Are You Losing Deals to iBuyers?

Each year more iBuyer competitors enter the real estate space, making it easier for people to buy and sell homes without traditional REALTORS. Yet 95% of real estate agents sell themselves short online and are also not effectively using systems and tools they already have to keep in touch with prospects and clients. Additionally, to effectively compete with iBuyers, real estate agents and brokers must understand and effectively tell the iBuyer story.

The rise of iBuyer programs has evolved naturally through technological advances that have enabled marketing direct to homeowners and those seeking to buy and rent homes. ("iBuyer" is simply the term for real estate investors who leverage online digital platforms to purchase and sell property at reduced costs).

According to Money Inc., the top 5 iBuyers include:

• Opendoor - Instant (initial) offers, 7% Fee plus additional costs

• Knock - Home "trade-in" service where Knock buys the sellers new home, then sells the old home for them and when it sells, then transfers the new home and mortgage to the seller of the old home.

• Offerpad - For qualifying homes, initial offers in 24 hours, seller chooses closing date.

• Zillow Instant Offers - Formally, Zillow says they are only exploring the iBuyer services as a test, yet have created partnerships with some high powered financial investors – including Offerpad. (They are live in several major markets.)

• RedfinNow - In over 80 markets. Redfin allows potential sellers to go online and view the market value of their home... Their home inspection is 30 minutes, and if approved the seller will find an offer within 24 hours.

What are the typical costs of iBuyer programs?

Each iBuyer has different fees and different ways of "spinning" all the costs passed on to the seller. Getting to the seller's bottom line cash received will always be some variation of:

[iBuyer's Perceived Present Market Value LESS (Estimated Improvements Costs, iBuyer Fees and/or Commissions & Closing Costs) EQUALS Cash Received by Seller]

Let's break that down. If you want to sell your home to an iBuyer:

• Expect your offer to reflect something a bit less than (85% or less of) present market value of your home without any improvements.

• After inspection, expect the offer to be reduced by the amount the iBuyer thinks it would cost to fix up your home (enough improvements to rent or sell your home for something closer to top dollar).

• At closing, expect the amount you actually receive to be reduced by fees and closing costs roughly the same as (or in some cases up to 2 1/2 times greater than) if you had sold your home using a traditional real estate agent.

What else is going on when you sell to an iBuyer?

• No one is competing to buy your home (and therefore there is no incentive for the iBuyer to offer you full market value).

• iBuyers are investors first and many have stockholders to answer to... they are motivated by only one thing, making as much profit as possible from every home they buy. (Some are ALSO generating leads to support additional revenue channels.)

• Although this applies to all iBuyer programs, expect to hear this message more than any other perceived benefit. As summed up in Opendoor's FAQ, "...what is the value of your time and sanity? Selling to Opendoor means zero showings, home preparation, and listing costs. You have complete control over your moving timeline."

So, if your sanity is unaffected by receiving the lowest offer possible, an iBuyer program may be for you.

iBuyer Research

You should do your own research, but here's a sampling of findings from iBuyer sites and an investor forum. I'm including this because it will help you gain perspective. With perspective and insight, you will be better prepared to serve sellers and compete with iBuyers.

From an Inman article, Zillow Chief Revenue Officer, Greg Schwartz, writes, "We require all buyers to be represented by an agent, and we aggressively encourage sellers to have representation through language on our site, email, and phone calls." According to Zillow Instant Offers FAQ, the seller will pay Zillow a service fee "similar to agent commissions in a traditional sale". The seller is also "responsible for the costs to up front repairs and improvements needed to get your home ready to sell".

And from a popular real estate investor forum (full post here), one investor's experience does not sound as hassle free as claimed by most iBuyer programs. Initially, this seller received what he thought was a reasonable offer. What he then learned was what I believe is common practice: iBuyers initial offers are designed to keep the conversation going long enough for an inspector to visit the property before finalizing the offer. The seller can walk away (as this seller did) or accept reductions to the offer based on the iBuyer cost estimates to make all the repairs and improvements that will make it easy for the iBuyer to sell or rent the property.

Offerpad.com provides a comparison of "average fees" on their site (their example doesn't mention that the fee may be up to 10%, which is roughly 43% more than the 7% in their example). To make Offerpad's deal (all iBuyers do this by the way) look better than the Traditional offer, they include assumed “Seller Concessions” and "Overlap ownership costs" (which don't apply to every seller. Additionally, for the Offerpad and Traditional scenarios, they show repair/improvements costs as "TBD", which in itself could be a deal breaker. Oh, and not to mention, in this example (or any iBuyer examples) is that the Top Line Sales Price for the Traditional Offer would actually be MUCH more if the seller completed all the "Market-Ready Improvements".

RedfinNow presents their fees a little different, although the net result to the seller is similar to other iBuyers. Here are a couple screenshots from RedfinNow's website.

But wait... there are more costs when selling to RedfinNow. They imply (as do most iBuyers) that you, the seller will have to do some repairs 0 to 2% of the offer price (if you are lucky...could be much more in reality). And closing costs...

Opendoor positions fees and expenses like other iBuyer programs, but they explain exactly how the seller/customer actually mitigates Opendoor's risk of buying and then re-selling homes. Their FAQ states, "Our service charge varies based on how long we expect it will take to sell your home." The next sentence claims (after they just stated higher fees apply if they think it will take longer to re-sell your home), "We take all the risk of the homes resale and holding costs so you can have the certainty of a competitive offer and move on your own timeline." In truth, the seller/customer is paying up front for the iBuyer’s potential risk by paying up to 14% in fees depending on how long Opendoor thinks it will take to sell their home.

Do you think Opendoor (or any other iBuyer) would follow up and give a home seller a rebate if their old home sells quicker than anticipated? I think not... the risk is passed to the seller and the iBuyer profits more if the home sells quickly. Opendoor Repair Costs present two options, do it yourself and they will reconsider initial offer or Opendoor will "...ask for a credit to cover costs...", resulting in less cash to the seller at closing.

Knock doesn't consider their program to be "iBuyer". They have a unique value proposition compared to other top iBuyer programs. Knock wants to buy your next home for you and let you move into it while they try to sell your old home. They actually refer to your old home as a trade-in. After they sell your old home, they then sell you the home they bought and let you move into.

Consensus says Knock generally works best with highly marketable homes. Of course, highly marketable homes sell quicker and for top dollar, so Knock or an iBuyer program would only make sense in rare circumstances. Worth noting, Knock's worst-case scenario may be rare, but would certainly be upsetting… that is, to move into a new home, lay down roots for a full year and then be forced to move back into your old home if it doesn't sell.

What have we learned? When home sellers accept iBuyer below market prices and pay fees equal to or up to 2 1/2 times more than traditional real estate transactions, the home seller subsidizes the iBuyer's "risk". Long before iBuyers, there have been individual investors in every market willing to pay cash for homes in "as is" condition who can close quickly. Better agents and brokers will be able to connect sellers with good local investors in every market.

Local investors may actually include terms that iBuyer programs would never consider. For example, Val Lemoine in Marietta, Georgia is a savvy investor with tremendous business and family values who has been known to buy homes and then rent back to sellers until they are ready to move. Try doing that with an iBuyer! Val and his network of investors can accomplish better results, with better service and consideration for sellers than any large-scale iBuyer program.

While there are circumstances where a seller may need to sell their home quickly (and sacrifice price in the process), I believe as homeowners begin to fully understand iBuyer programs, home sellers will demand better offers. The future is bright for real estate agents who EARN their commissions providing valuable service throughout the entire process of selling and buying homes. Sometimes that means finding the right local investor for a seller.

Residential real estate is all about homeowner transitions. Real estate brokers and agents owe it to their clients to understand each seller's circumstances and if they are considering a quick sale, sellers NEED to understand the entire iBuyer story AND local options.

iBuyers do an amazing job marketing their programs. REALTORS and brokers who get good at telling the ENTIRE iBuyer story will win more listings and earn every bit of their commissions.

What stories are you telling?

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Worthy Agent, LLC

United States based advocates for traditional real estate services. Advising and cultivating engaged successful agents and brokers who recognize the benefits of offering more value to their community, colleagues and clients. Worthy Agent maximizes income opportunities regardless of local market conditions, agency dynamics, individual personalities or experience. We leverage systems, people and processes to develop fully integrated real estate services so our clients dominate as the "MOST WORTHY" real estate pros in their market.