Are instant cash offers the future of the real estate market?

Technology is changing the way we do almost everything, and real estate transactions are no exception. In fact, a new crop of tech companies wants to revolutionize the way we buy and sell homes.

iBuyer startups like Opendoor, Offerpad, and Properly are rapidly expanding into new territories. Now established players, like Zillow, are starting to get in on the action too. Also known as direct buyers, these companies use computer algorithms to provide sellers with instant cash offers to buy their homes.

While the current market share of iBuyers remains small, their big advertising budgets have helped create a noticeable buzz in the industry. As a result, many of our clients are curious about the iBuyer process. Therefore, in this blog post we explain their business model, weigh the pros and cons of working with an iBuyer, and share strategies you can employ to protect yourself if you choose to explore this new option to buy or sell your home.

ARE INSTANT CASH OFFERS YOUR BEST OPTION?

While each company operates a little differently, the basic premise is the same. A seller or seller’s agent submits answers to a few questions about the size, features, and condition of a property. Additionally, digital photos of the home may also be required. The iBuyer then reviews the submitted information to determine if the home meets the requirements of its investment model.

The company is generally looking for houses it can easily value and flip for a profit. Typically, an ideal property is a moderately priced single family home located in a neighborhood with many similar houses. Of course, the home must not require any major renovations or repairs since the buyer’s objective is to limit additional investment to make the home ready to list.¹

Once the iBuyers have employed an algorithm to determine the amount they are willing to pay, they email instant cash offers to sellers. Such offers are usually delivered within a few days and include the company’s service fee, which typically range between 7% and 12% of the purchase price.²

For the sellers that accept an instant cash offer, an inspection is scheduled. If the inspection discloses any material defects, the iBuyer typically reduces the offer commensurately or withdraws from the transaction. Once the sale closes, the iBuyer makes the necessary updates and repairs. They then list the home for sale.

WHAT ARE THE PROS AND CONS OF SELLING TO AN iBUYER?

To be sure, the biggest benefit of selling a home to an iBuyer is convenience. To some homeowners, the stress and disruption of preparing and listing their home can feel overwhelming. Additionally, what busy family with kids and pets wouldn’t want to skip the hassle of keeping their house “showing ready” for a protracted period of time? Of course, many sellers also like the predictability of dealing with an iBuyer. How else could they instantly know their sales price, be sure the transaction will close and close when they choose to?

However, this added convenience comes at a price. An iBuyer is an investor looking to make a profit. So you can expect their instant cash offers to be materially below market value. Of course, their service fees and deductions for updates and repairs then lower the seller’s net proceeds even further. As a result, studies show that sellers who work with iBuyers net a significantly lower amount than those that list the traditional way.³ In fact, a MarketWatch investigation found that transactions involving iBuyers net sellers 11% less on average than if had listed their home with a Realtor.²

Instant cash offers have their place in the real estate market. But the convenience comes at a cost!

WHAT YOU NEED TO KNOW ABOUT INSTANT CASH OFFERS!

The process of buying a home from an iBuyer is similar to buying a home from any other investor. You will usually find the home to be clean, to feature neutral colors, and to be moderately updated. Additionally, because it’s vacant, you will not have to work around a seller’s schedule to see the home.

However, there are some pitfalls to avoid when working with iBuyers. Since speed is of the essence to the iBuyer, sometimes the renovations are rushed and the quality of workmanship can suffer. Also, since iBuyers set prices to yield required profit margins, they rarely agree to make further repairs. Therefore, while buyers may have a home professionally inspected before closing, they often have little recourse other than to absorb the cost of required repairs disclosed in the inspection report or to walk away from the transaction.⁴

On the other hand, to avoid unexpected consequences and disappointment, you would be wise to be represented by a buyer’s agent when considering buying a home from an iBuyer. A real estate professional can arrange to show you the home and point out issues of concern you may not have noticed. They can also provide background information about the neighborhood and an assessment of the home’s market value.⁵ The good news is that most iBuyers gladly cooperate with Realtors and pay their commissions.

HOW CAN I PROTECT MYSELF IF I CHOOSE TO WORK WITH AN iBUYER?

While it may be the “quick and easy” way to go, working with an iBuyer can present some unique challenges. For example, iBuyer are notorious for presenting a strong initial purchase offer to peek your interest, then presenting a long list of costly updates and repairs to reduce the price and assure the purchase delivers their desired profit margin.² Additionally, unlike a traditional buyer whose goal is to make a deal work, iBuyers are far more likely to walk away if you don’t agree to their demands.

Having a professional agent represent you can be especially important when negotiating with iBuyers. Their profit motive and your interests can be at odds.. Therefore, you would be wise to have a skilled and knowledgeable professional in your corner to ensure you get a fair deal and avoid unpleasant surprises. Avoid reacting emotionally and jumping at instant cash offers that cause you to leave cash on the table.

SHOULD YOU DO BUSINESS WITH AN iBUYER?

The emergence of new options that help to streamline the process of buying or selling real estate is exciting. Therefore, if we believe a client can benefit from working with an iBuyer, we present that option. But, as you may expect, the convenience comes at a price and most sellers and buyers find that price to be too high. In any event, it will be interesting to see whether the iBuyer model will continue to be a small, specialized niche in the real estate market or evolves into a more mainstream option for sellers and buyers.

EXPLORE YOUR OPTIONS
Do you want to learn more about iBuyers and more traditional ways to buy or sell a home? Let us help you to understand your options and select the one that fits your unique circumstances best. Contact us to schedule a free, no-obligation consultation!

“I still think buying a home is the best investment any individual can make.” – John Paulson, billionaire

Of course, Mr. Paulson is right. But having built up a home’s equity, a wise man does not flitter it away due to a lack of patience, an unwillingness to take steps to preserve and protect it, fear or lack of confidence!