Considering an iBuyer? Prepare to Pay Up
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:
- When would it make sense to use an iBuyer?
- Is using an iBuyer cheaper than using an agent?
- What is the future of iBuyers?
What You Need to Know About iBuyers
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.
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).
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.
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!