An iBuyer is the term typically used for real estate companies that offer to buy a seller’s home through a streamlined process. The advantage to the home seller is that they don’t have to keep their home on the market for months wondering when their home will sell. This is especially important for people who plan on buying another property and need the proceeds from the sold house to close on the next home. The catch is (since there always is one) the home seller may not get top dollar for their property and still have to pay a commission/service fee for the transaction. So the seller is making a tradeoff – getting a higher profit on their home sale which may require a few months versus a guaranteed sale in as short as 2-3 weeks for less money.
In crazy markets (i.e. San Francisco) where sellers get 20+ offers on their property in 48 hours, the iBuyer model is not needed right now.
Ironically, the iBuyer concept has been around for many years – go to any REI group (Real Estate Investment club) in any major city and that is exactly what many private investors have been doing for years. They offer to buy your home at a discount, in some cases closing on the home in a matter of days. The big difference here is that investors have typically targeted ugly homes with people who may be behind on their mortgage payments and don’t want to go through a foreclosure. HomeVestors, based in Dallas, TX, has been doing this for years through its franchise We Buy Ugly Houses®. While HomeVestors is a very successful franchise, the iBuyer nomenclature used in 2018 has come to mean a very different type of company – one based on technology and the “I” (Internet). An iBuyer takes advantage of a vast amount of public and private data about home sales and population projections to have computer algorithms help determine how much they should offer a home seller for their home, and the iBuyer’s potential profit if they fix it up and resell the home weeks or months later.
The big 3 iBuyers discussed today are extremely well-funded technology companies that target hot markets and a much higher home price point. These iBuyers can purchase pretty houses in fast growing neighborhoods, make few fixes and then sell the home to a new home buyer in a few months. The sellers working with these iBuyers are not consumers who have missed multiple mortgage payments – it’s quite the opposite. These sellers may have lots of equity, good credit, and are too busy to wait on getting their home sold. They are looking for convenience and fast liquidity, and will pay for that by taking less of a profit on the sale of their home.
THE BIG 3 IBUYERS
Zillow (Instant Offers Product)
Zillow launched their iBuyer offering in 2017 under the service name Instant Offers. Initially in Orlando, FL and Las Vegas, NV it is now in Phoenix, AZ. Like every well-funded iBuyer their plans are to go national, which is making some local real estate agents more than a little nervous. Zillow is trying to keep friendly with Realtors® by working with some agents to send them the seller leads for those sellers that decide not to take Zillow’s offer and list their home the traditional way with an agent. With Zillow’s program they may buy the house directly using their own money (REO – real estate owned) or work with a third-party investor who may buy the property. The options are presented usually within 2-3 days of the time a seller contacts them about selling their property.
OfferPad will give sellers an offer on their home within 24 hours and the application form to tell them about the property being sold only takes 5 minutes to complete. Every home seller that uses them also gets a free local move if their new place is within 50 miles of the property being sold. OfferPad operates in Phoenix, AZ; Atlanta, GA; Tampa, FL; Orlando, FL; Las Vegas, NV; Charlotte, NC; Salt Lake City, UT with Nashville and Dallas coming soon. OfferPad has been in the game since 2009 and actually had a partnership with Zillow until they found out about that company’s Instant Offer service.
Opendoor is another well-funded iBuyer that recently raised over $325 Million from venture capitalists, which will help expand them into new markets. They are rapidly making inroads in fast growing markets like Dallas-Fort Worth where one agent told me last year that there was a month where over 25% of the listings in one area were owned by Opendoor. Their impact is so big, the home builder, Lennar, has invested in the company. This is a great strategy since as a home builder one of the biggest problems is having buyers time the sale of their current home in order to close on their newly constructed home. If Lennar can refer buyers to Opendoor, it gives them a backup solution to sell their old home when the new one is ready. Currently Opendoor works in Atlanta, GA; Charlotte, NC; Dallas-Fort Worth, TX; Nashville, TN; Raleigh-Durham, NC; San Antonio, TX; Tampa, FL and Phoenix, AZ; Las Vegas, NV; Orlando, FL like Zillow.
HOW DO IBUYERS IMPACT HOME BUYING CONSUMERS?
As a buyer, you can still working with a buyer’s rep agent and purchase a resale home from one of these iBuyer companies. One of the benefits is that you may buy a home where some of the major issues have been already identified and fixed. Also, dealing with a company means that the process for documentation and closing will probably be a lot smoother. When you work with local agents from hundreds of different real estate companies you can see a lot of variance in process. These companies work at scale doing thousands of transactions, so they need processes in place to make buying and selling their inventory of homes smooth – at least in theory. Expect more iBuyers to enter the market in various forms using technology to make more informed and quicker decisions.
You can assume the real estate industry is undergoing massive transformation and will continue to do so, which has been long-predicted by many in the industry. Home sellers don’t want to pay 6% to sell their home, and if they do, then at least they can get a quick guaranteed transaction. In reality, when home sellers use an iBuyer, who purchases their home, it may end up costing them 8-11% or more, but again, it may be worth it, especially if that home would have sat for two more months requiring two more mortgage payments.
From a buyer perspective, the most important thing is that you purchase a home that is properly transferred with no major surprises that will cost you thousands of dollars later down the road.
The blog for everything about buying new home construction (and resale homes).