Should Home Sellers Beware of iBuyers?

by | May 7, 2019 | Buyers

A new real estate business model has emerged over the past several years that is creating confusion and fear among home buyers, sellers, and real estate professionals. Under what is known as an iBuyer or ‘Instant Buyer’ model, Start-up companies and established players in the real estate industry are purchasing houses directly from property owners.

The goal is to allow homeowners to quickly sell their property without hiring an agent, making repairs, staging the property, investing in marketing, or holding open houses. These ‘instant’ buyers then look to make modest improvements to the homes they purchase and resell them on the open market for a profit. In many ways this model resembles what  people would refer to as home ‘flipping’, but there are some distinct differences between ‘flippers’ and iBuyers.

The iBuyer pitch to the home seller is that they will provide instant cash to the property owner without any of the traditional hassle (or cost) of selling a home. Sellers may leave some money on the table compared with a traditional listing, but the iBuyer process is much faster and sellers are assured of getting a specific amount of money. For sellers who are in need of quick cash or have to sell their property rapidly, this can be a convenient option.

But the iBuyer is going to be wary of making offers on homes that need significant investment. To yield a return for the buyer, distressed properties require a larger investment of time and money, which creates additional uncertainty and risk. They also want to ensure that there are plenty of comparable properties in the area on which to base their offer.

Yet to make offers to attractive to sellers, the iBuyer can’t offer much below the market value of the property. Due to the modest margins the iBuyer generates on each transaction, a high volume of transactions are needed in order to make any significant money.

Flippers, in comparison, are often looking for distressed properties that need a lot of work and investment. By significantly renovating the property, the flipper can resell the home at a much higher price than was originally paid. This creates the opportunity for much larger returns, albeit with an associated increase in risk.

The skills of the flipper are also quite different from the iBuyer. Flippers need to be adept at home renovation, keeping costs down, and repair schedules on track. Also, flippers will often have to purchase homes through standard channels, such as the multiple listing service.

Regardless of whether instant buying and flipping is same thing, the emergence of iBuyers is not a fluke. Start-up companies such as Opendoor, Offerpad, Knock, and Bungalo Homes have raised tens of millions of dollars in venture investment to support buying homes directly. They also claim to have computer algorithms and underlying artificial intelligence technology to help them determine the optimal offer for the seller.

Sensing an opportunity to expand their current offerings, legacy players in the real estate market are joining the fray. Redfin and Zillow have each recently introduced their own iBuyer programs and even a stalwart real estate brokerage such as Keller Williams is dabbling in this new approach.

For markets like the Bay Area with a wide range of architectural styles and variable house sizes, determining accurate valuations through technology is nearly impossible. There are simply too many variables including home style, size, lot size, proximity to earthquake faults or flood zones, variable school district quality, and distance from public transportation.

For markets like the Bay Area, determining accurate valuations through technology is nearly impossible.

Consequently, iBuyers are not offering services in these areas due to the lack of standardization in the housing stock and the associated risk from price variability. Also, in a depreciating market iBuyers are going to be wary of making competitive offers which further erodes your potential for financial return.

Even if an iBuyer option is available in your market, you should think carefully about your long-term financial needs. If you are in a severe cash crunch or have to move very quickly for a job or other personal reason, selling your home to an iBuyer may be the right move.

Alternatively you should look to engage an experienced agent who is knowledgeable about your neighborhood, understands the nuances of marketing your home, and has a long track record of success. In fact, a recent report indicates that properties sell for up to 9% more and 30% faster than those which don’t hold open houses.

Look to engage an experienced agent who is knowledgable about your neighborhood, understand the nuances of marketing your home, and has a long track record of success.

While iBuyer’s tout the convenience of selling directly without having to stage your home or hold open houses, reputable agents will handle all aspects of your home sale for you. Even after paying the real estate agent commission and other selling costs, you net a much larger amount of money.

In the end, most savvy sellers are looking to maximize returns on the largest financial investment most of us will ever make. Letting market forces of supply and demand play out in the framework of a professionally staged and marketed property will inevitably yield the best outcome for you, your family, and your financial future.

Related Articles

Take Advantage of Your Home Equity: A Homeowner’s Guide

Take Advantage of Your Home Equity: A Homeowner’s Guide

Homeownership offers many advantages over renting, including a stable living environment, predictable monthly payments, and the freedom to make modifications. Neighborhoods with high rates of homeownership have less crime and more civic engagement. Additionally,...

The Value of a Buyer Representation Agreement

The Value of a Buyer Representation Agreement

Purchasing a residential property can be emotionally challenging and is, for most people, the most significant financial investment they will make in a lifetime. To position yourself for success when buying a home, it is critically important to hire a local,...