The Truth About iBuyers in Real Estate

Should I Use an iBuyer or an Agent to Buy/Sell a Home? |

In an age with the world at our fingertips, its no surprise that artificial intelligence is dabbling into many industries we used to depend on actual human interaction. The latest is home iBuyers, real estate companies that instantly buy homes for cash then are placed back on the market. Since Opendoor started it all in 2014, iBuyers in real estate have become increasingly popular—so popular that Inman named it Real Estate Person of the Year 2017 and other similar companies have quickly emerged. Now, what’s really caused some commotion in the industry from real estate agents, one of the largest companies in real estate, Zillow, followed suit last year with its release of Instant Offers.

The Positives 👍:

With a tagline like “Sell on your Schedule,” and our crazy busy lives, who wouldn’t see the appeal? Home sellers can instantly reap the benefits of skipping the hassle of listing their home the traditional way with an agent. Sounds like a dream come true for any seller!

  • No wait times – iBuyer companies usually send an offer within a few days
  • You pick the closing date – the selling process is tailored towards your schedule
  • No showings – staging and prepping the home to sell is no longer needed
The Negatives 👎:

Is it too good to be true? These types of companies certainly spark curiosity but also raise 2 major concerns:

1. Are the offers accurate to the actual home value? 

The common iBuyer sales pitch to lure home sellers in is all about the “savings” from selling their home right away, but is there much savings to be had? At Inman Connect, panelists define iBuyers like Opendoor, Offerpad, and Zillow Instant Offers as “investors that use automated valuation models (AVMs) and other technology to make quick offers on homes, close in days and then resell them.” The problem with using AVMs to determine offers is inaccuracy. Using these tools often produce lower or higher values than when using an actual appraised value amount. What’s the difference and why?

An AVM tool uses data points and a mathematical model to estimate real estate property value and produces an estimate based on a hedonic model (estimated demand) and a repeat sales index. What’s more important is what AVMs cannot do that a real estate agent and appraiser can:

  • tell you if the property physically exists
  • provide details of the condition of the structure
  • examine the quality or appeal of the location
  • calculate added value from upgrades
  • calculate decreased value from damages/dated furnishing

A prime example of a widely-used tool using AVMs to calculate home value estimates is Zillow’s Zestimate, though it is known for its popularity and also its inaccuracy. The company itself states a Zestimate should be used as a “starting point” in determining a home’s value, and even the CEO of Zillow, Spencer Rascoff, sold his home for 40% less than the Zestimate showed. Ouch. 

On average, Zestimates are usually off by $14,000, and considering iBuyers are using the same tools as Zestimates, the offers provided may not be accurate as well. In fact, many Yelp reviews provided by Opendoor customers attest to low ball offers or being extremely shocked at the actual value after already accepting an offer and are “too far in the process to turn back.” What does that mean for all iBuyer companies out there? If choosing to use an iBuyer in your particular situation, expect to have an actual value lower than the initial offer. Don’t forget they are pricing these properties in order to make a profit for themselves too!

2. How will iBuyers affect the real estate industry?

It’s almost as if iBuyer companies want to be the Amazon of real estate by becoming a one-stop shop of convenience for sellers and buyers alike. Some say iBuyers will revolutionize the industry in a good way, but others are very concerned for a number of reasons:

  • Reducing inventory even more – Buyers have become frustrated as home values rise and inventory remains tight. When using instant offers and selling homes to iBuyers, this tightens inventory even more, thus causing values increase, eliminating many types of buyers from the market. Yes, some of the homes purchased by these companies will be placed back on the market. Others will be kept for a larger return on investment or rented out.
  • Lowering value of neighborhoods – Instant offers don’t do the neighborhood many favors. Many times when selling the home the convenient way, the offers accepted are usually lower than the traditional way of listing a home. If multiple homes are sold to iBuyers for low ball prices, appraisers will start having to account for those lower prices when comparing the history of homes for sale in the neighborhood. When you accept a low offer, it affects all homes in the neighborhood.
  • Control over where listings go – Zillow especially has already attracted home buyers and are often a first stop during their home buying journey. If they capture sellers as much as they have buyers, real estate agents will have to change their game and start listening to iBuyer companies more. Giving this type of power to these types of companies will give them complete control on where homes for sale are listed and more importantly, lead distribution–a.k.a who will pay the most for the lead? If this happens, many agents will be eliminated, costing many jobs.

In some cases, a seller wants convenience over profit when in dire need to sell, so it all depends on your situation. If looking to get the highest return on your investment, DO YOUR RESEARCH before selling to an iBuyer! Home sellers can get offers from multiple sources before accepting–and at no obligation–even if you use an agent in the beginning.

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Anthony Cummuta

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