Real estate is always evolving and new trends come often and some stick while others fade. In my 15 years as a broker I have seen buyers markets, sellers markets, an abundance of homes, lack of homes available, short sales, foreclosures and various discount broker models. In the last 12 months one of the new trends has been the emergence of iBuyers. These are corporations and investors who buy homes from sellers for cash. The advantage for buyers according to the iBuyer companies is the seller does not have to go to market, can control the timing of when it closes and it does not require an appraisal or the seller to fix inspection items. One of the perceived benefits to using an iBuyer is also saving money on real estate agent commissions.
Here is the reality of the iBuying experience. There is a place for the iBuyers and some sellers could see value in selling their home this way. However, they need to consider the following information. When you sell your home with a real estate agent in a traditional sale, you are listing your home on the MLS which gives you the most exposure to home buyers. This is called retail. The iBuyers are wholesalers. Statistically you net more money when you go to the market and have the maximum exposure. The iBuyers have to buy your home at a discount to make a profit so they are buying your home at wholesale in most cases and then listing it higher so they can make a profit or try to. When you sell with a real estate broker you typically pay a 6% commission that covers the listing agent and buyers agent. The iBuyers charge between 6-12% commission even though you are selling directly to them and you are still unrepresented. Additionally, the iBuyer will complete an inspection and although they most likely will not ask you to repair items, they will ask for a reduction in price for the items they deem to be an issue. In a traditional real estate deal the buyer can ask a seller to fix non-functional, hazardous or marginal items. With an iBuyer they often ask for a reduction in price for non-functional items as well as cosmetic items such as paint and carpet. So sellers who choose an iBuyer to purchase their home are agreeing to a price upfront in their contract which is usually below market. Then they are being asked to reduce the price for inspection items and are still paying a commission that is on average between 8-9%. There is a cost for the convenience and in many cases the convenience may not be worth the money lost.
The iBuyer companies that are buying in Colorado are Zillow, Realogy, Open Door and Perch. These companies in most cases are not really making much of a profit on the sale of their inventory of homes. Their goal through being iBuyers is to get more leads for their preferred realtors and ultimately they may eventually bring in profits with mass quantities of homes they acquire over time.
When a buyer wants to see what these iBuyers will pay for their home, they contact the company and ask for an offer. The company will produce a number in most cases over email without seeing the home. Sometimes they will send a realtor representative out to evaluate the home if you are serious. The offers are on average 8-15% less than market value. On a $500,000 purchase price if you netted 8% less that is $40,000. If it was 15% less that would be a loss of $75,000. It is rumored that Zillow rejects 97% of homes that request an offer. The iBuyers have a very special category of homes they are looking for. They want turn key homes with predicability. Some of the things they are not interested in are, homes priced above $500,000, any home with an odd floor plan, weird location, well and septic, acreage homes or homes with long histories of being on the market and not selling.
There are a few unintended consequences of the iBuyer trends. Say you have two neighbors who sell to an iBuyer. If they each sold for a discounted price of 10% what does that do to the value of your home? In addition, the iBuyer companies re-list the home after the sale and they typically never stage the home or even have it in great show condition. So, even after the iBuyer purchases it from the seller and re-lists it again, most likely at a higher price, they often are not optimally representing the property or getting the best value for the home. Long term in some areas that fit the iBuyer mold, the prices may see a drop due to these wholesale discount prices.
The iBuyers will not be going away any they will be a small percentage of our market for the near future. These companies have huge financial backing and have a huge tech platform. Phoenix is a city that has had iBuyers in their market for over 5 years and the iBuyer market share remains at approximately 6%. So they are just a small segment of the market. Nationally they are only at about 2% of the overall real estate market.
So for the 98% of sellers who choose to sell their homes the traditional way with a real.. real estate agent we will continue to forge forward and advocate for our sellers. Real estate is harder than it looks and technology is unable to handle the complications and emotional aspects a real estate transaction can bring. There is value to working with an expert when you’re making one of the biggest transactions in your life.
When considering an iBuyer, it helps to understand how traditional real estate transactions differ. The iBuyer evaluates the value of your home primarily on an appraisal based software, similar to a ‘Zestimate’ on Zillow. They sometimes will view the home before pricing it but in most cases it is all done sight unseen. These estimates such as a Zestimate or even one called the AVM on our public records site can vary greatly. Sometimes the values are right on but most often they are either significantly higher or lower than they should be. When a real estate professional evaluates your home value they research recent sold, active and under contract properties. This also includes previewing any active homes that are comparables and calling the listing agent on homes that are pending or under contract to check on where it will be selling. Most importantly realtors come see your home. We walk through it and note any recent updates and the capital improvements you have completed. Without visiting your home we may miss key aspects such as condition, deferred maintenance or original quality of build. Our goal is to net you the most amount of money and that includes pricing it correctly but also includes pre-marketing services. We know statistically if your home is staged, super clean and photographed correctly that your home stands the best chance of appealing to the most amount of buyers and receiving a strong offer. These iBuyers are investors buying low and hopefully doing a minimal amount of repairs and cosmetics and listing it still with very little care. In our experience we can net our seller up to 10% more with our pre-marketing services.
Outside of the services a home deserves to net the most amount of money, nothing replaces a real live advocate during the sale of a home. For most sellers their real estate equity is one of their largest assets. Having a real estate broker to assist sellers in navigating a complicated and emotional move can be a lot more rewarding and beneficial. The iBuyer model is more focused on quantity vs. quality. Good service and communication will never go out of style.