Updated March 23, 2020: Due to the Covid-19 virus, Zillow has paused all home buying operations citing financial concerns. According to Zillow’s Chief Executive Zillow “determined it was prudent to pause our home buying to preserve our capital” . Additionally, Redfin, OpenDoor, and Offerpad have similarly stopped making purchase offers to home sellers.
The traditional selling process can stink
Let’s face it. Selling a home the traditional way can be very stressful. There’s often months of work preparing your home to sell, making repairs. Any free time you have is spent having multiple garage sales and taking trips to the thrift store to donate excess stuff and de-clutter your house. Then you have find a Realtor® you trust. After finding an agent, you’re subject to strangers walking through your house and snooping through your closets. When you finally do get an offer, there’s more repairs requested by the buyer. The list goes on and on.
There must be easier ways to sell a house right? Fortunately, there is.
What is an iBuyer?
An iBuyer is an Instant Buyer or Internet Buyer. Per Opendoor.com, an iBuyer company, “an iBuyer is a company that uses technology to make an offer on your home instantly”. “Instant” might be a over stated. Your offer typically arrives one to two days after completing an online questionnaire about your home.
iBuyers are typically institutional real estate investors. They are venture capitalists, REITs (Real Estate Investment Trusts) or Wall Street hedge funds that invest in residential real estate. iBuyers are different from fix and flip investors who typically buy fixer uppers, and count on buying at a discount in order to make a profit. iBuyers buy homes that are in good condition already and count on buying and selling large volumes of homes to make a profit.
The homes that iBuyers typically buy are:
- Single family homes, townhouses, duplexes and town homes in limited markets
- Homes priced between $100,000 and $500,000
- Homes in relatively good condition
- Houses built after a certain year ( i.e., 1960)
- Only in typical subdivisions with lot sizes less than 1/2 acre
- Stick built homes. I.e, no mobile homes or manufactured homes
- Are not in foreclosure or short sales
Not all iBuyer programs are the same. Opendoor’s focuses on homes good condition and not in need of major repairs and buys them directly from the seller. Zillow’s Instant Offer program acts as a middleman between Wall Street investors and home sellers. Keller Williams joined up with OfferPad and buys homes in good condition directly from sellers. Redfin’s “Buy it button for Real Estate” allows online buyers to place online offers on Refin listed properties.
The online home questionnaire
Opendoor’s online process asks a series of detailed questions regarding your home. There are questions about unpermitted additions, the condition of the kitchens and bathrooms, as well as landscaping of your backyard just to name a few. The entire online process takes between 5 and 10 minutes to complete. Depending on how you answer various questions, you may be asked additional questions about your home, and any work done.
What is an Instant Offer?
Zillow launched it’s own iBuyer program, called Instant Offer in test markets in 2017. Zillow’s Instant Offer program is a middleman between Wall Street investors like Invitation Homes (aka Blackstone) and home sellers. Invitation Homes buys homes for rental properties. With over 80,000 rental properties in 17 markets, Invitation Homes is one of the largest landlords in the U.S.
Home sellers may be surprised to know that Zillow’s Instant Offer price is not based on Zillow’s wildly inaccurate Zestimate. Instead, some 15 Walls Street and hedge fund investors determine what they are willing to pay for your home and submit their offers. Zillow does not represent either the buyer or the seller, but simply a middleman. Currently, they do not charge a fee to either party. This way they avoid any fiduciary duty to either party.
How are iBuyer programs different from real estate agents?
When using a Realtor® to sell your home, you have an agent who has a responsibility to represent you and get the best price for your home. In the case of the iBuyer programs, these companies represent themselves. When selling to an iBuyer, you as the seller need to be sure all of your questions are answered to your satisfaction and that you feel comfortable with the process.
However, if you decide to sell without a Realtor®, you’re not alone. Approximately 16% of homeowners in the U.S. sell their homes each year without a Realtor®. Many are simply trying to save on commissions. Others are familiar with the home selling process and are comfortable selling their home on their own.
How are offers calculated?
Internet buyer programs used Automated Valuation Methods (AVMs) to determine the value of your home. By comparing thousands of similar home sales, they can make reasonable estimate as to your home’s value. However, a real estate agent will use their local market expertise to create a Comparative Market Analysis (CMA) to help you determine the price to list your home for. In the case of a Realtor®, your buyer may still be subject to a home appraisal by a certified appraiser. In the case of any instant offer program, their offer will include enough margin to protect themselves.
The problem with many AVMs, is that no two homes are exactly alike. Two homes may have exactly the same square footage, and number of bathrooms and bedrooms, bu that doesn’t mean they are worth the same amount. A certified appraiser takes additional considerations such as condition into account that an AVM simply cannot account for.
For example, years ago we sold a home for substantially more than the market because of an upgraded kitchen and landscaping. Only a local agent who was familiar with the property we sold would know the reason the home sold for over market price. A computer program would have increased the neighboring homes $25,000 but not understand why. The same would be true if the computer used the value of a home that needed a new roof and HVAC system.
An experienced real estate agent would either be familiar with or research the condition of the homes used in their CMA. Since the iBuyer’s offer is conditional upon their inspection, you should expect the initial offer price to be adjusted after their inspection of your property.
What are the repair requirements?
Each iBuyer program has different criteria, but work similarly. You answer a series of questions about the home you are trying to sell. After completing the online process, an offer is sent to your email. However, it doesn’t end there. With each program, a representative or home assessor, will schedule an appointment to see the inside of the home and do a physical inspection. Based on the inspection, you will be asked to either correct items on buyer’s inspection list or give the buyer credit toward the repair costs.
If you enter into contract with an iBuyer, you’ll be asked to sign a contract. If repairs are needed, you’ll also need to sign an addendum that states either the credit the buyer will receive for making the repairs, or that you will be responsible for making the repairs according to the buyer’s specifications. Opendoor’s repair request list is pretty extensive covering everything from your HVAC unit to fencing. As their website states, their policy “is to ask for repairs we anticipate the next buyer of the home will ask for”.
If you thought you were going to avoid making repairs on your home, and sell for full market price using these iBuyer programs, you’re out of luck.
How is an iBuyer different from a Fix and Flip investor?
iBuyers only buy homes that are in good condition. They aren’t looking to upgrade your home, simply perform minimal repairs and relist your home on the open market. iBuyers charge a fee of between 10% and 15%, not counting any credits for repairs or closing costs. Since they’re not upgrading your home, the iBuyer has to be able to sell your home for the average prices of homes in the neighborhood in good condition. The iBuyer then subtracts their fees and any buyer credits from this average price to determine their price. iBuyer programs are well suited for sellers who have homes in good condition.
If a seller has a home that needs significant repairs or has a lot of deferred maintenance, a “Fix and Flip” investor may be a better option. A Fix and Flip investor looks at the top price they can sell a home after all of the repairs and upgrades are done. Like an iBuyer, house flipper will also subtract the costs of repairs, closing costs and a small profit margin to determine their offer price. A Fix and Flip investor like The Real Estate Solutions Guy will provide a no obligation, as-is offer. If you choose to accept their offer, you can close in as little as 7 days or later if you need the time.
Since an upgraded home can often sell for significantly more than an average home, a flipper’s starting point before deductions will be higher. The result can be that the seller nets more money than if they sold through an agent or to an iBuyer.
How much money will I really save with an iBuyer?
How much money you will save depends on the condition of your home and value. No matter what means you use to sell your home, you will either need to make any necessary repairs, give the buyer a credit for those repairs, or sell to someone who will buy your house as-is. With most programs, you’ll also be responsible for any seller closing costs. Selling through a Realtor® will cost you between 5% and 6% commission. But it may net you a higher dollar amount, but with all of the hassles of selling to the public.
Selling through an iBuyer program will realistically cost you between 10% and 15% plus repair costs. iBuyer programs typically advertise that they are charging between 7% and 7.5%. Opendoor calls this fee an Experience Credit, while OfferPad and Instant Offer call it a Credit. In addition to this fee, these programs are also known for asking for additional credits of $5K to $10K.
You can also expect to pay ” all HOA Transfer Fees” or a cancellation fee if you cancel your sale.
If you’re looking to net the most money, then making the repairs yourself and listing with a Realtor® is probably your best option. Does your home have minimal repairs? Are you looking for speed, flexibility and convenience? Then selling to an iBuyer may be good for you. If your home needs more repairs and deferred maintenance, consider a buyer like The Real Estate Solutions Guy.
Be prepared to pay upfront
Unlike selling through a Realtor® or home flipper, selling through an iBuyer program can cost you money upfront. Opendoor requires you to pay a percentage of their fees upfront. If your iBuyer program is nothing more than a listing service, then expect to have to pay for a photographer to take pictures of your home. You may also be required to pay for signs in advance for selling your home.
Comparing the different models
|Traditional||iBuyer||The Real Estate Solutions Guy|
|Wait 30 days or more for a buyer||Quick sale, often in two weeks||Sell in 3 to 10 days|
|Keep your home spotless and showroom ready||Clean for home inspection and haul trash away||Leave the clutter behind|
|Last minute interruptions for showings||Schedule home inspection at your convenience||Schedule meeting buyer one time at your convenience|
|Risk last minute buyer cancellations|
|Time and expense of repairs||Agree to buyer’s complete list of repairs||No repairs. Sell in as-is condition|
|Delay moving your family||Close quickly||Convenient closing. Close in 3 to 90 days.|
|Strangers poking around your house||Single home inspection||Home buyer does an internal walk through of home|
|Wait for buyer’s appraisal contingency to be removed||No appraisal contingency||No appraisal contingency|
|Worry about costs of owning two separate homes||Quick closing||Trade your house like trading in your car|
|No fees up front.||Pay portion of fees up front||No fees to pay|
|5% to 6% commissions||7% to 15% fees||No fees or commissions|
|No cancellation fee||Cancellation fees possible||No cancellation fees|
No matter what model you favor, the Internet is changing the way we buy and sell houses. When Amazon and others first started selling items online, many of us couldn’t fathom why someone would want to buy online. After all, you couldn’t touch and feel the item you wanted like a brick and mortar store. Now, we can’t imagine not buying things online. If you’re selling your home, you have more options due to the Internet that would have been similarly unheard of just a few years ago.