An iBuyer — also known as an instant buyer — is a tech-enabled company that handles the purchasing of properties online, often sight-unseen. And in recent years, a growing number of time-crunched homeowners are turning to iBuyers as an antidote to the typical selling headaches.
iBuyers bring the power of cash, speed, and certainty to a complex and traditionally stressful process (though you will pay a fee for this convenience). Not to be confused with home flippers, iBuyers typically purchase homes in good to fair condition, make only light repairs, and turn over a higher volume of homes on thinner profit margins.
The ability to skip house showings and zoom straight to closing can be appealing to sellers who need to unload their houses quickly, whether it’s due to a job relocation, divorce, urgent need for cash, deteriorating neighborhood, or another circumstance. Sellers who’d prefer to skip the hassle of showing their home may also be drawn to the iBuyer route.
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According to a study conducted in 200 U.S. cities early this year, iBuyers acquired 1% of all home purchases in those markets in 2019. That may sound like a small portion, but it’s nearly double that of the prior year, indicating that a growing number of sellers are shifting to the speed and convenience of this relatively new model.
Although COVID-19 suppressed iBuyer purchasing as much as 90% — and 2020 iBuyer activity will shrink compared to the year prior because of this — iBuyers are cautiously re-entering the market and will likely be a long-term fixture of the greater real estate landscape.
Here’s what you should know as a potential seller about the current iBuyer trend, from its genesis over five years ago to now.
How does the iBuyer business model work?
iBuyers use tools called Automated Valuation Models (AVMs) to calculate the value of a home and then generate an instant offer. According to CoreLogic, an AVM is a “computer-driven mathematical formula that uses basic property characteristics, local market information, and price trends to arrive at an estimated value or value range.”
It’s the same technology that is often used to calculate loan financing options, taxes, and insurance. Many firms, including HomeLight, offer the AVM model for residential valuations.
“The AVM is basically a fancy computer program that runs a machine-learning algorithm that accounts for many of the home factors, like square footage, number of rooms, and extras like lot size, pool, and granite countertops in the kitchen,” explains property investor John Lerner, owner of Five Corners Properties. “These factors, combined with the property’s past price history, yield a result that is the estimate of the home’s value.”
Robert Taylor, owner of The Real Estate Solutions Guy, a real estate investment company in Sacramento, says that an iBuyer’s offer price is typically 7%-15% less than the AVM to account for commissions, closing costs, and a small profit margin.
iBuyers typically buy in newer, traditional housing tracts where houses are similar in age and size, which makes it easier for their computer algorithms to estimate the value of a property.
“This means they usually limit their buying to houses valued between $100,000 and $500,000 that are not in foreclosure or in need of a short sale, and have lot sizes that are less than half an acre,” says Taylor.
A real estate agent’s take on iBuyers
At first glance, it might seem that using an iBuyer is an alternative to working with a real estate agent, but the two can actually complement one another quite well.
Cheesette Cowan, a top real estate agent in Florida, often approaches iBuyers immediately after listing a house on the market. One of her clients recently sold her home through an iBuyer. Because there is no agent-to-agent interaction, it makes the process much simpler and more straightforward.
“The negotiations in a traditional sale can get very emotional,” she says. “Working with an iBuyer takes the emotion of out the transaction, and makes it much smoother and more enjoyable.”
Cowan’s clients enjoy some key benefits of working with iBuyers. The biggest advantage is the ability to get quick offers, allowing them to gauge what their house is worth. The iBuyer route is also convenient for homeowners who are selling from out of town or have tenants living in their properties, as there’s no need to juggle showings.
Inspections are also less of a hassle when selling to an iBuyer. “Generally, an institutional buyer is just looking to make sure the home is safe and a good fit for who will be living there,” says Cowan.
Although the offer from iBuyer will initially seem like less than a traditional sale, it can come down to a decently fair shake out as far as net proceeds (your actual take-home pay) once you’ve factored in all the regular home-selling fees.
Plus, with a regular sale, there’s always the chance that the appraisal could come in low, which could end up matching the iBuyer’s price in the long run.
However, selling to an iBuyer is not a decision anyone should make lightly — or without doing their homework first.
The importance of profit protection
Andrew Monaghan is a top agent near Phoenix, Arizona, which has been a hotbed of iBuying activity. Although he has seen the business model work well for some clients, he warns that it can sometimes result in a lower price that cuts into the homeowner’s equity.
He recalls one example where a couple initially listed on the open market for $285,000, then decided to remove the listing and sold to an iBuyer for $258,000. They paid a 10% seller’s fee, which took their final price down to $232,200. The house soon went back on the market and ended up selling for $285,000, so the iBuyer ended up getting the profit that would have gone to the homeowner.
The best way to protect yourself from a scenario like this is to use a real estate agent who can determine what you could sell for on the open market, evaluate various iBuyer offers and fees, and then help you choose the best option. “If you’re fully informed and have a professional in your corner, it could end up being a good deal,” says Monaghan.
Who are the biggest iBuyers of 2020?
The first iBuyers emerged in the mid-2010s. Within a few years, they have become an active complement to the traditional home selling model.
The iBuyer phenomenon kicked off in 2014 with the launch of Opendoor.
Headquartered in San Francisco, Opendoor currently purchases properties in 21 cities; according to its website, it has served more than 75,000 customers. The company charges 7.5% in seller fees and 1% for closing costs.
Redfin’s instant home-buying service, RedfinNow, has offered online home sales since 2017. Sellers’ service fees range from 6%-12%, in addition to 1% in closing fees and any necessary repairs.
Although it’s one of the more recent additions to the group of major iBuyers, Zillow Offers has quickly expanded since launching in 2018. Its direct buying and selling service is now available in 24 markets. Zillow’s transaction costs include 6% for selling fees, 1-2% for closing fees, and a 2.5% service charge.
The best iBuyer for you
With all of these iBuyers offering a slightly different variation in services and fees — resulting in a wide array of experiences for sellers — the options can be dizzying.
Plus, depending on your home’s condition, price point, and location, your home will be a more desirable purchase to certain cash buyers over others. Most real estate buyers have a specific “buy box” they use with parameters as to which types of properties are most valuable to them. That means what your home is “worth” will vary, even among buyers who can pay instantly.
If you’re not sure where to start in your quest for a quick, hassle-free offer, HomeLight has built a network of hundreds of pre-approved instant buyers across the country.
Sellers can access this network via our Simple Sale platform. With a platform like this, you can request a cash offer on your home and we’ll actually introduce you to the best iBuyer match (similar to how we can connect you with the best agent in your area).
In addition, we’ll compare your cash offer side-by-side with an estimation of what you could likely fetch on the open market. With this information in hand, you’re less likely to sell to an iBuyer and then feel those pangs of regret. You’ll have made the decision knowing the full picture.
COVID-19 impact on iBuyer purchases
The uncertainty surrounding COVID-19 caused many iBuyers to halt home purchases from March to April, 2020. Since iBuyers carry homes on their balance sheet, any dip in the market could spell trouble for their profit margins. However, the real estate market remains resilient in the face of economic volatility, and as home prices hold, iBuyers have started to dip their toes back into the buying pool.
iBuyer operations and the overall volume of home purchases will likely be down significantly compared to 2019. However, throughout the pandemic, HomeLight’s Simple Sale platform has remained open and operational — offering sellers the peace of mind to skip showings and sell with certainty even at the height of lockdown. If you’re interested in matching with an iBuyer in your area who’s continuing to purchase homes like yours despite current conditions, we can certainly make that introduction for you.
Steps involved in working with an iBuyer
Now that you have the gist of the iBuyer concept, you might be interested in exploring it as a fast, convenient way to sell your house — but how does it work, exactly? Although the specifics may vary from one iBuyer to the next, most of them follow the same basic steps:
- The seller visits the iBuyer’s or iBuyer network website (such as Simple Sale), enters the home’s address and some other basic information about the property, and submits a request for an offer.
- The iBuyer sends a confirmation that the request has been received, and typically sends an offer to the seller within a few days.
- The seller evaluates the offer, often running it by a real estate agent to get their input.
- If the seller decides to accept the offer and move forward with the sale, the iBuyer schedules an evaluation/inspection of the home.
- The iBuyer may request price concessions to compensate for any necessary repairs (although that doesn’t mean they will actually make the repairs).
- A final price is assessed for the home, after backing out the iBuyer’s service fees. If the seller is working with a real estate agent, there may be some negotiations during this step.
- Once the price is agreed upon, a closing date is scheduled.
Pros and cons of using an iBuyer
There are several key reasons that a growing number of homeowners are gravitating toward the iBuyer model:
- Quick, near-instant offers to help gauge a home’s value
- No need to stage or prep the home for showings
- Fixed costs with no back-and-forth negotiations
- Easier, less exhaustive inspections
- Certainty of a completed sale (no need to wait on a buyer’s financing)
- Faster closings
- Flexibility in move-out dates
- More contactless home sale in the age of COVID-19
That said, the iBuyer model isn’t for everyone. Below are some of the reasons it may not be a good fit for some homeowners:
- Typically lower offers than open market
- Potential added costs for requested repairs
- Lack of iBuyer availability in certain areas
- No personal connection/relationship with the iBuyer
Should you use an iBuyer?
Now that you have a better idea of how iBuyers operate, it’s time to evaluate your situation, goals, and needs and decide whether this approach could work for you. Generally speaking, a homeowner might be a good candidate for selling to an iBuyer if they meet the following criteria:
- Needs to move quickly due to a job change, divorce, financial challenge, or another urgent circumstance
- Has a home that has been recently updated and is in good condition
- Has health concerns and wants to avoid people entering the home for showings (particularly during COVID-19)
- Has made a contingent offer on another home and needs to sell quickly
- Understands the market and knows what the home could sell for in a traditional sale
Ultimately, homeowners want the selling process to be as smooth as possible — and for some, working with an iBuyer can put them on that path. While selling to a regular buyer can often be an unpredictable and emotional process, iBuyers can offer a simpler, more straightforward transaction.
For that reason, Cowan is considering transitioning to using only iBuyers moving forward. “When going through an iBuyer, I know what to expect and I can better advise my sellers,” she says. “The goal isn’t just to get the most money — it’s also to sell in the shortest amount of time and with the easiest process. But if you also work with an agent, you’ll be more likely to get a higher offer from the iBuyer.”
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