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iBuyers: A Bad Deal in This Seller’s Market

With the arrival in Jacksonville of Zillow’s new iBuyer program, Zillow Offers, many people are asking what the iBuyer concept is all about. Here’s a general overview of the how, why, pros and cons of iBuyers.   

iBuyers: A Bad Deal in This Seller’s Market

The “We’ll Buy Your Home for Cash” scheme – you’ve all seen the signs on the roadside -- has been around for decades. Today, that same concept is clothed with some flashier new names and slogans: iBuyers, “instant Buyer,” Quick Cash Offers, etc., but the process and pros/cons are essentially the same. And in this hot Northeast Florida Seller’s market, the downsides of resorting to iBuyers are substantial.

What is an iBuyer?

It’s a company that uses technology (a website, a questionnaire, and a few algorithms) to instantly make a verbal cash offer on your home. iBuyers are often middle-man companies or brokerages funded by investment money from big banks or other cash-rich companies. iBuyers generally purchase specific types of residential homes (usually only those meeting restrictive criteria such as home age, price range, etc.) from private sellers at a low enough price -- and with high enough fees -- that they can eventually re-sell the properties for a much higher price that covers their carrying costs, transaction costs, and rehab costs.

Sounds straight forward, right? But the process is often not simple or convenient, and the financial disadvantages for Sellers in this strong market are significant.

Why are there so many iBuyers now?

Real estate is traditionally a cash-intensive business, and the availability of cheap money (record-low interest rates) over the past few years is changing the landscape. That’s why there are so many people/companies becoming iBuyers.  

Plus, setting up an iBuyer scheme is relatively easy, especially for a brokerage or other company already in the industry. I personally could probably raise a $50M fund within two weeks to buy properties around Northeast Florida at discounted prices. Are you interested? I will purchase your home for around 75-85% of your home's market value any day of the week, and close within 15 days. I'm serious!

Clearly, with the power of Wall Street behind them, it’s important to learn more about what iBuyers are all about. So, let’s delve into the primary issues:

#1:  How’s the Money Compared to Selling on the Open Market?

The offer you get from an iBuyer is almost always well below what you would get through the traditional, open market process. According to Forbes, studies have shown that, overall, selling through an iBuyer reduces a Seller’s net by about 11-15% compared to selling on the open market. That loss is due to the combination of a lower contract sales price plus higher transaction fees charged by most iBuyers.

Generally, iBuyer “instant offers” are based on a valuation that takes few of the critical aspects of your home's value into account. In many cases, it's simply a dollar-per-square-foot calculation, with little regard to upgrades, layout, condition, lot, area, etc. But real estate is extremely localized, plus factors like condition and amenities need to be evaluated by a person; appropriate valuation cannot yet be automated via a simple 5-step questionnaire.

So, an instant offer generally will not be the actual offer. That would not come until after inspection, repair negotiation, etc. Further, the Seller’s fees to an iBuyer range from 6-14% (check out their own terms - scroll down to selling options and check out the asterisk) of the home’s purchase price, versus about 6% commission to an agent under the traditional model.

Looking at a little investing background helps put the iBuyer situation into perspective. Traditionally, investors have targeted only Sellers in serious need of a cash solution, generally due to complex legal, financial, or family situations. For Sellers in those tough circumstances, the investors' creative, reduced-price-but-faster-cash approach could provide real value.

Further, the homes purchased in these situations are often in disarray, have deferred maintenance, and require months of rehab. Therefore, a fair cash solution to remedy the situation both helps the homeowner and makes the neighborhood a better place to live. Overall, those types of investors help someone out of hardship, and then make a return on their investment only after months of rehab work. This is called a value-add service.

But the investors behind many iBuyers have a different approach. They view the current low cost-of-capital environment as an opportunity to pick up share in the retail home sale market not just from Sellers under hardship, but from the general public. Think about it: Amazon had a successful strategy of picking up ungodly amounts of consumer goods market share and figuring out how to monetize later.

Why wouldn’t Wall Street try to apply that concept to housing, one of the largest sectors with the largest economic multiplier? Why not take advantage of cheap money by buying as much inventory as possible, then figure out what to do with it later? And if that means buying houses that sit unoccupied for a while, well, those investors aren’t living there, right?

Indeed, some experts predict a day when Wall Street will own the majority of the country’s single-family home inventory, leaving most people as tenants instead of home owners. That sounds radical in a way -- until you consider it from a Big Bank perspective.

The bottom line, then, is that Sellers utilizing an iBuyer will almost always net less money than if they sold what is likely their largest asset on the open market.

iBuyers often address that concern by arguing that even if the net is less, their process is way more convenient. But is it?

#2 Are iBuyers Actually More Convenient Than The Traditional Model?

As a retail Seller, you have to determine whether the “convenience” iBuyers claim to offer is actually real, or whether you’re getting into as many or more hassles than could occur with a traditional sale. Only then can you compute how much that "convenience" is worth to you, from a purely dollar perspective.

Here’s how an iBuying process generally works:

An iBuyer makes an instant valuation of your home based on certain algorithms, and gives you a verbal – non-binding – offer. Then it requires an in-person appointment with you by one of its representatives. It requires an inspection of your home. It can renegotiate the offer for your home based on the inspection results. Then it negotiates the closing period.

Sound familiar? It is essentially the same process as the traditional model!

What you do avoid with an iBuyer system are the showings and Open Houses often used with an open market sale. And when Sellers are in a strong Buyer’s market, where endless Open Houses and showings are needed to procure even one offer, that might be appealing. But that is not today’s reality in Northeast Florida.

This is a hot SELLER’S market. Appropriately priced homes in decent shape and a decent location are selling extremely quickly. Often, Open Houses are not needed (especially with COVID concerns), and relatively few showings result in an offer – even multiple offers. So, a Seller must decide: In this Seller’s market, is the relatively small – if any -- inconvenience of selling on the open market, worth losing thousands of dollars in net proceeds?

Further, in examining convenience, Sellers must be aware that those Wall Street-backed iBuyers may not come through as promised. These banks have narrow parameters when making their offers, with their algorithm tells them how long they'll need to hold the home on their books, and how long it'll take to sell. They are not families who have fallen in love with your home and are willing to stick with a complicated process if required to get their families into the house.

The iBuyer investors look only at their bottom line, carefully calculating how much they can afford to pay and still make a profit. And when something changes-- such as the stock market tanking in late 2018 and pre-COVID in March 2020—some of those iBuyers backed out of their pending contracts with Sellers.

Yes, this has happened. An iBuyer cash offer is not a sure thing.

#3 Is There Something Else Behind the iBuyer Scheme?

Of course, since I ask, you know there is.

The iBuyer system is not only about making successful “instant cash offers” on homes. It is also about collecting Seller data. When a curious Seller clicks to discover what he could get in quick cash, he is giving away something valuable: his contact information and the fact he is considering selling. With that in hand – even if no sale occurs--the iBuyer gains something to sell or refer to a real estate agent who wants your lead.

So, the quick cash offer is also a ploy to monetize your personal information.

What do IBuyers mean for the Real Estate Industry?

My personal view is that real estate agents and teams who are jumping into bed with Wall Street-backed iBuyers are doing a disservice both to Sellers and to their profession. They are purchasing iBuyer-provided contact information to make a quick buck off retail Sellers who may not understand the iBuyer process enough to know they will end up with less money in their pockets. Further, agents who drink the iBuyer Kool-Aid, are helping technology figure out how to replace themselves, as agents, with an automated system of purchase that will leave more and more residential properties in the hands of Wall Street. Sellers having access to the assistance of real people, expert agents, will be reduced and eventually eliminated as Sellers deal with Big Banks to sell. And, subsequently, Buyers who seek to purchase the iBuyer properties will have to negotiate with Big Banks, too.  

Recap:

1.     Sellers taking quick cash through an IBuyer in this market will probably not have a true value experience as to the money they net or their so-called “convenience.”  

2.     Even when Wall Street and iBuyer agents end up not offering reasonable quick cash deals, they still make money off Sellers by collecting and selling their data. Beware of that ploy.

So I'll leave it to you to decide:

Are iBuyers simply another ploy for Wall Street to come in and suck the equity out of hard-working Americans who are building equity in their homes after one of the largest real estate bull runs in history?

Or are they an actual value-add that provides convenience via an instant cash offer system?

I’d love to hear your thoughts, especially on the positives of iBuyers.

And, as with all things real estate, we have done the math. You should, too. Just reach out to Jon @ 904-570-1216, or check back to this website later for more details.