If you’ve been paying attention to trends in residential real estate over the past few years, chances are you’ve come across the term “iBuyer.” What does it mean, and why is it growing in popularity? Let’s take a closer look.
What is an iBuyer?
An iBuyer is a new breed of real estate company that uses digital technology to estimate property values and purchase homes directly from owners, providing a more efficient path for home sellers than the traditional real estate listing process.
Who are the main iBuyers?
Opendoor was one of the first to try out the model in 2013, and companies such as Offerpad and Knock came shortly afterward. Larger digital home listing companies have also gotten into the game, including Zillow with Zillow Instant Offers, and Redfin with a similar offering called Redfin Now.
What does an iBuyer do?
A typical model works something like this: the iBuyer provides an online tool where a homeowner answers questions and enters key information about their property. The iBuyer takes this info and makes the owner a cash offer for their house after a very short turnaround time (usually less than24 hours).
Citing speed, convenience, and flexibility as the key benefits, these companies offer an alternative route to the traditional agent-driven process of selling residential real estate on the open market.
How do iBuyers calculate the offer?
iBuyers rely on proprietary software known as “automated valuation models” (AVMs) that factor in a property’s size, age, location, and condition along with market comparisons and other data. By using this data, sometimes in combination with local pricing analysts who operate on the ground in markets where they are active, iBuyers are able to estimate a home’s value in a short amount of time so they can make sellers an offer almost immediately. There are usually three main components factored into the iBuyer offer price:
- The iBuyer fee – This number is subtracted from the total valuation. Different iBuyers have varying fees.
- Closing costs – Title, escrow, and other closing expenses are subtracted from the home value to calculate the seller’s net proceeds.
- Repair costs – These are calculated post-inspection. Each iBuyer does this differently. For example, Opendoor gives you a total repair cost number but doesn’t disclose specifically what the repairs are for. Offerpad provides a detailed report outlining what needs to be repaired, and also gives you option to do the repairs yourself. Most iBuyers will allow some negotiation on repair costs.
What does iBuyer stand for?
The “i” in iBuyer stands for “instant,” and that’s a key aspect of their popularity. iBuyers eliminate the long process typical of residential real estate sales. You can go online anytime of day or night and expect to get a cash offer for your property within a day or two. This is very different from the traditional home-buying process, which often takes weeks or months to complete.
Map courtesy of Curbed as of March 2019
Where do iBuyers buy houses?
iBuying is most common in the Sun Belt states, with Phoenix and other southwest markets leading the charge, but it is gradually spreading to the rest of the country. A recent report in the Wall Street Journal estimates that iBuyers may be involved in almost 60% of real estate transactions nationwide by 2024. In Phoenix, the most popular market for iBuyers as of 2019, such transactions currently account for around 6% of the market.
Who do iBuyers buy from?
iBuying is not available for all types of real estate. The properties iBuyers are after are typically relatively new (built within the last 20-30 years) and in relatively good condition. If your home is not in market-ready condition and/or needs significant work, this may not be a viable option for you.
Learn more about how Sundae helps homeowners with houses that need some love.
Why is iBuying becoming popular?
The most appealing aspect of selling a property to an iBuyer is that it takes a lot of work and uncertainty out of the sales process. When you sell to an iBuyer, you don’t have to hire a real estate agent, list the home, stage it, or even show it to potential buyers. The iBuyer handles all of that post-purchase. You will still be on the hook for iBuyer fees, however.
You also don’t have to worry about whether you’ll get the asking price in a traditional sale, or whether there will be contingencies that can strain or derail the sales process entirely, which can potentially eliminate months of stress for the seller. So if you are looking to move quickly or you just don’t have the patience for the time and effort necessary to participate in the typical sales cycle, this might be a great option to consider.
Changing demographics may also be fueling this trend. Young home buyers prefer to conduct their research and shopping on the Internet, so as more of them enter the real estate market, the demand for online solutions goes up. The iBuyer model holds special appeal for these consumers.
Further reading: How to sell a house that needs work.
The downsides of using an iBuyer
As with many innovations, there are some potential drawbacks to taking the iBuyer route to selling property.
iBuyers typically offer a price that is below market value so that they can clean, renovate, and resell the property for a healthy profit. That means you likely won’t be able to get the top asking price for your home. The idea is that the seller is paying for convenience via one quick transaction (eliminating a lot of hassle and uncertainty in the long run), so it’s up to you to do the math and determine whether it’s worth it.
Another potential pitfall with using an iBuyer is the accuracy of the purchase offer itself. Because iBuyers emphasize speed and convenience, most rely heavily on data in favor of on-site due diligence. This can lead to unexpected repair expenses discovered during the home inspection that significantly decrease the original offer price, which often jeopardizes the sale of the home.
Lack of seller support and guidance
You also will be on your own navigating what can be a stressful life event. While iBuyers have tools and resources available on their websites to guide and educate you, many homeowners appreciate the perspective and industry knowledge a local market expert can bring to the table during the selling process.
Find out how Sundae’s Market Experts help you get the best outcome when selling a home.
The road ahead for iBuying
The practice of iBuying is still in its infancy. While it is rapidly growing, it is not yet available nationwide. iBuying also hasn’t been around long enough for the model to be tested by large economic fluctuations or a recession, so it’s likely it will continue to evolve and change along with market conditions.