What’s the latest technology trend to sweep the real estate industry? iBuyers.
iBuyers, or “instant” buyers, are online real estate investors who use digital tools to make instant cash offers on homes and resell them online. They handle the repairs, staging and home showings, allowing sellers to avoid the time and energy often associated with the traditional selling process. But that convenience often comes at a cost.
If you want to learn more about iBuyers in general, click here. If you’re trying to decide between selling your home to an iBuyer or listing it on the open market, here are some things to consider.
- iBuyers don’t buy every home. iBuyers can be mistaken for house flippers, but iBuyers are more risk-averse and don’t exist in every market. Since 2014, iBuyers have expanded into 22 markets across the country and show no signs of slowing. Unlike flippers, iBuyers purchase moderately priced homes (the largest company buys homes between $100K and $500K) and avoid properties that could take too long or cost too much to improve. For example: short sales and foreclosures; homes built before 1960 or located in flood zones; and properties that require major renovations. It’s always best to check an iBuyer’s eligibility criteria upfront.
- With an iBuyer, you get less than Fair Market Value (FMV) for your home. iBuyers need to purchase properties slightly below FMV to make a profit. Real estate agents list properties at or above FMV, and they have the financial incentive to get sellers the highest price possible. If your goal is to get as much money for your home as you can, it may be best to work with a real estate agent.
- With an iBuyer, sellers are required to pay for repair costs they may not agree with. An iBuyer’s instant offer is a base price that gets lower after the home inspection. Sellers know they must pay for repairs their iBuyer will make to their property, but many are surprised by the cost of improvements they would not have made on their own. As those costs get higher, the iBuyer’s offer price gets lower, sometimes requiring frustrated sellers to pay thousands of dollars in seemingly petty repairs, out-of-pocket costs or both. Sellers who want more control over what they spend on repairs may want to think twice before selling to an iBuyer.
- Not all iBuyers offer the same services. All iBuyers offer an expedited sale and give sellers more control over the moving process, but not all companies take the same approach. Some iBuyers advance cash to sellers who need quick access to the equity they’ve earned in their home to move. Others integrate mortgage financing into the purchase process and offer more flexible loan terms than banks, helping borrowers enjoy a simpler end-to-end process that gets them into homes sooner.
- You pay NOT to play on the open market. The average real estate agent commission is about 6 percent of a home’s sale price, while iBuyer service fees vary by company and market. According to an analysis of transaction data for the largest iBuyer, the average service fee falls somewhere between eight and nine percent, but it can get up to 12 percent in riskier markets. iBuyer service fees generally earn investors a small profit of 5.5 percent, but it may still cost sellers more than working with a real estate agent.
It’s worth noting that many iBuyers rely on local agents to support their online listing service. They compensate agents for seller referrals and pay full commissions to buyer agents. Working directly with an agent instead of going through an iBuyer can save sellers money, but it costs them more time. We’ll explore how much in the cost breakdown and time table below.
iBuyer vs. Real Estate Agent
The example below is for illustrative purposes only. It allows sellers to compare how much they could make and spend working with an iBuyer versus a real estate agent to sell a home valued at $300K.
Remember, iBuyers purchase homes below FMV and realtors list homes at or above FMV, so that is where the comparison begins. The cost of repairs and holding property (mortgage, taxes, insurance, homeowners association fees and utilities) varies widely from one property to the next, and are the responsibility of whoever owns the property, so those variables were not assigned a specific value in the example below. All other values are calculated using industry averages that express a percentage of the home’s sale price.
|Real Estate Agent
|Home Sale Price
|FMV is $300K and the iBuyer offers to purchase at a 10% discount.
|The loan payoff amount is the same, regardless of who buys.
|Varies by property
|iBuyer assumes after a quick closing
|Seller carries until home is sold
|Varies by property
|Based on an average iBuyer service fee of 9% and a real estate agent commission of 6%.
|Based on average seller closing costs, which range between 1% and 3%.
|Cost difference: $35.4K
In this scenario, the seller walks away with $35.4K less – that’s 13.1 percent of the sale price – by selling their home to an iBuyer. According to a new study by Collaterial Analytics, iBuyers can cost sellers up to 15 percent of their home’s sale price.
|Real Estate Agent
|Days on Market (DOM)
|Av. 58 days*
|Days to Close
|Less than 14 days****
|Av. 47 days**
|Number of home showings
|4 / month***
|Flexible closing date
|Depends on buyer
|Flexible moving date
|Depends on buyer
*National average based on April 2019 data from Realtor.com.
**National average based on February 2019 data from mortgage software company Ellie Mae.
***Average number of home showings for Portland, OR, based on 2017-2018 RMLS data.
**** No industry average available; based on various iBuyer claims.
While it is possible to sell quickly using a real estate agent, the traditional closing process usually takes well over a month. Selling to an iBuyer involves a faster transaction with minimal effort from sellers. It can also benefit sellers with busy schedules and time constraints, such as those who need to relocate for work or get cash fast.
So, that brings us back to the million-dollar question: Is selling your home to an iBuyer worth the cost? It depends on who you ask. Everyone wants to sell their property for as much as possible, but in real estate and real life, time is money. The answer comes down to each seller’s situation and what they value more: cash or convenience.
These are the opinions of Eric Lapin and not necessarily reflective of Title First.
Eric has 25 years of experience in the mortgage industry, which includes origination through servicing, technology, innovation, data and analytics. He is a member of the MISMO Community of Practice for Blockchain Education Committee and a frequent speaker at industry events.