The Hidden Truths About iBuyers

Learn the facts about working with iBuyers compared to using a licensed professional REALTOR®.

What’s the best way to sell your home for the most money in the shortest time?

List with a licensed professional REALTOR® or sell to an iBuyer?

comparing iBuyers with working with a professional REALTOR®

What exactly is an iBuyer?

When thinking about selling, homeowners have many options. A relatively new option is using an “iBuyer.” What is an iBuyer? According to Jovio, the definition is:

“A company or investor that uses Automated Valuation Models (AVMs) to make instant offers on homes. It allows sellers to close on a property quickly. Once sold, the company then turns around and resells the home for a profit.”

Today, there are many iBuyer companies such as OfferPad, Zillow Offers, Knock, Opendoor, and Perch. Even some more traditional companies offer the same or similar services (ex. Keller Williams, Redfin, Realogy). Ivy Zelman reported in her ‘Z’ Report that some traditional brokers are partnering with some of the larger iBuyers too:

“Keller Williams announced a partnership with Offerpad, aligning the largest franchise-based brokerage brand in the U.S. with the five-year-old iBuyer. The move follows Realogy’s partnership with Home Partners of America last year as an established brokerage player more directly providing an iBuyer alternative. Likewise, in early July, Redfin and Opendoor announced a partnership, starting in Phoenix and Atlanta – aligning interests of the 13-year old, tech-enabled, and value-focused brokerage with the largest and longest-standing iBuyer. Outside of these larger-scale alliances, Zillow’s strategy has been to work with local brokerages as partners on a market-by-market basis.”

According to the Wall Street Journal article, Coronavirus Tests Viability of Home-Flipping iBuyers

“iBuyers buy homes, do minor renovations, and quickly resell the properties, using algorithms to help identify and price homes.”

This has been an attractive option for some sellers who need to sell in a hurry, but the Coronavirus is revealing the risks to this business model. Selling to an iBuyer appears to be quick and easy, with no need for staging, no open houses, and no need for delays while a buyer gets qualified or sells their existing home. It sounds convenient, but what happens when iBuyers suddenly stop buying and then cancel existing contracts?

Read the Fine Print

In a traditional real estate transaction, the seller is represented by the listing agent and the buyer is represented by their buyer agent. All documents used in a real estate transaction are standard forms created by the Delaware Real Estate Commission, including Listing Agreements, Agreements of Sale, and all Addenda. There are no hidden clauses like the ones that seem to allow some iBuyers to cancel executed contracts.

If you list your home for sale with a REALTOR®, a buyer under contract to purchase your home cannot just cancel the contract due to the coronavirus. The buyer can declare a contract null and void if inspections uncover major defects that the seller refuses to correct. A seller can declare a contract null and void if the buyer is unable to obtain financing. There are specific circumstances, all spelled out in the contract language, that could cause a sale to fall through, but any buyer that cancels an executed contract would typically forfeit their deposit.

According to Housing Wire, March 26, 2020 (read full article here)

Zillow is terminating closing contracts, citing coronavirus concerns.
Over the past few weeks, iBuyers across the board have been pressing pause on the service, citing Coronavirus concerns.

In a town hall conference call on Monday, Zillow Co-Founder and CEO Rich Barton said that the company would work with customers the best that they can, given the situation.

“We are working with existing customers to cancel our existing contracts to the greatest extent we can. We’ll do this in a humane way,” Barton said. “This is clearly a material adverse change, so we’ll be taking that position and then evaluating, on a case-by-case basis, what we actually do and using some financial incentives to largely extricate–to hopefully largely extricate ourselves from those transactions.”

Will you save money selling to an iBuyer?

An iBuyer is an investor. The way an investor makes money is by flipping the homes they buy quickly and for a profit. Think about it. Investors cannot be paying the seller market value or there would be no profit in the transaction.

Some are questioning whether iBuyer companies will even survive.

According to Market Watch, March 24, 2020 (read full article here)

As state and local governments across the country put restrictions on business activity to stop the spread of the coronavirus, so-called “iBuyer” companies have stopped purchasing homes.

Whether the iBuying business model — in which companies use technology to make instant offers on homes and then sell those properties for a profit — will survive any recession that results from the COVID-19 outbreak remains an open question.

Selling to an iBuyer vs. Listing Your Home with a REALTOR®

Which is more convenient and what is the “cost of convenience” when selling your home?

Does it make sense to sell your home to an iBuyer?

It depends. Collateral Analytics recently released a study which revealed the advantages and disadvantages of using an iBuyer. According to the study, if the homeowner is looking for the convenience of a quick sale with less uncertainty, using an iBuyer may make sense.

“iBuyers offer quicker closings for sellers who would like to avoid the uncertainty of knowing when and if their home will sell. For motivated sellers who want a predictable sale date and need to move, perhaps a long distance from the current location, there is no question that iBuyers have provided a welcome alternative to traditional brokerage.”

The study, however, also showed there is a cost for that convenience. Collateral Analytics explained:

“Traditional brokers fees generally range from 5% to 7% of the sales price…In addition to this cost, buyers typically pay some closing costs including lender related charges in the range of 1% to 3%.”

In contrast:

“iBuyers charge sellers a ‘convenience fee’ of 6% to 9.5%, some also charge the seller for fees typically paid by buyers at closing adding another 1% or more. Most iBuyers will inspect the home, assess a generous home repair allowance and negotiate a (an additional) credit to handle such repairs…Overall the total direct costs, ignoring repair credits, will run 7% to 10% for an iBuyer, versus the typical 5% to 9% combined seller and buyer costs with a traditional broker. Yet, that is not the end of the story or comparison.”

The study went on to explain how iBuyers need to charge even more because they have additional expenses beyond that of the traditional broker. They include:

  1. Carrying costs involving significant amounts of capital – The iBuyer must pay the expenses of the house between the time they purchase it and the time they sell it to a new buyer.
  2. Safeguarding the home risks – A home with an iBuyer ‘For Sale Sign’ alerts anyone passing that the house is vacant. The study suggests that these homes could become targets for vagrants and criminals.
  3. Adverse selection risks – The study explains that since iBuyers use computer models to determine their offer, they may be unaware of certain challenges in the neighborhood that could adversely impact the value.
  4. Potential home price declines – As the survey states:

“A downturn in home prices, not forecast by the iBuyer market analysts could be devastating as they ramp up their business platforms, particularly if the cost of capital increases. At the same time, downturns are precisely when the most sellers would want this option.”

After taking a thorough look at the iBuyer platform, the study concludes that using an iBuyer is more expensive for the homeowner than the traditional brokerage model, but for some sellers, it may still make sense:

“These preliminary empirical results suggest that sellers are paying not just the difference in fees of 2% to 5% more than with traditional agencies, and a generous repair allowance, but another 3% to 5% or more to compensate the iBuyer for liquidity risks and carrying costs. In all, the typical cost to a seller appears to be in the range of 13% to 15% depending on the iBuyer vendor. For some sellers, needing to move or requiring quick extraction of equity, this is certainly worthwhile, but what percentage of the market will want this service remains to be seen.”

KCM Source: https://bit.ly/2zzGXYS

Active Adults Realty is here to answer your questions and help you get the best offer on your home. Don’t hesitate to give us a call to discuss all of your options.