What's an iBuyer? A buyer with a whole lot of cash.
iBuyers are companies with access to incredible amounts of data that allow them to quickly estimate the value of a home and make fast offers to homeowners. They are shifting the axis of how we view and experience real estate transactions. In the digital age, data rules, and there is no one in the real estate world with greater access to data than online tech companies backed by billions in market capitalization.
Real Estate tech companies like Zillow Offers (Mkt cap 27.77B), Opendoor (Mkt cap 9.45B), Offerpad, RedfinNow (Mkt cap 6.11B), and even smaller “we will buy your home for cash” programs all fall under the umbrella of “iBuyer.” These companies offer different avenues to sellers including quick cash to close and trade-ins. While they are all known for their ability to provide quick offers, they also capably function as contract to close real estate companies. To understand more about what an iBuyer is, we need to talk about how iBuying programs work.
How the iBuyer works, will depend on which iBuyer is running the process. Working in generalities, the iBuyer will make an offer on a home, close on the home, and eventually list, market, and resell it. Not to be confused with flippers, iBuyers look for marketable homes that need little to no repair. They also work with slimmer margins where flippers typically buy low and sell high.
For a homeowner, the process starts when they, or a REALTOR® working on their behalf, complete a request for an offer from the iBuyer of choice. The homeowner will be asked to enter basic facts about the home including its features (countertop type, flooring material, number of bathrooms), restrictions (HOA, age, etc.), and known damage (water, mold).
If the property meets the basic qualifications, the iBuyer will use the provided information to assign a cash value using Automated Valuation Models (AVMs). AVMs differ from the traditional appraisal as they rely on statistical modeling that crunches huge amounts of data—both private and public. This process of assigning value is not new (it is used by U.S. mortgage lenders), but it does differ from a sales comp, which is what REALTORS, underwriters, and appraisers use to assign value. Sales comps look at similar, localized transactions and require a touch of personal discernment in deciding what is and what is not a good comp. In short, sales comps are a manual process, AVMs are automated.
Perhaps the biggest misconception about the iBuying process is that it’s “instant.” The offers are fast, but not instant. iBuyers typically respond to requests within 48 hours of submission. Even then, the offer is not final.
If the seller accepts the offer, the iBuyer will perform due diligence to minimize the risk of their investment. They usually schedule an in-home visit to make sure the property’s condition is as described. If the home needs minor repairs, the cost is either deducted from the sale or the homeowner can choose to make the repairs on their own. If the seller misrepresented the property, the iBuyer can lower its initial offer or walk away.
The final step in the process is closing, and a seamless closing that eliminates the typical contingencies is one of the most attractive aspects of using an iBuyer.
The pros and cons for each member of the transaction (seller, buyer, iBuyer, REALTOR) are different. Let’s start with the impact to the seller, move on to the iBuyer, and wrap up by looking at how the process impacts real estate agents.
The Pros of the iBuying process are widely reported. iBuyers solve many of the pain points created by the traditional real estate process. The specifics will depend on the iBuyer the seller chooses, but speaking in generalities, the list includes:
The disadvantages also depend on the iBuyer. For example, some iBuyers can offer fast cash closings, others need more time. There can also be differences regarding repair requirements and costs. In short, the primary disadvantages include:
Let’s talk about the final point on our list of disadvantages: Not all homes are eligible. It’s important to note that iBuyers focus on site-built, single-family homes, townhomes, duplexes, and condos. Typically, they look for homes built post-1930 that sit on smaller lots.
iBuyers want homes they can move quickly, so they also look for homes that fall within the average price range of any given area. For example, Redfin will buy homes in San Antonio, Texas priced between $200,000 and $400,000, but in Seattle, Washington, where the average sale tops $800,000, they will buy homes valued as high as $1,500,000.
If you’re wondering what’s in it for the iBuyer, the answer is short: money.
The margin of profit for iBuyers is slight but they focus on volume and speed, seeking out properties that need little to no work that can be relisted and resold. They can expand their margins through property improvements, market appreciation, or even by offering co-services such as financing. Also, iBuyers charge the seller a service fee. Zillow, for example, charges an average service fee of 2.5% which they say can be as high as 9%. Plus, they separate out their “selling costs'' which they estimate to be 6%. RedfinNow’s service fees range from 6-12%.
The service fees for each company vary based on how long the iBuyer expects it to take to sell the home which means that the fee is contingent on the property’s saleability as well as general market conditions.
iBuyers do not replace real estate agents. In fact, iBuyers and REALTORS often work together. Dan Norma, iBuyer expert and founder of iRealEstatePro.com, shares that using an iBuyer significantly reduces the workload of real estate agents all while providing value to the sellers they serve.
“See the win here for us is time; we can win some time back and eliminate consumer doubt by bringing the options to our clients and letting the process drive.” Dan Norma
In short, the iBuying process doesn’t have to impact REALTORS. Many iBuyers, including Opendoor and Zillow, have “agent partnership programs.” According to Opendoor.com, “Opendoor works with agents every day to provide their clients with more options for buying and selling homes. In fact, our brokerages paid more than $50 million in commissions and referrals to other brokerages in 2018, and more than $133 million in 2019.”
Most companies will work with agents representing both buyers and sellers. When working with listing agents, companies like Opendoor honor existing listing agreements including pre-negotiated commissions. They also pay agents a referral fee.
Throughout the country, REALTORS are waking up to the reality of a paradigm shift in the real estate industry and there are now thousands of agents who are certified to help sellers navigate the iBuying process. These agents are greatly needed as matching a seller's needs to what each iBuyer offers takes specialized skill and knowledge. Many of the benefits of using an iBuyer can quickly turn to cons without the support of someone who can guide the seller through the process.