Third-party home buyers like Zillow and Opendoor present a new form of buying and selling real estate that currently exists only in the nation’s largest housing markets. In simplest terms, these iBuyers (“instant buyers”) are large companies who can afford to buy homes quickly with cash. Although this model has some variations, they generally find homes with minimal fix-up work, buy the home at a discount price from the seller, then turn it around to sell to a buyer for profit. It’s basically a low-cost flip for them. For people needing a quick sale that requires minimal work on their part, iBuyers might seem attractive because the owner can sell and close with cash quickly. Let’s break down the pros and cons.
Pros
∙ Sellers do not have to stage their home or deal with showings.
∙ Sellers may choose to do their own repair work or the iBuyer will handle it (subtracting expenses from the seller’s payout).
∙ Sellers fill out a questionnaire regarding the condition of their home and then quickly receive an offer from the iBuyer. They can accept or decline a cash offer that the iBuyer determines via a computerized model of what the home is worth.
∙ iBuyers can set up closings very quickly because they are buying with cash. Contingencies for appraisals or financing are not necessary.
∙ The risk of a deal falling through is minimal because a large company is the purchaser.
Cons
∙ Because third-party buying is a low-margin business, iBuyers must buy property at a discount. That means a seller could potentially profit much more money from a traditional market sale handled by a Realtor.
∙ iBuyers tend to require more repairs than the average buyer in a traditional sale. The owner has to make those repairs or have the cost deducted from the iBuyer’s offer.
∙ Because an iBuyer uses a computerized model for offering cash, they rarely negotiate their price. That means the seller gets only one offer. Getting only one offer in a hot sellers’ markets means the seller misses out on buyer competition to bid up the price.
∙ Some sellers might be attracted to the absence of commissions in an iBuyer transaction, which is typically 5 to 7% of the home’s sale price. However, iBuyers charge a range fees for their convenience, which Opendoor discloses could be as high as 13%. When you factor in the discounted offer price with fees higher than a typical Realtor commission, the seller is getting thousands less than a traditional sale.
The bottom line is that the iBuyer method offers a low-hassle, convenient way of selling a home. But selling at a discount price is likely to result in large profit loss to the home owner when compared to selling through a real estate broker.
Real Estate Term of the Week
iBuyer: A company that uses technology to make an offer on your home instantly. Models vary, but the basic idea is that the company estimates the value of your home and makes a discounted, non-negotiable offer. If you accept, you close with cash minus fees and they own, market, and resell the home for their profit. Depending on the service you choose, the benefit is the certainty of an all-cash offer and more control over when you move.