2018 was the year that the iBuyer came into the real estate world. As we look more and more at the process, it looks more like this is new wrapping on an old business model. The word iBuyer sounds cool and hip, but it’s totally reasonable to wonder if it is a good idea to use an iBuyer service to buy your home versus selling it using a real estate agent. And, full disclosure, I am a real estate broker in St. Louis, so I am naturally biased; hopefully, I’ve produced something fair.
What is an IBuyer service?
As of this writing, there are many players competing in the iBuyer space. Zillow Offers, Knock, Opendoor, Offerpad, and Redfin are all companies in this space. The iBuyer model is that you submit your home address and answer some questions about your home, and you get a cash offer from an iBuyer to purchase your home. Sounds great, right? Well, yes and no. Let’s go over some of the issues related to the iBuyer services and see if it really makes sense for you.
How Do iBuyers Make Their Money?
This is where the advertising magic happens! An iBuyer is really no different than a local home investor buying your property. It’s house flipping in a digital media. After you submit your information online, you get a cash offer. If the house needs work, you can guarantee your house isn’t going to get a full asking price offer, and in the traditional marketplace you wouldn’t either. There are fees which are different than commissions.
Do The Math
So, the example I see is this. Let’s say a house is worth 1 million dollars and the iBuyer offers 85% of that. That would be $850,000. iBuyers charge fees, in this case let’s use 7% so that would be $59,500. As the seller, you walk away with $790,500 cash in as little as 7 days. In a traditional real estate transaction with agents, assume a 6% commission on that million dollar house. That’s $60,000. If you use a traditional agent, your net is $940,000. Put this way, does an iBuyer model make any sense? I don’t see where it makes any sense at all. But, this example probably isn’t real world, so let’s go over some of the problems with the example.
- If your house is really worth a million dollars, and you know it, you would never accept $850,000. Therefore, the value of the home may be a million dollars after repairs. This is a key distinction in the marketplace. When you are using an iBuyer service, you are making a bet that they either get the purchase price exactly right, or they miss badly. You would win two ways. One, your risk of sale is transferred to them, and two, you get a home sold very quickly.
- Assuming a 6% commission to a real estate broker is a little rich, in my opinion, especially when the value of the house is above a million. Depending on brokerage, depending on agent, the commission number changes. It’s definitely not set in stone. You still run the risk of hiring an awful real estate agent, but given the money involved, it looks like a better risk than the iBuying route.
- How is this any different than Homevestors, or We Buy Ugly Houses? I don’t think it is. It’s better marketing, sure. Also, it puts a more sterile face on house flipping. The key to any real estate investment is buying a house at a price where you can repair it and sell it for less than what you have in it. This model has been around 100 years. The issue has always been finding the sellers willing to sell before the next investor.
Who Is the Target Market For iBuyer Services?
After looking around, here is what I found and my commentary on who the target market is for iBuyers and whether or not that makes any sense in the real world.
Family issues We are talking here about divorce, death in the family, etc. In these cases, the sellers may want to sell quickly and not necessarily top dollar. I can certainly see that. If a family member dies and leaves you with a home that needs a lot of repairs that you don’t want to oversee or have the cash for, it can make sense to sell quickly.
Repairs Sometimes you’ve lived in a home for many years but you either never had the money to update it or chose not to. When it’s time to sell your home, the house isn’t positioned in the marketplace where someone would buy it. In theory, it would be better to sell the house to an investor rather than go with a traditional agent. I don’t agree with this. Let’s assume your house is worth 300,000 fixed up, and the house needs about 100,000 in repairs. I can guarantee you that if you list your home for 200,000, you will have buyers. Now, you could argue that the commission paid to agents (12,000 @ 6%) leaves you with less than 200,000, and that is true. But the idea that your house won’t sell because it needs repairs and your only option is to use an iBuyer or local real estate investor is also not true.
Relocation The idea here is that you are moving to a new city and need money fast. Better to sell to an iBuyer fast than risk putting your house up for market the traditional way. Again, I don’t disagree, but I also know that when a home is priced right, it sells quickly. I would argue that you will end up with more cash at the end of the day going the traditional route.
Ease Of Transaction Listing your home for sale can be a hassle. I totally get that. The idea with an iBuyer is that they will come in and do everything for you. You don’t have to worry about showings, don’t have to keep the house clean, and don’t have to get to know your agent. While that sounds great, just remember that comes at a steep price when compared to using a traditional agent.
Common Real Estate Investor Marketing
Let’s look at the main marketing messages of real estate investors and see if they hold up when compared to a traditional real estate brokerage.
Cash For Your Home I cannot understand this. When you sell your home, you get cash or a check as long as you have equity. It is disbursed at closing. If your house is worth 200,000 do you really think that you are going to get a briefcase full of cash from an investor and somehow that doesn’t set off alarms somewhere in the banking system?
Sell Your Home Fast Hire a good real estate agent to sell your house. Set a realistic asking price. Your house will sell in days. Now, closing may take 30 days. If you can’t wait 30 days to close on a house, you have bigger issues than selling your house.
No Commission to sell your house Ok, here’s how this really works. Real estate investors may not use the term commission, but there will be fees. And, if there is really no commission, you will end up handing cash over to the real estate investor in the form of lower sale price.
Does It Make Sense To Use An iBuyer?
The answer, as per usual, is “it depends”. I know sellers who would benefit from an iBuyer service, but that isn’t the vast majority of home owners. If I were to guess, I would say there’s probably 10% of the total real estate market where an iBuyer service would make sense for the sellers. If you are looking to list your home for sale in St. Louis, my advice would be to reach out to us at Deeerwood Realty. We can look at your situation, see what makes sense for you, and there’s no obligation.