Jacksonville has launched Zillow’s new iBuyer Program, Zillow Offers.(https://www.housingwire.com/articles/zillow-offers-launches-in-first-new-market-since-early-march/)Many people have been
iBuyers: A Bad Deal For A Seller’s Market
Dated: April 7 2021
Jacksonville has launched Zillow’s new iBuyer Program, Zillow Offers.
Many people have been asking what the iBuyer concept is all about. It is Important to outline the pros and cons as well as how and why.
A Bad Deal For A Seller’s Market.
You’ve seen the signs on the side of the road – “We’ll Buy Your Home For Cash”, – it has been around for decades. Today the same scheme is cloaked by a flashier new name and slogan: iBuyers, “instant Buyer,” Quick Cash Offers, Etc., but the list of pros/cons remains basically the same. In this popular Northeast Florida Seller’s marker, the downsides to resorting to iBuyers are significant.
What is an iBuyer?
It’s a company that uses technology (a website, a questionnaire, and a few algorithms) to immediately make a verbal cash offer on your home. iBuyers are often companies or brokerages funded by investment money from big banks or other cash-rich companies, a so-called middleman. iBuyers generally purchase specific types of residential homes (usually only ones that meet restrictive criteria such as home age, price range, etc.) from private sellers at a low enough price — and with high enough fees — that they can eventually re-sell the properties for a much higher price that covers their carrying costs, transaction costs, and rehab costs.
Sounds simple, right? But the process is often not straightforward or convenient, and the financial disadvantages for Sellers in this strong market are substantial.
Why Are There So Many iBuyers Now?
Real estate is usually a very cash-intensive business, and the availability of cheap money (record-low interest rates) over the past few years is changing the landscape for new buyers. That’s why there are so many people/companies becoming iBuyers.
Plus, setting up an iBuyer scheme is relatively easy, especially for a brokerage or other company already in the industry. Clearly, with the power and financial backing of Wall Street, it’s important to learn more about what iBuyers are all about. So, let’s go through the main issues:
1. What Is The Profit Like Compared To Selling On The Open Market?
The offer you get from an iBuyer is typically well below what you would get through the traditional, open market process. According to Forbes, studies have shown that, overall, selling through an iBuyer reduces a Seller’s net by about 11-15% compared to selling on the open market. That loss is due to the combination of a lower contract sales price plus higher transaction fees that most iBuyer’s charge.
Normally, iBuyer “instant offers” are based on a valuation that takes a few of the critical aspects of your home’s value into account. In most cases, it’s simply a dollar-per-square-foot calculation, with almost no regard to upgrades, layout, condition, lot, area, etc. However, real estate is extremely localized, plus factors like condition and amenities need to be evaluated by a person; appropriate valuation cannot yet be automated via a simple 5-step questionnaire.
In other words, an instant offer generally will not be the actual offer. That only comes after inspection, repair negotiation, etc. Further, the Seller’s fees to an iBuyer range from 6-14% (check out their own terms – scroll down to selling options and check out the asterisk) of the home’s purchase price, versus about 6% commission to an agent under the traditional model.
Looking at a little investing background helps put the iBuyer situation into perspective. In general tradition, investors have targeted only Sellers in serious need of a cash solution, normally due to complex legal, financial, or family situations. For Sellers in those rough circumstances, the investors’ creative, reduced-price-but-faster-cash approach could provide real value.
Moreover, the homes purchased in these situations are commonly found in disarray, have deferred maintenance, and require months of rehab. So, a fair cash solution to remedy the situation both helps the homeowner and makes the neighborhood a better place to live. Overall, those types of investors help someone out of hardship and then make a return on their investment only after months of rehab work. This is called a value-add service.
But the investors behind many iBuyers have a different approach. They view the current low cost-of-capital environment as an opportunity to pick up share in the retail home sale market not just from Sellers under hardship, but from the general public. Think about it: Amazon had a successful strategy of picking up ungodly amounts of consumer goods market share and figuring out how to monetize later.
Why wouldn’t Wall Street try to apply that concept to housing, one of the largest sectors with the largest economic multiplier? Why not take advantage of cheap money by buying as much inventory as possible, then figure out what to do with it later? And if that means buying houses that sit unoccupied for a while, well, those investors aren’t living there, right?
Indeed, some experts predict a day when Wall Street will own the majority of the country’s single-family home inventory, leaving most people as tenants instead of homeowners. That sounds radical in a way — until you consider it from a Big Bank perspective.
The bottom line, then, is that Sellers utilizing an iBuyer will almost always net less money than if they sold what is likely their largest asset on the open market.
iBuyers usually address this concern by arguing that even if the net is less, the process they offer is more convenient, But is it?
2. Are iBuyers Actually More Convenient Than The Traditional Sellers Market?
As a Retail Seller, you have to determine whether the “convenience” iBuyers claim to offer is actually real, or whether you’re going to get into as many or more hassles than could occur with a traditional sale. Only then can you decipher how much that “convenience” is worth to you, from a purely monetary perspective.
Here’s how an iBuying process usually works:
An iBuyer makes an instant valuation of your home based on certain algorithms and gives you a verbal – non-binding – offer. Then it requires an in-person appointment with you by one of its representatives. It requires an inspection of your home and can renegotiate the offer for your home based on the inspection results. Then it negotiates the closing period.
Sound familiar? It is essentially the same process as the traditional model!
What you do avoid with an iBuyer system are the showings and Open Houses often used with an open market sale. And when Sellers are in a strong Buyer’s market, where endless Open Houses and showings are needed to procure even one offer, that might be appealing. But that is not today’s reality in Northeast Florida.
This is an extremely popular SELLER’S market. Appropriately priced homes in decent shape and a decent location are selling extremely fast. In most cases, Open Houses are not needed (especially with COVID concerns), and relatively few showings result in an offer – even multiple offers. So, a Seller must decide: In this Seller’s market, is the relatively small – if any — inconvenience of selling on the open market, worth losing thousands of dollars in net proceeds?
Further, in examining convenience, Sellers must be aware that those Wall Street-backed iBuyers may not come through as promised. These banks use their algorithms, creating narrow parameters when they make their offers, telling them how long they’ll need to hold the home on their books, and how long it’ll take to sell. They are not families who have fallen in love with your home and are willing to stick with a complicated process if required to get their families into the house.
The iBuyer investors look only at their bottom line, carefully calculating how much they can afford to pay and still make a profit. And when something changes– such as the stock market tanking in late 2018 and pre-COVID in March 2020—some of those iBuyers backed out of their pending contracts with Sellers.
Yes, this has happened. An iBuyer cash offer is not a sure thing.
3. What Else could be Behind The iBuyer Scheme?
Of course, since I ask, you know there is something.
The iBuyer system is not only about making successful “instant cash offers” on homes. It is also about collecting Seller data. When a curious Seller clicks to discover what he could get in quick cash, he is giving away something valuable: his contact information and the fact he is considering selling. With that in hand – even if no sale occurs–the iBuyer gains something to sell or refer to a real estate agent who wants your lead. They Collect data about who exactly and where people may be interested in selling or buying homes.
So, the quick cash offer is also a ploy to monetize your personal information.
What Do iBuyers Mean To The Real Estate Industry?
My personal view is that real estate agents and teams who are jumping into bed with Wall Street-backed iBuyers are doing a disservice both to Sellers and to their profession. They are purchasing iBuyer-provided contact information to make a quick buck off retail Sellers who may not understand the iBuyer process enough to know they will end up with less money in their pockets. Further, agents who drink the iBuyer Kool-Aid, are helping technology figure out how to replace themselves, as agents, with an automated system of purchase that will leave more and more residential properties in the hands of Wall Street. Sellers having access to the assistance of real people, expert agents, will be reduced and eventually eliminated as Sellers deal with Big Banks to sell. And, subsequently, Buyers who seek to purchase the iBuyer properties will have to negotiate with Big Banks, too.
- Sellers taking quick cash through an IBuyer in this market will probably not have a true value experience as to the money they net or their so-called “convenience.”
- Even when Wall Street and iBuyer agents end up not offering reasonable quick cash deals, they still make money off Sellers by collecting and selling their data. Beware of that ploy.
So I’ll leave it to you to decide:
Are iBuyers simply another ploy for Wall Street to come in and suck the equity out of hard-working Americans who are building equity in their homes after one of the largest real estate bull runs in history?
Or are they an actual value-add that provides convenience via an instant cash offer system?
I’d love to hear your thoughts, especially on the positives of iBuyers.
Still on the fence about using a traditional agent or going with the buyer model?
Contact me today, I’d be happy to answer all of your questions!