A few years ago, if you said you were selling your home to an iBuyer you probably would have received nothing but blank stares or maybe an “I what?” in response. You may still get that reaction, or you may be wondering what an iBuyer is yourself. It’s an important trend in the real estate world, and whether you think it’s positive or negative, you need to understand this fast-growing phenomenon of the rise of the iBuyer.
First, the “i” in iBuyer doesn’t stand for internet, although technology plays a big part in the iBuyer process. It stands for instant, as in, the sale will move very quickly. An iBuyer is a real estate investor who makes extensive use of technology to keep transaction costs low. This technology generally includes an automated valuation model (AVM) instead of an appraiser, and online programs to replace the services of a real estate professional. (However, there are real estate companies entering the iBuyer world in a hybrid model.) The investor uses technology to determine a home’s value and make an instant cash offer to the seller. If the seller accepts the offer, the investor sends an inspector who notes any problems with the home, and the seller then has the option to make repairs or accept a lower price. From initial offer to final sale, the process may take only a few days.
The investors in the iBuyer world are not individuals buying a home to fix and flip or move into as their own residence. They are big companies backed by major funding from venture capitalists. Some names you may have heard include Offerpad, Zillow Offers, Opendoor, and Redfin Now. Their goal is to make a profit by buying for what they consider a fair price, spending as little as possible on the transaction, making necessary repairs, and selling for a higher price. To make the model work, they need to keep buying and selling as quickly as possible, with no negotiation. Their risk comes if they have to hold a property for a longer time, or experience a downturn in the market that lowers home values.
It May Be Right For You.
If you want a fast sale, the iBuyer concept may work well for you. Situations where it could be beneficial include selling an inherited home (especially if you live far away), needing to sell your home to buy another, and wanting a cash deal with a definite closing date. Alternatively, you may want to avoid the whole hassle of listing your home, which can involve staging, open houses, and showings on short notice. Finally, the uncertainties of negotiations and the “under contract” phase may be too unsettling for you.
Is A Fast Sale Worth It?
There’s a price to pay for speed. There’s no negotiation. It’s a take-it-or-leave-it offer, lowered by the amount the investor feels they will have to spend on repairs, unless you make the repairs yourself. (Limited negotiations may be possible on the cost of repairs.) Then there are transaction fees. One study estimated that iBuyers charge fees of 7% to 10%, compared to the 5% to 9% total fees in a traditional transaction. (Remember that the initial offer price will probably be lower than a price negotiated with the assistance of a Realtor®.) However, the study goes on to conclude that the total costs to a seller are closer to 13% – 15% when you factor in the iBuyer’s need to cover business expenses that include liquidity risks and carrying costs.
The iBuyer model is expanding rapidly, causing concern among traditional real estate companies. What’s not clear yet is whether a majority of sellers will embrace this new way of selling. Will it appeal to Millennials and subsequent generations who are accustomed to living their lives on their phones? Or will the need for the human touch in transactions prevail? Perhaps the best result of the iBuyer revolution is that you can choose to sell your home in the way that makes the most sense for your situation.