Randy Gilbert, J.D.
Chief Happiness Officer
Florida’s Title Insurance Company
(954) 500-Title (8485)
What is an iBuyer? A novel and innovative tool in real estate has flipped the script by providing sellers a platform, not to list their home for a certain price, but instead to ask, “How about you make-me-an offer?” iBuyers (short for “Instant Buyer”) are web-based real estate companies which allow sellers to offer their home for sale online directly to the web based iBuyer. The seller simply plugs in their address, answers some questions about the home’s condition, finishes, and upgrades, uploads a walkthrough video taken on the homeowner’s cell phone. Then, using the iBuyer’s computer generated algorithms, the iBuyer generates a near instant no obligation cash offer to purchase the seller’s home.
iBuyer vs. Flippers. Flippers typically find properties needing lots of work, buy low, renovate them, and then resell. Contrast, an iBuyer, which buys properties in relatively new and good shape that are close to market ready, usually make minor repairs, resell, and make their profit from fees they charge to sellers.
What Type of Sellers are iBuyers Looking For? As stated, these companies use computer algorithms so they are looking for uniformity and predictability. So the most attractive properties to an iBuyer will be single family homes, newish, not custom or unique, something predictable, on a standard lot, which are move in ready, and require minimal to no work.
Market Penetration. I buying is relatively new. iBuyers accounted for 0.36% of U.S. homes in 2021’s Q1 and tripled to 1.6% of U.S. homes (i.e. 28,000) bought in 2021’s Q3.
iBuyer Benefits. Many owners consider the traditional home-selling process long and fraught with inconvenience. Selling to an iBuyer appeals to homeowners wanting to: sell quickly and conveniently, to a financially solid iBuyer for cash. No need to worry whether a potential buyer will qualify or not for a mortgage. iBuyers generally do not re-negotiate, cancel, or default. Additionally, sellers can avoid the usual pains of staging or tidying their homes, and having to leave with their dogs and children while caravans of potential buyers trapse through for showings.
iBuyer Cons. Sellers looking for speed and certainty will pay for the fast-pay-day convenience iBuyers offer by netting less money. There are typically higher fees charged than compared to using a listing real estate agent. Especially now in a competitive market sellers will likely receive less than fair market value because properties are selling for asking price. There is no real way to negotiate the offer with the iBuyer. Customers have reported that iBuyers tack on inflated repair costs which dramatically reduce the real offer being made by the iBuyer. Lastly, the algorithms and quick purchases may be incorrectly and artificially manipulating market prices. That claim has been refuted based on iBuyers only occupying a small market share; however others disagree arguing, iBuyers may act as market influencers by buying large pockets or properties and then inflating the price in particular neighborhoods.
iBuyer Service Fees. iBuyers charge different convenience fees but they seem to range from 5-13% of the value of the seller’s home. Additionally, the seller may also have to pay for closing costs (1-3%) and repairs (1-2%). iBuyers also make money by reselling the home for more than they paid and may also sell a potential seller’s contact information as leads.
Top iBuyers in the Key Market. Opendoor and Offerpad, based on real estate transaction volume, are the largest. Opendoor reported buying 15,181 and selling 5,988 homes in 2021’s Q3. Offerpad reported buying 2,753 selling 1,673 homes in the same period. Other iBuyer companies include: RedfinNow (which allows the seller to rent back for up to 60 days after closing), Orchard, Sundae, Keller Offers (in Northern Florida), and WeBuyUglyHouses. Zillow Offers which launched in 2018, was one of the biggest iBuyers; but on November 2nd, 2021, it shut down its iBuyer operation and cut 25% of its workforce, attributing hundreds of millions of dollars in losses to “unpredictability in forecasting home prices,” faulty algorithms, and supply shortages to make repairs.
Using Real Estate Agents with an iBuyer. Real estate agents will be paid commissions for procuring buyers for a property being resold by an iBuyer, but the Commission may be as little as 1%, depending on the iBuyer. Realtors acting as listing agents will also be paid a commission if they procure an iBuyer for their sellers. Some iBuyers allow Realtors to show their homes to potential buyers using a text-to-enter system. Offers to purchase an iBuyer home are submitted through iBuyers’ internal portals. One iBuyer suggests realtors representing sellers request an offer from the iBuyer before listing that Seller’s property on the MLS in order to get a more competitive price, but that sounds counter-intuitive.
Online Estimate vs. Actual Offer. It’s one thing to play online and get an estimate of your home’s value; but quite another thing to receive an iBuyer’s actual purchase offer making those estimates real.
Using iBuyers as a Tool to Set a Pricing Floor. For homeowners selling their property, even if they ultimately decide not to use an iBuyer to buy their homes, and instead opt to use the traditional method of listing with a realtor, getting an iBuyer’s offer is not a bad idea, because it can establish a baseline asking price.
Rip Off-er or Fair Market Value (FMV)?. One report indicated that in 2019 iBuyers paid about 98.5% of FMV and then in 2021 some iBuyers paid over FMV. In large part however, iBuyers often pay less than buyers listing conventionally with a realtor; but not much less. The question is whether iBuyers are worth the financial trade-off for a quick sale and convenience of not opening the house to a parade of strangers.
Realtor vs. iBuyer. If sellers have the time, then realtors are the better option to net the most. Buying and selling real estate is still a very people centric profession. Homeowners and homebuyers need experts whom have localized knowledge in their field, have honed their craft, and understand the relevant real estate market, communities, and metrics. A real estate agent should be able to navigate the mechanics of a real estate transaction, guide parties, mitigates problems, and in the-long-run bring a better result to the consumer.
DISCLAIMER: Topics discussed are general concepts, not intended to constitute legal advice, accuracy, nor completeness, and may not be relied upon as such; consult an attorney or accountant. The author Randy Gilbert, J.D. is neither an attorney nor an accountant. FTIC is a national award winning title insurance company known for its white glove customer service and “No Junk Fee Guarantee.” ®