by Kyle Stoner and Thomas O’Shaughnessy
Tech companies have entered the real estate market. They’re using algorithms to sniff out deals and snap up properties. They’re the new “Instant Buyers” or iBuyers. This is home flipping on an industrial scale, sponsored by Silicon Valley. Companies like Zillow and Opendoor close deals and resell properties at a lightning pace. Not many sellers are using them yet, likely because of the widespread comparisons with payday loans. Instant does not always mean better.
But what does it mean?
The iBuyer concept is only about 5 years old. So far, home sellers are rejecting that concept. Industry analysts estimate 90 percent of all instant offers are rejected by homeowners, particularly because of the high additional costs and fees tacked on to the back end of their offers – they make their money from fees, not from resale.
Many iBuyers focus on a narrow home price band for their offers. For instance, Opendoor’s average instant home price is just over $200,000. Another problem? The U.S. is not one-size-fits-all, which is why most companies are only active in a handful of major cities across the U.S. It sounds obvious, but the housing market of each state requires a different approach. For example, the concept has found success in states like Arizona, where uniform subdivisions create similar housing stock, while it is yet to crack the Northeast where homes are older and varied. iBuyers expect homes to be newer, up to code and without maintenance issues. Furthermore, their equations factor in weather-related maintenance costs to decide which homes are even worth buying.
Cash Buyer vs. iBuyer
A cash buyer is usually a local investor who relies on boots-on-the-ground property evaluations to set prices. Their cash offers are based on techniques like comparative market analysis (CMA), or even a gut feeling, to assess a property’s profit potential.
An iBuyer is backed by venture capital. iBuyers will typically offer more than cash buyers; however, this advantage is often more than cancelled out by the high service fees they charge to cover maintenance and selling costs, and ensure a decent margin on the transaction. Speed can come at a high price. Expect to lose a big chunk of your equity when you sell to an iBuyer.
Pros and Cons of Selling to an iBuyer
- Speed: The entire sale, from initial contact to closing, can happen in a couple weeks.
- Convenience: Most of the process takes place online. Fill out a form and get a preliminary offer. The company will send a representative to your house to do an inspection. If any repairs are necessary, their costs (as determined by the iBuyer, not a local contractor) will be deducted from your offer.
- Simplicity: You don’t have to stage your house.
- No Hidden Costs: Most iBuyers will lay out all of the costs and fees (along with how much they’re willing to pay) up front. There may be some discrepancy between the initial and final offer, pending the on-site inspection.
- Service Fees: iBuyers charge a service fee to ensure their profit margin is met on each transaction. The fee covers their carrying costs and protects their bottom line. Long story short, if the iBuyer thinks your house is going to be difficult to resell at a profit, expect your fee to be higher.
- No Negotiations: When you get an offer from an iBuyer, it’s usually a take-it-or-leave-it deal. Some will allow you to submit additional information; however, most will be unwilling to budge on price.
- Limited Coverage: Because the iBuying phenomenon is relatively new, most companies are only operating in a handful of major metro areas across the U.S. In other words, selling to an iBuyer isn’t actually an option yet for the vast majority of Americans.
- Strict Criteria: iBuyers are relatively strict about the types of properties they buy. Most will only make offers on properties that are relatively new (post 1970), worth less than $500,000-600,000, and sit on less than one acre. If you’re trying to sell a unique, distressed, or older property, an iBuyer may not be a viable option.
If you’re not in a hurry to sell, or your property is not distressed, test the water first with a real estate agent. If time is of the essence or you don’t want to be locked into a binding agent contract, then consider a cash buyer or iBuyer. Broken down further, if your home is newer, does not need repairs and is in one of the few markets where iBuyers operate, then take offers from an iBuyer. If your home needs updates or repairs, or is not a cookie cutter property, call a cash buyer. It’s the best of both worlds: a fast sale for your as-is property.
For more help and answers to all your questions, call Vital Capital Strategies at 302-635- 0205. We’ll get that cash right where you want it—in your pocket.