'iBuyers' Like Zillow Want to Buy Your House in 2021. Is the Convenience Worth a Smaller Profit?
One day in October, Sosan Samarneh stepped out of her three-bedroom home in Jacksonville, Florida, locked the front door and dropped the key in a secure box. Navigating the process online without an agent, she had just sold her house to real estate company Opendoor.
“The next day, the close was final,” said Samarneh, who works as a financial analyst for a hospital. “It was just such a pain free-experience. I still can't believe how easy they made it.”
Opendoor is one of several so-called instant-buyers — often referred to as iBuyers — that have emerged in the last several years. Others include startup Offerpad and branches of bigger companies like Zillow Offers and RedfinNow. These companies buy homes in select markets for cash, make necessary upgrades and then resell them, aiming for a small profit per house. Relying on software to tell them which homes to buy and for how much, their goal is to eventually buy and sell enough homes to make billions.
Because other homes in her neighborhood lingered on the market and she hoped for a quick sale, Samarneh contacted Opendoor after reading about the company online prior to the pandemic. “It made more sense to do it that way,” she said.
But then, the coronavirus swept across the country, disrupting the housing market.
In a pandemic that has upended daily life and discouraged sellers from inviting strangers in their homes, iBuyers offer nearly contactless transactions and a degree of certainty. Yet, selling to an iBuyer during the pandemic bears financial and logistical risks. For one, these companies adjusted their operations and pricing to match the market dynamics.
iBuyers suspended their purchases in early spring, citing market uncertainty and safety concerns. This left some sellers empty-handed as companies revoked their offers, right when the housing market went quiet in the early days of the virus. When Opendoor's initial offer to Samarneh expired (offers are valid for five days) and the company closed temporarily, she looked for investors to sell to instead.
When iBuyers resumed purchases over the summer, they entered hot markets across the country. Low interest rates and limited inventory continue to spur intense buyer demand, quick sales and high prices, undercutting some of the usual advantages iBuyers promise.
“We need to be competitive with other iBuyers,” said Jason Aleem, vice president of RedfinNow, the Seattle-based brokerage’s iBuying arm. “Today, we're actually having to be really competitive with listing agents who are selling the idea that you can go on the market and sell pretty quickly too.”
This begs the question: does it still pay to sell an iBuyer?
The Pros of Selling to an iBuyer
The appeal of selling to an iBuyer is convenience. After requesting a price quote online — for instance, through the Zillow or Redfin's listing for their home — sellers can offload their property to an iBuyer in a matter of only a few weeks, skipping any repairs, a formal appraisal and home tours. (iBuyers do require a property inspection prior to committing to a sale price, however.)
“It is a means of selling your home without most of the traditional elements where you do not have to concern yourself with open houses and you don't have to concern yourself with how long your home is going to sit on the market,” said Kaylee Land an agent with Briggs Freeman Sotheby's International Realty in Dallas, Texas.
During the pandemic, as homeowners have become weary of strangers coming into their homes, convenience has taken on new meaning. To meet sellers’ need for contactless transactions, Opendoor implemented virtual interior home assessments and touch-free exterior inspections, said Kerry Melcher, the company’s head of sales and brokerage.
After resuming operations in Jacksonville in August, Opendoor started working with Samarneh again, deploying its digital solutions to the transaction process. “It was completely contactless and that spoke volumes, especially because I've been working from home since March,” she said. “[I was] being cautious and not wanting to obviously catch COVID and having strangers in the house, but still wanting to sell my house at the same time.”
iBuyers also offer flexibility when it comes to closing dates. Most iBuyers can stretch the escrow period from two weeks to three months depending on seller needs. (A traditional sale typically takes about a month to close.) In a low inventory market, this can be key for sellers who are also trying to buy. “What we've seen is that people are more sensitive to and interested in flexibility,” said Jeremy Wacksman, president of Zillow. “With us, you get to pick the close date up to 90 days out, especially when you're not sure what you’re going to buy yet.”
Because they don’t need financing like most typical buyers, iBuyers also provide sellers with certainty and liquidity. This can enable sellers to make an offer on their next abode without a sale contingency that could hurt their chances, especially in cities with limited inventory and eager shoppers.
“That's one side that we've seen accelerate,” said Aleem. “Folks really want to make sure they don't have to have a contingency, or they have the freedom to move to their next property.”
The Cons of Selling to an iBuyer
So far, iBuyers capture less than 5% of sales in the markets where they operate. Instant buyers tend to go after median-priced homes with conventional features that computer algorithms can quickly and accurately value using local market data. A multimillion-dollar property with unique upgrades would present a headache — if not an impossible challenge — for iBuyers’ valuation software.
There is also some debate about whether sellers are leaving money on the table by going with an iBuyer. “The seller is being hurt because they don't know what price the market is willing to pay,” said Mauricio Umansky, founder and CEO of brokerage The Agency.
A 2019 analysis also found iBuyers tend to pay about 1.3% less than a buyer on the open market might. A recent analysis by Zillow Offers, however, found that homeowners who declined an offer by the company realized a sale value that was, on average, only 0.09% higher in the open market.
Meanwhile, in lieu of the usual agent commision, which averages 6% in most U.S. markets, iBuyers charge a service fee that can range from 5% to 12% depending on market conditions.
“In anything, there's always price, time and quality,” said Mike Miedler, CEO of brokerage Century 21. “And as a seller, you've got to figure out what's most important to you.”
In Samarneh’s case, Opendoor offered $134,000 with a 6% service fee for her house when it began buying again over the summer. That was about $10,000 higher than the deal they’d reached in February, she said. That price also slightly exceeded what a relative in real estate recently suggested she could get for the place.
Before committing to Opendoor, though, Samarneh shopped for a company that could quickly buy her home in the peak of the pandemic. Although she engaged a couple of investors, no one could beat Opendoor’s offer, she said.
Redfin’s Aleem also suggests shopping iBuyer offers. “Create your own market with those iBuyers to figure out where your price can be,” he says.
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