Everything You Need to Know About iBuyers

Understanding iBuyers and Instant Cash Offers

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, and now established players, like Zillow, are starting to get in on the action. Also known as Direct Buyers, these companies use computer algorithms to provide sellers with a quick cash offer to buy their home. While the actual market share of iBuyers remains small, their big advertising budgets have helped create a noticeable buzz in the industry. This has left many of our clients curious about them and how they work. In this article, we explain their business model, weigh the pros and cons of working with an iBuyer, and share strategies you can use to protect yourself if you choose to explore this new option to buy or sell your home.

FIRST, HOW DOES THE iBUYER PROCESS WORK? While each company operates a little differently, the basic premise is the same. A seller (or seller’s agent) completes a brief online form that asks questions about the size, features, and condition of the property. Some also request digital photos of the home. The iBuyer will use this information to determine whether or not the home fits within their “buy box,” or set of criteria that matches their investment model. They are generally looking for houses they can easily value and “flip.” In most cases, their ideal property is a moderately priced, single-family home located in a neighborhood with many similar houses. The property shouldn’t require any major renovations before listing.1 These qualities make it easier to assess value (lots of comparable sales data) and help to reduce risk and minimize carrying costs. Once the iBuyer has used their algorithm to determine the amount they are willing to pay, they will email an offer to the seller, usually within a few days. The offer should also disclose the company’s service fee, which is typically between 7% and 12% of the purchase price.2 If the seller accepts, an in-person visit and inspection are scheduled. The iBuyer will ask for a reduction in price to cover any defects they find during the process. Once the sale closes, they will make the necessary updates and repairs and then resell the home on the open market.

WHAT ARE THE PROS AND CONS OF SELLING TO AN iBUYER? Of course, the biggest benefit of selling your home to an iBuyer is convenience. For some homeowners, the stress and disruption of preparing and listing their home can feel overwhelming. And what busy family with kids and pets wouldn’t want to skip the hassle of keeping their house “show ready” for potential buyers? Additionally, many sellers like the predictability of a cash buyer and the flexibility to choose their closing date. However, this added convenience does come at a cost. An iBuyer is an investor looking to make a profit. So their purchase offer is usually below true market value. When you tack on service fees of up to 12% and deductions for updates and repairs, studies show that sellers who work with iBuyers net a lower amount than those that list the traditional way.3 In fact, a MarketWatch investigation found that transactions involving iBuyers net the seller 11% less than if they would have sold their home with an agent on the open market.2

WHAT ARE THE PROS AND CONS OF BUYING FROM AN iBUYER? Buying a home from an iBuyer is a lot like buying a home from any investor. The pros are that it’s usually clean, neutral, and moderately updated. You’ll often find fresh paint and modern finishes. And because it’s uninhabited (no one is living there), you don’t have to work around a seller’s schedule to see the home. However, there are some pitfalls to avoid when working with iBuyers. Speed is of the essence, so sometimes the renovations are rushed and the quality can suffer. Also, their investment margins don’t leave much room for negotiating a price reduction or additional repairs. That leaves buyers —who have already invested hundreds of dollars in an inspection—little recourse if any issues are uncovered.4 That’s one of the reasons we always recommend viewing properties with an agent. During your visit, a real estate professional can point out any “red flags” at the home, provide background information about the neighborhood, and help you assess its true market value. That way, you don’t invest time and money in a high-risk or overpriced property. Safety is also a concern. Some companies allow buyers to access their homes via a smartphone app. While it may seem convenient, it provides an easy way for squatters and others to enter the home illegally.5 Luckily, since most iBuyers (and traditional sellers) pay a buyer agent’s commission, you can benefit from the guidance and expertise of a real estate professional … at no cost to you!

HOW CAN I PROTECT MYSELF IF I CHOOSE TO WORK WITH AN iBUYER? While it may seem like the “quick and easy” way to go, working with an iBuyer can present some unique challenges. For example, they are notorious for presenting a strong initial purchase offer and then whittling it down with a long list of costly updates and repairs once they complete their inspection.2 And unlike a traditional buyer who is incentivized to make a deal work, iBuyers can easily walk away if you don’t meet their demands. Just like you wouldn’t go to court without a lawyer, you shouldn’t enter into a real estate transaction without an advocate to represent you. Having a professional agent on your side can be especially important when negotiating with an iBuyer. Remember, they employ sophisticated representatives and a team of lawyers who are focused on maximizing their profits, not yours. You need someone in your corner who has the skills and knowledge to ensure you get a fair deal and who understands the terms of their contracts, so you don’t encounter any unpleasant surprises along the way. Overall, we think the emergence of new technology that helps to streamline the real estate process is exciting. And if we believe a client can benefit from working with an iBuyer, we present it as an option. But there is—inevitably—a cost to the convenience. After all, most iBuyers eventually list the properties they acquire on the open market, which is still the best place to find a buyer if you want to maximize the sales price of your home.

Sources:

  1. The Dallas Morning News – https://www.dallasnews.com/business/real-estate/2019/07/11/so-called-ibuyer-real-estate-firms-pitch-programs-to-buy-your-house-help-you-hunt-for-another/
  2. MarketWatch – https://www.marketwatch.com/story/selling-your-home-to-an-ibuyer-could-cost-you-thousands-heres-why-2019-06-11
  3. Forbes – https://www.forbes.com/sites/alyyale/2019/08/16/study-shows-ibuyers-cost-home-sellers-thousands-is-convenience-worth-the-price/#697ac0c42269
  4. US News & World Report – https://realestate.usnews.com/real-estate/articles/what-to-expect-when-buying-a-home-from-an-ibuyer
  5. Inman – https://www.inman.com/2019/09/11/police-arrest-couple-found-squatting-in-opendoor-home-with-their-kids/

Did You Know Consumer Confidence in the Economy & Housing is Soaring?

Consumer Confidence

The success of the housing market is strongly tied to the consumer’s confidence in the overall economy. For that reason, we believe 2017 will be a great year for real estate. Here is just a touch of the news coverage on the subject via The KCM Crew.

HousingWire:
“Consumers’ faith in the housing market is stronger than it’s ever been before, according to a newly released survey from Fannie Mae.”

Bloomberg:
“Americans’ confidence continued to mount last week as the Bloomberg Consumer Comfort Index reached the highest point in a decade on more-upbeat assessments about the economy and buying climate.”

Yahoo Finance:
“Confidence continues to rise among America’s consumers…the latest consumer sentiment numbers from the University of Michigan showed that in March confidence rose again.”

MarketWatch:
“U.S. consumers are the most confident in the U.S. economy in 15 years, buoyed by the strongest job market since before the Great Recession. The survey of consumer confidence rose…according to the Conference Board, the private company that publishes the index. That’s the highest level since July 2001.”

Ivy Zelman, in her recent Z Report, probably best capsulized the reports:
“The results were incredibly strong and…offer one of the most positive consumer takes on housing since the recovery started.”

Why Now is a Good Time to Invest in Real Estate

Real Estate

Real Estate is on an upswing.

HousingWire Aug 10: If you have been on the fence about getting into real estate investing, now may be the best time to take that first dive into this business. Real estate has seen its highs and lows over the past decade.

Due to the subprime mortgage housing crisis, many investors jumped ship when it came to this business, and ever since then, there still seems to be whispers of hesitation to enter back into this market.

However, in recent years, there appears to be an upswing in the real estate market, prompting experienced investors to return and even inspiring confidence in newbie investors to try their hand at investing.

Here are three reasons why now may be the best time to invest in real estate.

1. Home prices are rising

One of the first signs that the real estate market is seeing improvement is that the prices of homes are steadily rising. According to a study conducted by CoreLogic, “national home prices were 5.7% higher in June compared to a year ago.” Some areas are seeing astonishing levels of growth, specifically Washington, Oregon and Colorado, which have experienced a yearly price gain over 9%, the three highest in the country according to CoreLogic’s data.

Yahoo Finance reported that “June is the 52nd consecutive month where U.S. median home prices increased on a year-over-year basis.” This rise in prices could be due to the lack of inventory in the market, which is driving prices up and giving investors the opportunity to capitalize on these investments.

2. The rental market is growing

The rental market for real estate investing also appears to be seeing a change for the better due to this lower inventory of distressed properties which is raising the prices of rentals, giving buy and hold investors important insight into where to invest based on the current market trends.

In a recent webinar hosted by Dennis Cisterna, chief revenue officer for Investability, he discussed how the current single family rental market is experiencing a growth spurt. He attributes this to the stabilizing economy increasing demand for rentals, the lower inventory leading to rising prices, and the difficulty people are experiencing obtaining mortgages as reasons why they are moving more towards renting.

He further explains how investors are branching out to markets outside their local areas: “In 2016, people want to invest in markets outside their own neighborhood because if you want to buy a rental property and live in Southern California right now you’re going to spend over $400,000 and possibly not even have any positive cash flow in year one.”

3. Foreclosure levels at the lowest since 2000

Another important sign that the tides are turning in a positive direction is the fact that foreclosures are on the decline. MarketWatch cites data compiled by Black Knight Financial Services that show in the year 2000, the number of foreclosures was 114,310 and now in 2016, that number has dropped to a staggering 77,657 compared to its peak between 2008 and 2010 of about 650,000 foreclosures reported.

These numbers should further prove how the economy is seeing a change for the better, another indicator for investors to try and get into the business while the market still is primed for it. Less foreclosures mean homeowners have the money to pay their mortgages so banks aren’t coming in and taking away their investments.

The future for investors

If you are new to investing or were involved in the business before and took a break due to the uncertainty of the market, now may be the best time to get back in and start building those investments for the future. Take the rising home prices, the growing rental market, and the low levels of foreclosures as signs of a better real estate market ahead for all investors.

Are you thinking of investing in real estate?  We’d love to help you find some great properties.  Please give us a call.  727-895-6200