There has been a lot of hype around a newer real estate technology trend referred to as “iBuying.” Companies like Opendoor, Knock, OfferPad and even Redfin are either engaged in the space or are testing services, but what does this mean for you as a homeowner thinking about selling?
First, what exactly is an iBuyer? An iBuyer is a company that will make you an offer on your home within minutes (or days), sight unseen, based on a proprietary valuation model. (In most cases any renovations & updates are not taken into account.) If you choose to accept the price, you can close in as little as a couple of days. The iBuyers tout the selling experience as quick and easy, but when would you consider selling your home this way? A few examples are if you need to move to relocate for a job, you are a distressed seller or you have found your next home and want to act quickly.
This sounds awesome, but what’s the catch? When selling to an iBuyer, the other side of the transaction is a company or an investor. Investors like to make money, and the quick and easy experience for sellers doesn’t come cheap. The iBuyer will typically charge a full commission, plus build in a discount to fair value to compensate for the risk they take by providing you with “instant” liquidity. Those who work in finance would call that a “liquidity premium” because the buyer has to use their own money to buy an asset. The iBuyer runs the risk of being unable to resell the property quickly enough, having costs add up, or being unable to sell the property for a profitable price. While there isn’t a lot of data available yet, some estimate that these costs can add up to more than 10% of the fair market value of a home compared to 5-6% in commissions with a traditional agent.
So what does this really mean for the homeowner’s bottom line? Most homeowners purchase their home with a mortgage. If you purchased your home for $400,000 with 20% down, you showed up to closing with $80,000 of your own money, which is also your equity. If the value of your home remains the same and an iBuyer offers you $380,000 for your home — a 5% discount to fair value — you will lose $20,000 on the value of your home, plus pay a 5% commission (an additional $19,000). This is a higher transaction cost compared to selling on the open market for $400,000. More importantly, compare that combined $39,000 to your original down payment of $80,000 — you will be giving up close to 50% of the equity you put into your home partly for the convenience of a quicker sale. Does the added cost make sense for the consumer? Several people have put it to the test just to see how it would work. In 9 out of 10 cases, selling with a Realtor netted them more money. In every situation, the homes were undervalued. While iBuyers provide the convenience of selling quickly, matching expert investors against consumers isn’t always the best thing for the consumer. It is a one-sided transaction with no human element involved.
Zillow recently explained that 90% of sellers who engaged its Instant Offers platform decided against the iBuyer offer and chose a traditional agent instead. If 9 out of 10 consumers pass, the pricing can’t be that compelling. Choice is good, but a home is generally your largest asset, so you may want to consult an expert before “iSelling.”