We have all heard the commercials: “Sell your home when YOU want to paying no real estate agency commission!” Can this be true? What are the Pros and Cons? Full disclosure – since we have a dog in this fight we will be spending a lot of time on the Cons.
What the Heck Is an I Buyer?
iBuyers are companies that purchase homes outright, directly from the owner. The seller doesn’t have to pay an agent, list the home, stage it, market it, or even show it to potential buyers. Instead, they tell the iBuyer about the property—things like its age, condition, and zip code—and using data and mathematical algorithms, the iBuyer predicts the home’s future value.
The iBuyer will then present the seller with a cash offer, which they can accept or decline. If they accept, they get their cash within a few days (or weeks, depending on the closing date they choose), and they’re free to purchase another property or use their profits as they wish.
In most cases, iBuyers take the properties they purchase, fix them up, and eventually list them on the open market or sell them to investors at a profit.
That Sounds Great – Is It a Good Choice for Me?
Convenience and speed are the big benefits of using an iBuyer. For sellers, there’s no staging or marketing necessary and they don’t have to wait weeks for inspections, mortgage commitment and closing processes to take place. Instead, they can sell their property quickly and possibly on a day they need to Close. This can be especially advantageous for sellers needing to relocate quickly or those who just don’t have the time and resources to deal with the open market.
So I’ll Save All that Commission Money I Would Pay a Realtor?
Nope. You won’t. And your interests will be completely unrepresented in the process. A July 2019 Marketwatch investigation, for instance, found that convenience comes at a cost. They found that sales involving iBuyers would net Sellers, on average, 11% less than owners who choose to sell their homes on the open market, when fees and other costs are considered, translating to tens of thousands of dollars lost. The findings also revealed considerably more uncertainty around the transactions — the scope of inspections, for instance — than the iBuyer model purports to offer consumers who are looking for ease.
So what does this really mean for your bottom line? Forbes Magazine gives this scenario: Most homeowners purchase their home with a mortgage. If you purchased your home for $400,000 with 20% down, you showed up to closing with $80,000 of your own money, which is also your equity. If the value of your home remains the same and an iBuyer offers you $380,000 for your home — a 5% discount to fair value — you will lose $20,000 on the value of your home, plus pay a 5% fee (they don’t call it commission) or an additional $19,000. This is a higher transaction cost compared to selling on the open market for $400,000. More importantly, compare that combined $39,000 to your original down payment of $80,000 -- you will be giving up close to 50% of the equity you put into your home partly for the convenience of a quicker sale.
Also remember that iBuyers have to make a profit, and to do that, they can’t offer sellers full market price for their homes. This typically means sellers get significantly less for their home than they would if they used traditional methods. iBuyers also need to cover repairs and maintenance in order to make the home marketable. These expenses can cut into a seller’s bottom line as well.
