Beware of Smoke & Mirrors
iBuyer is a clever name given to investment buyers who purchase residential property at a discount with the intent of quickly reselling at the market rate. Essentially just the rebranding of a home flipper. They have been around for
a long time–one of the first was We Buy Ugly Houses. Adding a technology component, the current iBuyer model emerged in 2014. These companies operate under different names (Opendoor, OfferPad, Knock, Zillow Instant Offers, and others) but their offering is similar (purchase the property below market, charge a fee similar to a typical commission plus carrying costs, charge the seller for repairs, relist with the intent of selling quickly). The most developed
iBuyer markets are Phoenix and Las Vegas, but there has been a rapid growth in the number and location of iBuyer companies.
HOW DO THEY OPERATE?
These companies utilize technology to remove human contact (and local market expertise) from the process. The seller submits a request for an offer online and if the property meets the Buyer’s conditions they will receive an offer using an Automated Valuation Model (AVM). The offer is reduced by a service charge (anywhere from 8–10.4%). If the offer is accepted, the property is inspected and the purchase offer is further reduced in an amount equal to
the recommended repairs and upgrades. If the seller accepts the
heavily discounted offer, a closing is scheduled. Once the seller
vacates the property, repairs and upgrades are completed with the intent of selling the property quickly.
WHO WOULD SELL THEIR HOME AT SUCH A DEEP DISCOUNT?
Everyone’s situation is different. iBuyers generally appeal to sellers with an urgent need to sell quickly regardless of their return on investment. An agent with local market expertise assists sellers with negotiating the highest return and smoothing out the complex selling process.
WHAT DOES IT COST TO USE AN iBUYER?
In addition to a below fair market offer, an iBuyer’s fees will range from 8% to 10.4%–far in excess of the average real estate commission you would pay to a full service agent that will take care of all your needs. Should there require any repairs, the offer will be further reduced by the cost of repairs.
HOW DO iBUYERS MAKE MONEY?
The companies are currently funded by venture capitalists and have yet to make a profit under this business model. They hope to make a profit by purchasing homes at the lowest amount, charging fees that cover their carrying costs, and flipping the property as quickly as possible. In addition, they are hoping that the seller will allow them to sell their information to a buyer’s agent who is willing to pay the iBuyer a referral fee and that the seller will use their mortgage and ancillary business partners who also pay the iBuyer a fee.
SHOULD I TRUST AN AUTOMATED VALUE MODEL?
Absolutely not! The most used AVM is Zillow’s Zestimate and it is acknowledged that it may widely vary depending on the availability of public data sources. The fact is that no automated software takes into account the special features, condition, livability, finishes, and many other non-data driven features that are part of the home pricing formula. If you want to obtain the best estimate of your home’s worth, you should either hire a licensed appraiser or a real estate agent that you trust. It will save you time, money, and heartbreak.
WILL iBUYERS PURCHASE ANY RESIDENTIAL PROPERTY?
No, each has a long list of qualifications. Nationally, the median purchase price of an iBuyer property is $225,000 to $250,000. In addition, gated communities, older homes, high-rises, and many other conditions may disqualify a property.
HOW DO iBUYER OFFERS WORK?
The programs have many qualifications such as price range, age, location and condition. Potential sellers electronically submit a request for an offer to purchase their home and upload current pictures to the website. Zillow, presumably using their inaccurate Zestimate system, will return a conditional offer to the potential seller if their qualifications are met. Their fees of 8% to 10.4% are deducted from the conditional offer price. The offer is conditioned upon a property inspection. Once the inspection has been completed, the original offer is reduced to account for the costs of the repairs identified in the inspection (this averages $7,100 according to Zillow). Should the seller wish to proceed with the sale at a less-than-market rate, they schedule a closing. What’s missing is the trusted advisor that guides you through the process.
WHAT IS THE BEST WAY FOR ME TO GET THE HIGHEST RETURN ON MY INVESTMENT?
Work with a trusted real estate advisor with a high level of local market expertise.
Berkshire Hathaway HomeServices Select Properties professionals are highly trained and are subject-matter experts in their markets. They understand the nuances to effectively price your home to sell at the highest price and in a timeframe that meets your needs.
We know that for most Americans, the highest percentage of their wealth is tied to their home – we are here to protect that.