparison, house flippers are probably 5 percent to 6 percent of all sales.”
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, DeFranco says.
In exchange, homeowners receive flexible move-out dates and avoid dealing with frequent home showings.
The companies 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 puts the home back on the market to sell for a higher price.
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,” says Boller.
- Fast cash. Home sellers who need the cash quickly or are willing to accept less money in exchange for less stress and uncertainty 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 a moving 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 5 percent of the sales price to an 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 than the iBuyer wants to knock thousands off that for items that it claims must be replaced or repaired.
Happy iBuyers in Las Vegas
When John and Becky Schlatter needed to sell their Las Vegas home last year, 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.”
How iBuying stacks up against traditional real estate sale
Selling your house the traditional way can often take months after you put the house on the market and wait for someone to make an offer you’ll accept. In some instances, the deal falls apart because the buyer is not approved for a mortgage or due to home inspection issues.
“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: Consumers overwhelmingly use real estate agents to buy or sell a home.
Eighty-nine percent of home sellers worked with an agent to sell their home; 8 percent of homes were sold as “For Sale By Owner” listings, according to the National Association of Realtors’ 2017 Profile of Home Buyers and Sellers. NAR is the nation’s largest trade association, representing 1.3 million members.
Compare offers from 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. It doesn’t hurt to explore all of your options and get free offers or pricing opinions.