Throughout the past five years, instant offer companies have grown throughout the country. This new way of buying and selling real estate has made some realtors nervous, while others roll their eyes at a trend they hate and think will fade.
Although iBuying currently makes up a small segment of the real estate market, it’s growing because it meets the needs of certain buyers and sellers.
We’ll dig into how iBuying really works so you can decide, as the buyer or seller of a home, whether realtors’ hatred is justified or if iBuying could be a helpful option for you.
What is iBuying?
Known as instant offer companies, iBuyers are tech-based real estate investors that buy and sell houses online, streamlining the process for themselves and their customers.
Without making a commitment, you can upload information about your house to an iBuyer’s app or website and receive an instant cash offer within 24 hours.
Their services include trading in a house for another house, receiving a fast cash offer, and selling a house as-is, if it meets certain standards. Typically, houses valued between $100k – $500k, in middle-class neighborhoods, needing minor updates, are the most likely candidates for iBuyers.
When selling to an iBuyer, you won’t list your home on the market or manage staging the home for showings, as you would with traditional real estate methods.
The convenience that’s marketed by iBuyers causes realtors concern. They worry that buyers and sellers will no longer find the services of a realtor useful, as they can instead work directly with a real estate investor. For a segment of the market, this is likely true. iBuying offers convenience and speed that the traditional realtor method hasn’t provided.
How iBuying Differs from Working with a Realtor
Costs and Fees
iBuyers charge a fee for their services, which is similar to the commission you’d pay a realtor. Collateral Analytics released a report that says the total cost for sellers working with iBuyers is estimated at 13-15% of the home’s sales price, which can be considered high when only compared to the average 5-6% realtor commission.
The iBuyer costs include a service fee of 6-9.5%, a repair allowance, and an offer discount of 3-5% for risks and costs, according to the Consumer Federation of America.
When compared to the costs of a home sale with a realtor, selling through an iBuyer may be more expensive, but the gap isn’t as high as it appears upon first look:
- The service fee charged by an iBuyer will be only slightly higher than what you would pay in realtor commissions through a traditional home sale.
- The repair allowance will be a wash, as you would otherwise have to make the repairs or discount the home’s price for any potential buyer.
- The additional 3-5% offer discount allows iBuyers to recoup unforeseen risks they take on with a home and some predictable ones, such as holding costs and interest, that they’ll have between when they buy a house and they’re able to sell it. You would typically incur these costs over a few months when selling through a traditional process.
When selling a home in any case, it’s best to compare options and negotiate to reduce fees as much as possible.
Fair Market Value
Fair Market Value is an impartial estimate of the market value of a house. Most homeowners hire a professional to determine fair market value, but realtors and iBuyers determine the price of a house differently.
A seller applies for an instant offer by providing basic information about their home online. The iBuyer compares that information about the home’s condition, features and location to other houses using millions of data points they’ve collected in select markets. They also incorporate local experience in each targeted market, providing considerations and detail that take the guesswork out of determining a home’s value. Using this data, they make an offer on the home.
Many realtors think iBuyes are focused on their own gain and take advantage of the consumer. However, it’s typical for iBuyers to make their money on slim margins of 1-2%, meaning they can generally provide fair offers to homeowners that fit their criteria.
A realtor will do a comparative market analysis to compare your property to similar properties in the area. This, with an appraisal of your home, will be the major factors used to determine fair market value. A realtor will then use that value to recommend a price when listing the house, with a focus on the local market’s condition. Depending on the market’s response to the house, the price might then be adjusted.
Market is Driving iBuying
Real estate experts agree that the market is driving iBuying.
In Realtor Magazine, consultant Victor Lund said, “The convenience factor, along with an alignment of circumstances are contributing to the growth of iBuyers. Consumers have built up a lot of equity in their homes since the recession, interest rates are low, days on market are low, prices are up, and there’s lots of competition, which puts cash buyers in a better position to buy.”
Currently, iBuyers target specific cities, using data to understand what markets would be best for their business model. These companies continue rapid growth, expanding into even more markets in 2020.
Technology is Changing Real Estate
Anybody can find thousands of data points online about their local market, comparable homes, local and national real estate trends, as well as advice on how to buy and sell houses, or even flip houses
Realtors previously benefited as the experts on local real estate. Multiple Listing Services (MLS) were only available through real estate brokers. They used MLS within their professional groups to share information, see one another’s listings, and share commissions. Now MLS is available to anyone through multiple websites.
In 2018, 50% of buyers found their homes online, compared to 28% who found their homes through a realtor, according to the National Association of Realtors (NAR). The NAR also reported that 55% of all home buyers in 2018 started their search for a home online. Within that group, 99% of millenials relied on the internet as a resource for their home-buying process.
As homeowners can gather so much information that was previously unavailable to them, their need for realtors wanes, along with the necessity to pay the premium price for a realtor’s commission.
iBuying is a New Option for Homeowners
If you see past the concerns and frustrations realtors have with iBuying, to understand the services it provides, you can decide whether iBuying could help you buy or sell your next home.
iBuying uses technology to open new options in real estate that weren’t previously available through traditional realtor methods. For the right homeowner, it could be the remedy to their real estate headaches.