So you may have heard the term iBuyer thrown around in the last year or so and are interested to know what the potential buzz is all about. We will go into detail what iBuyer is and also why it most likely will fizzle out. First let us define what the iBuyer platform is so you have a good foundation to understand the product then we will look at the pros and cons and ultimately the conclusion to draw from such analysis.
So many people think that the iBuyer platform or product is something new. It is not. It is something that most people have actually viewed quite negatively in the past. The iBuyer product is by definition a company that buys homes from Sellers directly normally after Sellers fill out a form online and after giving a property description. A iBuyer using Automated Valuation Model or AVM technology makes an instant offer or a offer in a couple of days with a promise of a simpler more convenient way to sell a home than a traditional sale. iBuyer is a instant offer product or platform promising peace of mind and hassle free process of selling your home or so they say. Anyone in Real Estate may think this model sounds familiar and that is because it should. This platform or product has always been around but slightly different and known as Investor Offers or Flipper Offers. These are the people who send you mailings “we will buy your house for cash for x price and close quickly.” Now iBuyer programs are slightly different and directed at a different market. Flippers and Investor Offers are normally targeting property that needs work or updating and are looking to purchase the property at a huge discount in lieu of the work the property is needing and looking to make profit off the “Sweat Equity.” Whereas iBuyer platforms are looking for properties that do not need a lot of work and are more closer to “move in ready condition” and need maybe just some buff and polish aka minimal work. It is the same product with just different target markets. iBuyer platforms also have a niche market of homes targeted from the $200,000 to $400,000 range typically. They normally do not stray from this market and iBuyer products are only in a few limited markets.
Maybe you have been reading and are thinking that sounds great why would I not want to do that. Well let us go into the reasons why. This has been studied and I have had the bad luck or good luck depending on perspective of actually having friends and clients use the iBuyer platform. Bottom line is it costs a whole lot more money than if you just would sell your home in the open market which has proven time again to get the most money for sellers over the years. Anytime someone promises fluff words or sales words like “peace of mind” or “hassle free” its normally just fluff not much there sure there maybe a little less hassle, but at huge cost, a huge cost of money much more than a real estate commission and nothing is hassle free. I do not know about you but I will keep my money for a little bit of hassle and peace of mind if any is not something I can deposit into the bank. I am using a more conservative study and also from my first hand knowledge it typically cost Sellers 11% to 15% more money using an iBuyer product than had they just used a Real Estate Agent. I have seen some studies where they have said 13% to 20% but from what I have seen 11% to 15% is normally the amount of money of the home’s value sellers are losing. The typical cost of most real estate commissions is 6% of the sales price a lot less money than an iBuyer product. So how does this look? Let us break it down. You may not be paying a real estate commission but you’re paying fees 2% to 5% just more in fees that a traditional home sale normally this also included a generous repair allowance for things that need to be fixed, but also another 3% to 5% sometimes more to compensate the iBuyer for the liquidity risks and carry costs. A study authored by Dr. Michael Sklarz and Dr. Norman Miller with Collateral Analytics did a study “iBuyers: A new choice for home sellers but at what cost?” that the cost overall added up to 13% to 15% of the value of the home so 15% less than a seller would have grossed in the open market . I have seen this like I said personally from friends and clients and consistently it cost 11% to 15% of the money they would have received on a traditional home sale. We had a friend make a shotgun decision to get up and just leave to be in upstate New York and did not want to take the time to sell and just used an iBuyer program. It was not hassle free she was worried about things like the walkthrough and the inspection just like a typical transaction. She sold her home through an iBuyer for $224,000. She made a small profit for what she paid for it but here is the thing I am not talking about listing price I am saying her sales price conservatively would have been $252,000. Case in point it cost more than a traditional sale was not worry free or hassle free she just gave up money for a slightly smoother process and a little bit of convenience. I would rather keep my money. The market is ever changing but a lot of markets are still in very much the favor of the seller or are a balanced market slightly favoring the seller. What does that mean there would be a great possibility that your home would be sold in 30 to 60 days anyway on the open market with less fees and making the most money. The open market drives competition and normally just like those Flipper or Investor offers or iBuyer offers it makes more sense and dollars to put it on the open market and fetch the best price. Also something to think about a Real Estate agent selling your home is aligned for the same outcome as a seller to sell fast and for the most money as possible. iBuyers are buying sellers homes fast but not for the most money and their interest is not in alignment with the seller. They just like any other investor are out to make money the difference is at the expense of the seller as opposed to the real estate agent where the more money you make the more money they make.
Does that mean iBuyer never makes sense? No there is a target market for this product just like most products and even Investor or Flipper offers. Homes are illiquid by nature of investment because you have to wait for them to sell which takes time. So if you live in a very slow market or you literally cannot wait and need the money ASAP and time is not a commodity you have an iBuyer product may be something you would need if it is available in your market, but the average consumer it is not truly a suitable product because most people cannot afford to give up as much money as the iBuyer platform costs sellers.
