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iBuying is the latest trend in the home buying and selling industry—a method of instantly garnering offers for a home, and selling within minutes or days of posting. Knowing the advantages and disadvantages of iBuying could potentially save your clients thousands of dollars.

Objectives

What Is iBuying?

iBuying is online homebuying technology. In short, iBuyers are companies that use a proprietary algorithm to assess a property’s value and create an instant offer. If the seller accepts the offer, the iBuyer company purchases the home—no negotiating or waiting for home inspections and bank appraisals. It’s easy to see how this method would attract some sellers: It’s fast and convenient.

That said, iBuying isn’t right for everyone. A traditional real estate transaction will be the better option for many consumers.

Who Are iBuyers?

iBuyer companies value homes internally—without getting traditional on-site inspections or appraisals done—and make cash offers on properties they feel will be easy to resell to make a profit.

Opendoor was the first iBuyer to hit the marketplace. Today’s iBuyers include Knock, RedfinNow, Keller Offers, Offerpad, and Orchard, to name a few. Zillow was in the game, but quickly jumped out when it began losing money on its “flips.” iBuyers don’t operate in every part of the country, yet; some sellers interested in iBuying may find that the service isn’t yet available in their area.

How Does iBuying Work?

Here’s a simplified overview of how iBuying works:

An iBuyer Offer

Because iBuyers purchase many properties every day, they tend to remain firm on their offer price. They know that the benefits iBuying provides to a certain group of seller customers means that the companies don’t have to offer top dollar.

Sellers who need to get a higher sales price may be better positioned for a traditional real estate transaction. It’s your job to give consumers all the information they need to determine which transaction method is right for them.

Are All Homes a Good Fit?

Not all properties will be compatible with the iBuying business model. iBuyer companies are interested in homes that are in good condition and generally ready to go—a fact that differentiates iBuyers from fix-and-flippers. That’s because iBuyers want to sell quickly and avoid much additional investment.

That doesn’t mean the home has to be perfect. However, any costs for necessary repairs will be deducted from the final sale price, and iBuyers make all decisions regarding repairs.

The Real Estate Professional’s Role

iBuying is increasing in popularity, but consumers still need your professional guidance to help them determine whether or not the system will work for their particular situation, needs, and goals, and also how to navigate the iBuying experience if they choose to do so. Most consumers will need to learn how iBuyers work differently from traditional real estate brokerages. They’ll also need to learn the benefits and drawback of iBuying in order to make an informed decision. A misstep here could cost them thousands of dollars.

Let’s start with the good news first. That usually seems to be what most people prefer, right?

iBuying Benefits

In general, iBuying is a convenient time-saver that bypasses some of the trickier aspects of a traditional transaction.

Convenience

With a few clicks, sellers get an instant offer (or as close to instant as possible). For consumers, the minimal effort combined with quick liquidity is very attractive.

Time savings

Depending on the market, homes can take weeks or even months to sell. Sellers who opt for iBuying can close within a few days—or even on the same day.

Overcoming potential hurdles with traditional sales

Buyer financing, inspections, repair negotiations, appraisals, move-out timing, and double mortgages are a few of the potential snags involved in traditional sales.

For example, many traditional sellers have to wait for their current home to sell before they can buy another home. To help these traditional sellers, some iBuyers offer a “trade-in” service. Here’s how it works: The iBuyer will make a cash offer on the seller’s desired next home. Then, when the seller’s former property sells, the iBuyer will keep the money from that sale. Extra fees tend to apply for this service.

Here’s another example: An iBuyer will purchase a home that a seller desires as the next home, and then the iBuyer will lease it to the seller for a stipulated time period while the seller waits for the former home to sell via the traditional method. When a previous home takes longer to sell than the iBuyer’s stipulated timeframe, the iBuyer will purchase the former home, and end the seller’s lease on the new home.

Both of these scenarios beg questions such as, “What about any difference between the two homes’ sales prices?” and “What happens with title transfers?” It can get complicated, and the actual procedure depends on the iBuyer’s policies. When you’re working with consumers who are contemplating these transaction types, explore the fine print with them so they fully understand the details.

iBuying Drawbacks

What sellers gain from iBuying may not be worth the price of what they’ll lose financially by accepting a lower offer from an iBuyer, paying service and premium fees, and absorbing repair costs. A recent MarketWatch study determined that sellers who worked with an iBuyer company profited on average 11% less than sellers in traditional transactions. (Optional: See the link in your resources to read the report.)

Low offers

iBuyer offers are not only below market value, they also don’t take unique property features into account because of the algorithms iBuyers use.

Service fees

All iBuyers charge a fee for their services, which is usually between 6% and 8% of the home’s value. These fees are often higher than real estate agents’ commissions.

Premium fees

iBuyers also charge a “discount to fair value” fee that’s intended to compensate them for the risks they assume by purchasing homes quickly. Usually, premium fees are around 5% of the home’s value.

Repair costs

These costs may be a big surprise to sellers, who lose out by having no ability to negotiate the repairs, compare repair estimates, or choose who does the repairs. The iBuyer company makes all the decisions.

We’re in the Money?

Let’s look at a comparison example between an iBuying transaction and a traditional home sale. The sellers invested $5,000 in repairs to increase their home value by $10,000, bringing it to a market value of $500,000. Homes are selling at or near list price in this area.

Traditional

First, consider the gain in value from the repairs. The sellers’ $5,000 expenditure gained them $10,000 in value, so that’s a $5,000 overall gain for them ($10,000 — $5,000 = $5,000). We add that gain as a profit increase, giving them a market value of $505,000. The sellers accept an offer of $500,000. The commission is 6%, and they paid 3% in closing costs. Let’s do the math!

$500,000 × 0.06 = $30,000

$500,000 × 0.03 = $15,000

($500,000 – $45,000) + $5,000 profit increase = $460,000

iBuyer

To make things simpler, we’re going to set the iBuyer’s service fee at 6%. Note that some iBuyer fees may by as much as 8%.

We’re also going to assume a premium fee of 5%, although, again, this could be more, depending on the iBuyer company. Because iBuyers rarely (if ever) offer market value, we’re going to set the offer price at $450,000—a 10% decrease, which is realistic. We’ll leave the closing costs the same: 3%. We’ll need to subtract the $5,000 gain from the repairs, as they don’t factor in.

$450,000 × 0.06 = $27,000

$450,000 × 0.05 = $22,500

$450,000 × 0.03 = $13,500

($450,000 – $63,000) – $5,000 = $382,000

That’s a difference of $78,000.

iBuying for Buyers

Buyers can log onto an iBuyer’s app to see homes they can purchase almost immediately. Although this seems attractive in an instant gratification world and may be a great option for some people, there’s a lot to be said for buying a home with an agent’s assistance. iBuyer apps lack personalized service and can’t offer a licensee’s dedication to finding the perfect home at the right price under the most optimal terms.

Further, although photos and videos go a long way in marketing a home, they fail miserably when compared to actually setting foot on the property. Buying a home sight unseen is a massive risk and could lead to a big case of buyer’s remorse. After all, even buying a car online usually includes taking a test drive.

Here’s Our Prediction

Our crystal ball is out for repairs, but we feel pretty comfortable predicting without it that iBuying is here to stay. The good news is that many iBuyer companies are happy to work with licensees, even offering commissions on sales.

When you’re working with clients who are considering the iBuyer option, you can help them decide whether the system will work well for their situation. You can also assist clients in selecting which iBuyer company is best for them. Not all iBuyers offer the same services.

Recent iBuyer Trend

In 2020, Zillow Offers announced that it was going to drop independent brokerages in order to form its own brokerage, Zillow Homes, with Zillow employees serving as licensees. Before this move, Zillow arranged agreements with brokerages, franchisors, and multiple listing services.

In 2021, sellers who worked with Zillow Homes in Atlanta, Tucson, and Phoenix also worked with licensed Zillow Homes employees. The company had plans to expand to other markets in the future. Buyer’s agents still earned commissions.

Zillow was the first iBuyer company to give this a try, but in November 2021, Zillow abruptly left the home buying business, laying off 25% of its workforce.  

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