Dunedin, FL – All about iBuyers and “Instant Cash Offers”

Technology is changing the way we do almost everything, and real estate transactions are no exception. In fact, a new crop of tech companies wants to revolutionize the way we buy and sell homes. Those who understand that it is today’s buyers and sellers who are driving this change will be better able to deliver the services and options expected by the consumer.

iBuyer startups like Opendoor, Offerpad, and Properly are rapidly expanding into new territories, and now established players, like Zillow, are starting to get in on the action. Also known as Direct Buyers, these companies use computer algorithms to provide sellers with a quick cash offer to buy their home. If you were reading the local news, you observed that these algorithms showed Crystal Beach, FL experiencing a 107% increase in home value. That should send up the red flag regarding algorithm accuracy.

While the actual market share of iBuyers remains small, their big advertising budgets have helped create a noticeable buzz in the industry. This has left many of my clients curious about them and how they work.

In this article, I explain their business model, weigh the pros and cons of working with an iBuyer, and share strategies you can use to protect yourself if you choose to explore this new option to buy or sell your home.

FIRST, HOW DOES THE iBUYER PROCESS WORK?

While each company operates a little differently, the basic premise is the same. A seller (or seller’s agent) completes a brief online form that asks questions about the size, features, and condition of the property. Some also request digital photos of the home. 

The iBuyer will use this information to determine whether or not the home fits within their “buy box,” or set of criteria that matches their investment model. They are generally looking for homes they can easily value (lots of like-kind homes that sold recently) and “flip.” In most cases, their ideal property is a moderately priced, single-family home located in a neighborhood with many similar houses. The property shouldn’t require any major renovations before listing and no investment to address obsolescence. These qualities make it easier to assess value (lots of comparable sales data) and help to reduce risk,  minimize carrying costs and assure PROFIT to the iBuyer.

Once the iBuyer has used their algorithm to determine the amount they are willing to pay, they will email an offer to the seller, usually within a few days. The offer should also disclose the company’s service fee, which is typically between 7% and 12% of the purchase price. Just as observed with services such as auctions, the actual ‘real cost’ of selling exceeds the cost of selling via traditional methods.

If the seller accepts, an in-person visit and inspection are scheduled. The iBuyer will ask for a reduction in price to cover any defects they find during the process. Once the sale closes, they may make the necessary updates and repairs and then resell the home on the open market.

WHAT ARE THE PROS AND CONS OF SELLING TO AN iBUYER?

Of course, the biggest benefit of selling your home to an iBuyer is convenience. For some homeowners, the stress and disruption of preparing and listing their home can feel overwhelming. And what busy family with kids and pets wouldn’t want to skip the hassle of keeping their house “show ready” for potential buyers? Additionally, many sellers like the predictability of a cash buyer and the flexibility to choose their closing date.

However, this added convenience does come at a cost. An iBuyer is an investor looking to make a profit. You have seen on those weekend and late night shows how investors go about their craft. Personally, I have paid the dollars to attend their training sessions and have intimate knowledge of the investment models and where the profits are derived. So, by necessity their purchase offer is below true market value. This margin, in many of their models it the actual PROFIT margin. When you tack on service fees of up to 12% and deductions for updates and repairs, it becomes easier to see how profit is augmented with piling on of fees and costs. The end result is the sellers who work with iBuyers net a lower amount than those that list via traditional methods.

In fact,  transactions involving iBuyers net the seller 11% less than if they would have sold their home with an agent on the open market. The FEE for convenience is not insignificant. However I understand the appeal and recognize that home buyers and sellers want more options, more choices than the traditional methods offer. 

WHAT ARE THE PROS AND CONS OF BUYING FROM AN iBUYER?

Buying a home from an iBuyer is a lot like buying a home from any investor. The pros are that it’s usually clean, neutral, and moderately updated. You’ll often find fresh paint and modern finishes. And because it’s not occupied (no one is living there), you don’t have to work around a seller’s schedule to see the home. 

However, there are some pitfalls to avoid when working with iBuyers. Speed is of the essence, so sometimes the renovations are rushed and the quality can suffer. Too often quick and cheap prevail over done right. Also, their investment margins don’t leave much room for negotiating a price reduction or additional repairs. As a buyer you can not see what is behind the wall board. As a ‘investor seller’ no disclosures are available since the seller never lived there. This may not be the ideal buying situation for the inexperienced home buyer. 

That is a value viewing properties with an agent brings. During your visit, a real estate professional can point out any “red flags” at the home, provide background information about the neighborhood, and help you assess its true market value. It is very possible that a local agent will have knowledge of the house from previous activity.  Safety is also a concern. Some companies allow buyers to access their homes via a smartphone app. While it may seem convenient, it provides an easy way for squatters and others to enter the home illegally. Your local agent will have in place resources and responses when unexpected occupation is observed. 

Luckily, since iBuyers (and traditional sellers) pay a buyer agent’s compensation, you can benefit from the guidance and expertise of a real estate professional … at no cost to you!

HOW CAN I PROTECT MYSELF IF I CHOOSE TO WORK WITH AN iBUYER?

While it may seem like the “quick, easy and convenient” way to go when considering selling your home, working with an iBuyer can present some unique challenges. For example, you must understand, they work for PROFIT and are notorious for presenting a strong initial purchase offer (bait) and then erode it with a long list of costly updates and repairs once they complete their inspection.  And unlike a traditional buyer who is incentivized to make a deal work, iBuyers can easily walk away if you don’t meet their demands for PROFIT.

You wouldn’t go to court without a lawyer and you shouldn’t enter into a real estate transaction without an advocate to represent you. Having an experienced, knowledgeable, agile agent on your side can be especially important when negotiating with an iBuyer. Remember, like investors, iBuyers employ sophisticated representatives and a team of lawyers who are focused on maximizing their PROFITS, not yours. You need someone in your corner who has the skills and knowledge to ensure you get a fair deal and who understands the terms of their contracts, so you don’t encounter any unpleasant surprises along the way. And, it is important to acknowledge the value having someone in your corner brings when it comes to understanding the strategies involved and keeping the emotions in check.

Overall, we think the emergence of new technology that helps to streamline the real estate process is exciting and to be frank, overdue. There is—inevitably—a cost to the convenience. 

For years I have noticed an evolution in the expectation of buyers and sellers today. They are empowered with more information, fully comfortable with on-line technology, willing to do a lot of the heavy lifting and wish to be recognized and liberated to do it their way.

That is what drives my real estate business model to offer the most agile and fully featured menu of options allowing home seller and buyers to select what they need, not forced to accept what tradition dictates.