The entire premise behind an iBuyer is simple. They buy your home in a way that offers the convenience and flexibility that would be hard to match when selling with a real estate agent. Sites like Redfin and Zillow are opening up this platform to markets across the United States. Click get an offer, put your info in, and they will send you something in writing. Sounds great right?
A market analytics firm by the name of Collateral Analytics did extensive research on the actual cost of using these iBuyers and the numbers tell an interesting story. In the article, they compare 2 different iBuyers, which an article I read from Inman confirms that they compared Offerpad and Opendoor. I also added Zillow Instant Offers to the mix.
|Below Market Offer
|Buyer Closing Fee to Seller
|Total Expense Range
|Collateral Analytics’ Est.
|Listing Agent Fees
|Buyer Agent Fees
|Buyer Closing Fee to Seller
|Preparing Your Home
|Total Expense Range
What’s the actual expense?
The charts above show you how expensive the iBuyer platform is when compared to the traditional route. Many people think that they are avoiding broker fees when using these iBuyer services, but that is not the case. Not only do they charge convenience fees that are typically higher then broker commissions, but they also need to pad their investment by offering anywhere between 2% – 6.9% below market value. Some companies also pass along fees that are normally paid for by the buyer, such as escrow fees, to the seller. This can add an additional ~1% to the cost.
Another common misconception is that these iBuyers are purchasing the home as is. This is typically not the case. They do still get an inspection by their own inspectors and the article says they often ask for “generous repairs” based on the results of the home inspection. One important thing to note is that most iBuyers are only interested in single family homes with easy values to compute. I do not believe any of the existing iBuyers are currently looking at condos, nor do they want “unique” homes. Zillow estimated that their existing model covers about 50% of the homes in the United States, although they aren’t in very many markets yet.
To put it into perspective, let’s use a home that is worth $500,000. In a traditional sale, a homeowner would need to prepare the home to market. They would need to pay a commission to the agent listing their home, which also includes the fee that goes to the buyer’s agent. Once in escrow, they also will typically receive some sort of request for repairs. These fees together usually range from 5% on the low side to 10.5% on the high side. On average, I would estimate these costs to be about 7.8% of the sales price.
In retrospect, if we look at the fees charged by iBuyers, these costs could range from 8.0% on the extremely low side to upwards of 19.4%! The market analytics firm closes this range a bit by saying, on average, using an iBuyer would cost approximately 13% – 15% of the home’s value. If we use the average amount of 13.7% (8.0%-19.4%), which does fall within that range, it is still about 5.8% more expensive then using a traditional agent. On a home of $500,000, that means it could cost the seller approximately $29,750 for the convenience!
- iBuyer Cost
- Homes Equity
- Traditional Cost
- Homes Equity
Zillow is Betting Big on iBuying
Zillow has remained the top real estate search site used by consumers. Majority of the company’s revenue is based on selling advertising space, or leads, to real estate agents like myself, but now the company seems to be taking a turn. The company has been scaling up and sold 786 homes in the second quarter of this year.
The problem is, Zillow lost $2,916 per home they sold last quarter. In a letter to their investors, the CEO of Zillow, Rich Barton, outlined how they plan to make money in the future on their iBuyer platform. Barton explains that they will need adjacent services, such as title, escrow, and lending ventures. They want to control the transaction from start to finish, with the consumer (seller) going directly to them.
Why is this an issue?
Take another look at the screenshot I took of Zillow’s site. This is a home we sold in Clairemont Mesa East less then one month ago. Zillow’s home evaluation tool, or Zestimate®, places the home’s value at $679,899. Admittedly, I placed the value around that same price based on the comps. I figured the property would sell around $680,000-$690,000, but I was definitely incorrect and so was Zillow.
Once we hit the market, we had so much interest. The open house resulted in about 100 attendees and we received 6 offers, the highest of which was $45,100 over our list price of $679,900. We ended up going with an offer at $720,000, which was $40,100 over list price. The seller credited the buyer $3,550 for repairs, $800 for termite work, $4,000 for a new furnace and there were $0 credits towards the buyers closing costs.
Without allowing people to compete for the property and the market telling us where the value is, the seller would have missed out on thousands of dollars. Think about this. I put the market value somewhere around $680,000-$690,000. Zillow did as well. If we use their $679,899 Zestimate®and then take the cost of an iBuyer off of the top, the seller would have net around $586,753 versus the $668,450 we were able to get. That is a difference of $81,698.
Here is one more thing to think about
In Barton’s letter, he mentioned that they plan on turning a profit from other services, such as title, escrow and lending. This is to “improve the consumer’s overall transaction experience, while also generating cost savings”. The big problem I see is the lack of separation throughout the process. I am going to use Zillow as an example because they are, in my opinion, going to be the largest player in the game.
In this scenario, Zillow or an agent affiliated with Zillow, is telling you how much your home is worth. They are, then writing you an offer based on that value and acting as the buyer. If you like what they have to offer, you will use their title and/or escrow company to facilitate the transfer of the property. Escrow holders are meant to be a neutral third party and have a duty to impartially oversee the escrow process. How is this possible if they are owned by or affiliated with the buyer? This is all done to “improve the consumer’s overall transaction experience”.
Don’t get me wrong, there are plenty of brokerages that are also affiliated or have a financial interest in title/escrow companies, but it doesn’t mean I agree with that either. I have been an agent in companies that have had a tie to an escrow or title company and I refuse to use them because I believe they should always remain a neutral 3rd party.
In the end of the day, once you compare the numbers, there is a very narrow market for using an iBuyer platform. When people sell their home, they typically have intentions for the equity they have in the property. If you are looking to sell your home and net the most money possible, the iBuyer platform is not for you.