Buying & Selling Houses

Considering an iBuyer? Prepare to Pay Up

Expertise: Landlording & Rental Properties, Real Estate News & Commentary, Real Estate Investing Basics
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This article is largely based off a video by Frank and Brian of the National Real Estate Group. I am directly pulling from this video because I think they do a nice job of summing up the iBuyer landscape.

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What is an iBuyer?

First things first, an iBuyer is a real estate entity with technology behind it. Right now, the big iBuyers are Zillow, Offerpad, and Opendoor. They are using scale to purchase homes, and then selling them at a markup. Much like other disruptors (Airbnb, Lyft, ClassPass), the assumption is that iBuyers may soon blow up real estate norms and make the experience cheaper and better for the end users: buyers and sellers. That was my assumption/concern (as an agent), at least.

So, let’s look at the three basics: 

  1. When would it make sense to use an iBuyer?
  2. Is using an iBuyer cheaper than using an agent? 
  3. What is the future of iBuyers?

man on the coast searching house on a real estate application on his smartphone. All screen graphics are made up.

What You Need to Know About iBuyers

  1. When would it make sense to use an iBuyer?

At this point, iBuyers are supporting and targeting sellers more than they are targeting buyers. Most iBuyers are interested in single family homes that are relatively new builds. This would mean they were built between now and 1960-ish, which may not seem that new. But in areas close to downtown Denver (and other city centers), this eliminates a lot of properties because they are condos or older homes.

We still don’t think it’s a good deal for sellers (more on that below), but there is one occasion where it might make sense. It could make sense to use an iBuyer if you are more concerned with convenience than money. 

We might see this if you sell your house but still haven’t picked somewhere to move. Rather than move out, temporarily get an apartment, and then move again when time allows, a lot of these iBuyers will allow you to stay in your place for an additional two months while you find your new place. 

Likewise, if lifestyle demands a quick change (e.g., job out of state, ailing health), an iBuyer could make sense because of the speed of the process.

Related: News Flash: Zillow Is NOT a Game-Changer in Real Estate

  1. Is using an iBuyer cheaper than using an agent?

Absolutely not. Unequivocally, iBuyers cost sellers more to use and sell for less than a traditional agent. The standard right now is that sellers pay both commissions (the buyer’s agent’s commission and the seller’s agent’s commission). The cost of those commissions is usually between 5.6 and 6 percent (total) of the cost of the house. 

So, for a $431,000 house, the commission price to the sellers would be $24,136. Yowza. I know. It hurts, but bear with me.

iBuyers don’t call them “commissions,” but as of July 2019, they are charging a rate between 7 and 7.5 percent and calling it an experience charge or a seller credit. The use of the word “credit” is confusing because it makes it sound like money back in your pocket. But in reality, it is money out.

So, for a $431K house using an iBuyer, you would be paying between $30K and $32K in commissions. (More hurt.) On top of that, they have been known to add in additional costs between $5K to $10K. 

Therefore, when you compare the cost of a traditional agent to that of an iBuyer, you pay more with the iBuyer. For a $431K sale, you would pay about $24K in commission costs. For an iBuyer you would pay baseline $30K in costs plus (a possible) additional cost of $5K to $10K, making your total costs to the iBuyer $40K. Clearly, using an iBuyer is more expensive.

There’s another reason to not use an iBuyer. iBuyers make their money on the spread between what they buy your house for and subsequently turn around and sell it for. So, they want you to sell your place as cheaply as possible. To the contrary, a traditional agent’s commission is tied directly to how much you sell your place for, so they are motivated to get you top dollar (because then they get top dollar).

Related: 5 Factors to Investigate BEFORE You Buy That Property You Found on Zillow

  1. What is the future of iBuyers?

As an agent, I’ll admit I’m afraid of iBuyers. It feels like in the next five to 10 years, they could clear the field of agents. They are currently making moves to do as such, but I don’t think they are there yet. 

The value proposition they offer is not strong enough or thorough enough (yet) to do that, but it’s reasonable to assume it is coming. For now, I’ll probably just invest in the stock while it’s still cheap, and keep an eye on what’s to come. 

Source:

https://www.thedenverchannel.com/lifestyle/real-estate/may-2019-ended-with-more-homes-for-sale-in-metro-denver-than-any-other-month-in-the-past-five-years

What is appealing or unappealing about iBuyers to you? Do you think real estate agents should fear iBuyers? Why or why not?

Weigh in with a comment below!

Erin Spradlin co-owns James Carlson Real Estate. She loves working with first-time home buyers or sellers because it is fun to help people realize their dreams and loves working with investors because she's a fellow spreadsheet nerd. In addition to working with clients on buying and selling real estate, Erin Spradlin also runs Denver Women Invest, a monthly female investing group (email her if you want in!) and educational classes on Airbnb investing and buying or selling your first home. In keeping with many successful real estate investors, James Carlson Real Estate believes strongly in giving back to the community. For that reason, Erin and James donate a portion of their commission to a charity of their client's choosing on every single transaction.

    John Bierly Rental Property Investor from Bainbridge Island, WA
    Replied 4 months ago
    Zillow currently earns most of its revenue from ads purchased by realtors, which obviously is a problem if they start to put them out of business. They have not been particularly profitable and the stock has been volatile, down 30% from its high in a market where most tech stocks have performed well over the past year. The iBuyer approach is an attempt (something, anything!) to create a profitable business model for Zillow, see this Forbes article for a skeptical analysis: https://www.forbes.com/sites/samanthasharf/2019/07/01/rich-barton-zillow/#1c85cdb83d92 Unfortunately techies think that almost any business can be "disrupted" by some sort of tech overhaul; the reality is that it works well for relatively standardized transactions (taxi rides replaced by Uber, bookstores by Amazon, etc.) but not so well for real estate where each transaction and property can differ enormously from even its next door neighbor.
    Deryk Harper Residential Real Estate Broker from Alpharetta, Georgia
    Replied 4 months ago
    I would note that currently in our GA market the iBuyer offer is sometimes, but not often, better than others. While Wall Street money is trying to establish a foothold throwing money at these iBuyer models this has caused them to "overpay" in rare cases for a home. Even after their fees, inspections, mark downs for repairs etc some Sellers can come up with a close to value sale that they can live with for the convenience. I don't think this will last long though as theses businesses need to make a profit eventually. We counsel our Sellers on iBuyer platforms and what to expect generally. Then they have the information they need to make a decision based on their individual needs. Rarely does convenience factor overcome an iBuyer offer 20% below market but it does not hurt for a Seller to at least check it out. This may change as we move into the next Buyer market though.
    Ronny Lee
    Replied 4 months ago
    The other replies are spot on. Ibuyers will always be significantly less..it's complicated and local to sell homes!
    Kyle Strouse Investor from Dallas, Texas
    Replied 3 months ago
    Sometimes using an iBuyer is definitely cheaper. Door.com offers to sell on your behalf for a flat $5,000. In the case of your $430k home-sale example that would offer a significant savings vs. a traditional agent. This would seem to contradict your statement that iBuyers “unequivocally cost sellers more.”
    N.A N.A Investor from Kent, Washington
    Replied 3 months ago
    To be clear, door.com is not an iBuyer. They are a flat-fee broker. They and others like them compete with traditional brokers by offering a cheap, flat-fee commission to sell the seller’s property. IBuyers buy the seller’s property outright.
    Michael P. Lindekugel Real Estate Broker from Seattle, WA
    Replied 3 months ago
    Discount brokerages and flat fee brokerages have been around a long time. during the Great Recession nearly all of them crashed and burned. The total average commission has decreased since the early 1900s. to say there is no competition and free trade and commissions are not negotiable is not true. Discount brokerages still have a very small share of the market. I think that it comes down to cost. It cost more than most people think to run a profitable real estate practice long term. Then there is the gorilla in the room redfin. Redfin has been in business for more than 14 years. They have raised the cost to the seller three times and cut it once. They have decreased the buyer rebate three times and increased it once. Redfin saw a spike in revenue for Q2 and still reported a net loss. They have had a few profitable quarters, but have never come close to a yearly profit. Essentially, the debt investors and equity investors continue to subsidize the real estate sales business. now, those investors are subsidizing the redfin ibuyer business which has not been profitable. The ibuyer business model is based on volume of homogenous product and to a small extent time value of money. The model only works with housing developments with cookie cutter houses with lot of quantitative data and not much qualitative data impacting the AVM algorithms. For a discount from the FMV there is a quick sale. There is nothing wrong with that. Sometimes, a seller must sell now. The buyer is taking on risk for which they buy at a discount to compensate for risk. For ibuyers that discount is used to pay closing costs on both ends, holding costs, fix up costs, overhead, etc. I haven’t seen yet that the ibuyer discount model is profitable.
    Andrew Taylor Contractor from Magnolia, TX
    Replied 3 months ago
    Your cost comparison isn't exactly legit. Yes, if taken alone, a 6% realtor commission is less than a 7.5% experience fee. But that's not the whole picture, is it? What you should be asking is, is the extra 1.5% an acceptable cost for the convenience of not having to repair, clean up, keep the house showing-ready, etc. pain points of the traditional sales model? The allure becomes a whole lot more apparent from that perspective. Next, you mention a mysterious "additional $5-10k." If you're going to use these figures, then either do the homework to find out what they're for, or be honest and tell folks what you found out when you asked: They're estimated repair costs, and will likely be about the same whether selling to an iBuyer or through an agent. (I'm an inspector for an iBuyer, so I know what I'm talking about.) We inspect the home looking for the same things your inspector does when you represent a buyer: things that are unclean, unsafe, or non-functional. We ask sellers to either repair these items or give us a credit to make the repairs. Since our pricing is substantially better than retail, we generally can do the repairs for less money than the seller can on their own. I think you're looking at the wrong metric when you compare numbers. What you ought to be looking at, with respect to iBuyers, is the convenience factor. People don't want to clean, repair, list, and show their houses for a month or more. Most of them can't even be bothered to clean up their house before I arrive to inspect it. They want to punch a few buttons, pack their stuff, collect their check and get on with life. We make that easy.
    Phil Hayes
    Replied 3 months ago
    Any time that one takes the human element away from a transaction, it deadens it. Andrew may be correct, and sadly, easy click platforms that "i-buy", will appeal to lazy sellers, or those looking for a quick cash out. Frankly, the commssion that I receive from my seller, is well earned, simply with respect to the negotiation and the pouring over the stack of contractual paperwork. Andrew has added that the additional costs mentioned might cover the same things that any other buyer might request with respect to say, clean outs or repairs. In the end, you may get a lower price, AND have to pay for whatever "i-bot" wants fixed, without a chance to answer that. "Button punching" is best left for elevators.