Selling Your Home….Online?
The internet has changed the way that you sell a home, whether you realize it or not.
More and more buyers are finding the homes they buy online every year. Listing your house with a tech savvy is a smart investment for this reason.
However, sellers are beginning to receive offers and sell their homes to something called an “iBuyer”.
Essentially, instead of listing the home on the open market, they accept an offer from a corporation to buy the home, which will then turn around and sell it on the open market.
Why use this middleman approach instead of going to the market? For many, it is all about convenience.
But the real question is, is it worth it to sell to an iBuyer? At what price is the convenience offered? This article gives more information on the process, pros and cons of selling to an iBuyer, and more.
2023 Update: The fall of Zillow Offers in 20201 (followed in 2022 by Redfin closing RedfinNow).
What is an iBuyer?
The term “iBuyer” stands for Instant Buyer. iBuyers are usually corporations that either exclusively buy homes or are involved in other processes of real estate.
For example, the more progressive real estate brokerages have divisions of their business devoted to iBuying. Keller Williams, eXp Realty, and Redfin all have home buying programs.
The “instant” aspect of the process refers to how quickly you can receive an offer on your home. iBuyers rely heavily on automated home valuation algorithms.
They then make a cash offer for your property, sight unseen — aside from any photos that you send.
You can get an offer within 24 hours from most of the major iBuying companies. The closing date is flexible but can go as quickly as 7 days.
The goal for them is to buy the property and then immediately sell it on the open market.
What Homes Do iBuyers Buy?
Buying homes quickly for all cash is not a new concept. Investors have been making all cash offers probably as long as cash has been around.
These “home flippers” usually target houses that need significant repairs, deferred maintenance, and an owner that absolutely must sell quickly.
So what about an iBuyer? iBuyers are interested in more well-kept homes.
The homes that they are looking to purchase are similar to homes that are on the market.
Your home does not need to be in perfect condition…but if it is in complete disrepair and you need to sell quickly, a traditional real estate investor would be a better match.
The iSelling Process
Ok, iSelling is not really a real estate buzzword. But if you are considering selling to an iBuyer, why not?
Keep in mind that every company is different, so this process varies depending on who your iBuyer is.
1. Get Connected to an iBuyer
The first step is to get connected with an iBuyer to give you an offer.
Not every company is buying homes in every area. As time goes on, companies will expand (and some may die off) to more markets.
If you want to see if there is an iBuyer in your area, send me a message.
Another way to get connected to an iBuyer is through a real estate professional, as some real estate companies have their own programs.
2. Give Them Info on Your Property
The iBuyer will want as much information about your property as possible. Photos are strongly recommended, and in some cases are required.
It is a good idea to give them as much info as they ask for and be as specific as possible.
They will eventually see your property, so painting a realistic picture of the condition and update level in your house will save time and get you a realistic offer.
3. Receive Your Offer
iBuyers will email you a cash offer, in most cases very quickly.
Zillow actually does their property assessment before making their offer, but most other companies will get you a number within 24-48 hours.
Most companies will adjust this offer based on any repairs they deem necessary to re-sell the property.
Will you be able to negotiate your offer with an iBuyer? Probably not. They know the exact numbers they need to offer to make their model work.
Therefore, their number is usually firm.
However, if they have made a mistake in their assessment, you can challenge that. Perhaps there is a comparable sale that they missed, or they did not count a finished basement.
If you want them to reconsider their evaluation because of such mistakes, that is your chance to get a higher number.
Aside from that, you likely will not get wiggle room.
5. Property Assessment
If you decide you want to accept your offer, you will digitally sign a contract with your iBuyer.
Soon after that, they will physically send someone out to your home to do an inspection.
Your iBuyer will send a representative, a home inspector, contractor, or some combo of all of these.
They will need access to your whole home, just like any home inspection.
6. Offer Adjustment
After that, many companies give you the option to either do the repairs yourself, or give a credit by reducing the sales price to account for repairs.
As in a normal real estate transaction, it often can be easiest for you as the seller to just give a credit.
The closing date is set by you, and can be done very quickly (as little as 7-10 days) or can be extended farther out.
There is a maximum — usually about 2 months — although some companies will then allow you to rent back your home if you should require it.
How do iBuyers Make Money?
These companies are not traditional home flippers. The “cash for homes” people are buying different homes at a steep discount.
An iBuyer can possibly offer a legitimate alternative to the traditional method of selling a home on the market.
If they are buying and selling on such a small margin, how do they make money?
A legitimate question, and I have dug deeper on these companies to answer that.
The “service fee” is the most reliable source of income for an iBuyer. This fee comes in on average higher than real estate commissions by going to open market.
The fee varies greatly with what market you are in, your home, and what the company charges; the average you will find is 7-8% but it could go as high as 14%.
The fees are also likely to vary depending on the market, and the competition of iBuying companies.
Buying & Reselling
Although iBuyers break from the old school “home flip” model, they are still buying your home and reselling it quickly after, often with repairs or upgrades involved.
Although the margins are sometimes razor thin, they do typically make money on the price difference between buying and selling.
This can be accounted for in 3 ways depending on the market, how much the contractors are paid, and which company you use.
First, any price appreciation that occurs between the time that they buy and the time they sell. Although it is a short timeframe (usually a few months), in a healthy market they will get a bump here.
Second, they could get a return on making repairs/upgrades to the property and sell at a higher price difference than the upgrades and staging costs.
Finally, they could make money by buying your house at a discount to the open market.
For example, if your home is worth $600,000 on the open market, and they pay $590,000 for it, they will make that $10,000 back when reselling.
iBuyers are constantly evolving and adding services; and some are large real estate brokerages.
Another way they make money would be if you use their partnered services. For example, they buy your home and you use their mortgage and title company to buy another.
This one changes all the time and varies by the company.
Cost of iBuyer Sale vs. Open Market
The reason you came to this article could be to figure out if you are better off selling to an iBuyer or just putting your home on the open market.
You will get different answers depending on who you ask. I am a real estate consultant and help sellers list and sell their homes in Northern VA.
That said, I also work with Keller Williams, and will at some point be able to offer iBuyer offers to sellers in Northern VA, once they expand their market.
Let’s take a look at some potential numbers — these are rough figures. Real estate is hyper-local and there are a lot of factors that could be different for your specific property.
Commissions vs. iBuyer Service Charges
Selling real estate on the open market involves paying agent commissions. These commissions vary with each agent and there is no standard fee.
If you are in Northern VA, I would say a good average for calculating this is about 5%, but will depend on many factors. Other markets may differ.
A portion of this is split usually offered to the agent who sells the home, and the rest kept by the listing brokerage.
iBuyers charge a service fee, and this fee also can vary. But most iBuyers seem to put this fee at around 7.5% average.
iBuyer Offer vs. Fair Market Value
This topic is hotly debated. Studies have found that iBuyers are likely not buying at 100% of the open market value.
The discount that you will offer selling to an iBuyer is unclear, and hard to really know for sure unless you get an iBuyer offer and then sell on the open market.
This article written by Mike DelPrete, a real estate technology expert, finds the discount to average 1.3%. This used an AVM (automated valuation modeling), essentially an algorithm.
Some research has found the discount that iBuyers purchase homes to be even more. Collateral Analytics found the discount to be 3-5%, in some cases more.
Every house is going to be different, but to say that an iBuyer is going to give you the same price that you will get from a home buyer that will move into your home on the open market looks, at best, optimistic.
The failing of 2 large iBuying programs (Zillow Offers and Redfin Now) has called into question whether iBuying is even a good business decision.
Obviously, the more “pure” iBuying companies who are focused solely or mostly on iBuying may adjust their offer prices as other more risky operations fail.
Every iBuyer will come out to your home to do an inspection. Most of the time they will adjust your offer based on repairs that they identify.
This is not necessarily different from a home buyer on the open market. There has been speculation in the past that iBuyers may use an inspection to make the deal better for them.
But then again, a buyer on the open market could try to do the same thing.
One of the big advantages that iBuyers flaunt is the fact that you will avoid additional “carrying costs”. These include HOA fees, taxes, mortgage interest, and other costs associated with owning your home.
In your case, these additional costs would be incurred if you are in your home longer than if you would be selling on the open market.
For instance, if you were sell to an iBuyer and close in 14 days, where it would have taken you 44 days on the open market, you save 30 days of these costs.
Should You Sell to an iBuyer?
The answer to this question will require some research and planning on your part.
A real estate professional can help answer these questions based on the market conditions, your particular home, and by giving you estimates of both.
Here are some examples.
Example Net Sheet 1
|Price (1.3% difference)*||$493,500||$500,000|
|(1) Home Prep||–||1% ($5,000)|
|(2) Fees||7.5% ($37,012)||5% ($25,000)|
|(3) Seller Concessions||–||.5% ($2,500)|
|(4) Repairs||1.5% ($7,402)||1.5% ($7,402)|
|(5) Carrying Costs||–||.5% ($2,500)|
|(6) Closing Costs||1%||1%|
In this example, selling on the open market would net you $13,447 more than selling to an iBuyer. These are, in my opinion, good estimates on the expenses associated with each.
Here are some notes and assumptions on how I arrived at these numbers.
Price: here, I am assuming that iBuyers buy at a discount to fair market value. I used the least difference found in the 2 articles referred to above.
(1). You will likely have to spend some money to prepare the home for sale if you go the route of selling on the open market.
(2). This reflects the service fee vs. real estate commissions.
(3). This column assumes that you will be providing the buyer some closing cost assistance. This is not always the case, especially in a seller’s market.
(4). Let’s just assume that the iBuyer and the buyer you found on the open market ask for the same concessions during the home inspection.
(5). This one is tricky. It accounts for the costs you incur by having the home longer than if you sold to an iBuyer.
So if the iBuyer closes in 15 days, and you are on the market for 15 days then under contract another 30, the difference would be 30 days.
I estimated this based on what I would anticipate the extra cost would be of hanging on to the home longer (taxes, utilities, interest, insurance, maintenance, HOA fees, etc.)
(6). This is a rough estimate, but your closing costs should stay the same no matter who you sell to. You can find more info on those here if you are in Virginia.
Net: As you can see, you will — in this example — net more on the open market. It is ultimately up to you to decide what is best.
I actually think that in a very hot seller’s market, it makes even more sense to go to the open market. The concession amount should be lower in that case, and the repairs the buyer request could also decrease.
Pros of Selling to an iBuyer
There are some appealing things about using an iBuyer.
• Little preparation. You will not really have to do much preparing your home, as it will not show. Obviously, you will not be able to avoid moving your things eventually.
• Offer is very likely to go through. Although in extreme circumstances I have heard of an iBuyer walking away from a contract, this is rare. Their contracts are all cash and pretty close to a guaranteed close.
• Flexible closing date. iBuyers will work with your desired schedule. They even are usually able to change the closing date. This is within a certain timeframe, usually a couple of months.
• For some homes, it is a much better alternative to a traditional cash investor. The traditional “cash for your home” investors offer significantly less than iBuyers, if your home is in good condition.
Cons to Selling to an iBuyer
Here are factors to consider when selling to an iBuyer.
• You could be selling at a discount. This is where it pays off to get an agent. They can show you the amount of money you might be trading in for convenience.
Not to mention, many agents can connect you to an iBuyer or have a similar program.
• The offer adjustment phase. Will an iBuyer ask for more in repairs than the average homebuyer? It is hard to really know without getting into a contract with them and seeing what they request after their inspection.
• Your home may not qualify. iBuyers usually buy homes up to a certain price point in certin markets, and not above. And in good condition. If you have a more expensive home or your home needs extensive work, they are likely to pass.
The Fall of The iBuying Giants
Zillow, one of the major real estate websites in the world, exited iBuying in late 2021.
It came shortly after many experts in the industry speculated that Zillow was losing money on the homes that it was reselling.
After that, there was some speculation about whether iBuying was sustainable.
Most likely, iBuyers are here to stay. However, Zillow’s failure likely is a warning to iBuyers to be conservative with their offer prices.
What does that mean for you? In the long run, it is very unlikely that iBuyers will offer you a “too good to be true” offer for your home.
This could bolster the case that selling with an agent on the open market is the best way to net the most money…however each house and situation is different.
Shortly after that in 2022, a market downturn caused Redfin to close it’s iBuying division, RedfinNow.
Will iBuying Stay Around?
Most likely, in my opinion, iBuying will stay around. But the failure of these 2 large companies shows a simple concept: the margins have to be correct.
That likely means that iBuyers could be offering even lower prices to homeowners in the coming years.
If that that turns out to be the case, it is even more important to compare an iBuyer’s offer to selling on the open market the traditional way.
Every seller has different goals. Are you wondering what your home is worth? Wondering whether an iBuyer or going for sale on the open market is better?
For you, the answer may indeed be to sell to an iBuyer. In some cases, speed and convenience will be worth it.
But talking with a trusted real estate consultant first will help you know what you may or may not be leaving on the table.
Share this article: