What you get with iBuyers

The popularity of iBuyers has gained traction within the last few years. How does it compare to selling through a local real estate agent?
POSTED ON:
October 14, 2020
UPDATED ON:
October 30, 2020
Category:
Buying/Selling

The popularity of iBuyers—like Zillow, OpenDoor, Redfin, Offerpad, Perch, Knock, etc.—has gained traction within the last few years. However, how safe is it compared to selling through a local real estate agent? We look at a few important factors.

Representation through an iBuyer vs. a real estate agent

When selling a home, you can either sell it as a FSBO (for sale by owner) or by finding an agent as are presentative to sell through. We’ll go through the differences of those in a different blog – but for now, let’s stay on the path of iBuying company vs. real estate agent representation.

Owners deserve to be represented by the most professional and knowledgeable agents possible. It is the agents’ fiduciary responsibility to have your interest top of mind. Agents will always do their best to position your property as well as possible to insure everyone’s success.

(Screen shot of Opendoor website home page)

iBuyers offer two options: you sell your home directly to them – or – they list it for you and assign a local agent to represent you.

If you choose to sell your home directly to an iBuyer company, you won’t have ANY representation. These businesses have their needs in mind, looking to profit off your property instead of helping you get the best price. iBuying services focus on speed (rather than value) and disregards the economic consequences of your money leaving the community.

iBuying platforms can list your home for you and assign a local agent. However, these companies have strict guidelines and restrictions their local agents must work within. This limits their ability to represent you in a manner you deserve. In addition, agents unfortunately only get a very small share of the commission charged. To cover their cost, the iBuyers ask for a higher-than-average commission from you since they also look to be paid. This means only a fraction of your money is kept in the community. We believe in helping the local economy—and if you’re like us, this might trigger you a bit.

The cost of doing business with an iBuyer vs. a real estate agent

The average commission charged by real estate brokers working on your transaction is 5%. This amount is shared between both the buying and selling agents.

iBuying platforms charge a minimum commission (they call it“service fee”—but let’s be real here) of 7% and goes as high as 12%. In addition to the commission, they “build in a discount to fair value to compensate for the risk they take by providing you with “instant” liquidity.” Chase Marsh, author of the linked article, presented a scenario that may help you understand the potential loss:

"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% commission (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. Does the added cost make sense for the consumer?"

Several home sellers have shared their experience with iBuyers. Some mentioned Zillow’s initial offer as reasonable, but the offer was reduced by $20,000 - $40,000 after completion of the home reductions. Remember: their model is to provide convenience and sell quickly, but you won’t get top dollar AND paying top dollar to do so.

Local economic effects of iBuyer vs. a real estate agent

Many residents feel connected to their cities. We have lived in Redlands nearly our whole lives and do our best to shop local for everything possible. When using an internet-based real estate company, only a small portion of the commission paid stays local. All monies stay local when you use a local, real estate brokerage—to be re-spent locally and keep our small hometown thriving!

(Infographic from American Express)

Amount of listing exposure between an iBuyer vs. a real estate agent

We refer to exposure as who’s getting to see your property. Of course, it makes sense that if more people are able to see your property, more people will have an opportunity to purchase it. You think that the internet companies would win on that level, right? NO.

Given our agency, as an example… AboutRedlands/About Redlands Realty has over 100,000 views on our social media sites per month alone. We also list your property on the Multi Listing Service (MLS) where iBuyers source a majority of their listings from. If you list with Zillow, you’re only being shown on Zillow's website. That’s definitely short of the exposure you need to maximize your property’s value. 

As a local real estate agency, we also have the network of licensed professionals with whom we can refer to you during AND after the sale (if you’re moving into a home in the area). Our knowledge of local small business can help sell your property as well, by sharing with buyers what makes the area attractive compared to others.

So…should I sell to an iBuyer or through a real estate agent?

Ultimately, that decision is for you—the owner—to make. iBuyers are certainly more convenient (speed) but that comes with a price…

Selling with a real estate agent allows you to build a professional relationship with someone who has your needs in mind. Speed is important, but we take a seller’s unique situation as foundation for a custom plan. Let us know if you have any questions on how to get started.

TAKENOTE: Opendoor, in their process of going public, revealed that it is currently under investigation by the Federal Trade Commission (FTC) for its advertising practices. As of writing and original post date of this blog, the investigation is still ongoing.

HousingWire pulled the following quote from Opendoor’s filing:

"In August 2019, the FTC sent a civil investigative demand (CID) to Opendoor seeking documents and information relating primarily to statements in the company’s advertising and website comparing Opendoor’s offers to purchase homes to selling in a traditional manner using an agent and statements pertaining to Opendoor’s offers reflecting or being based on market prices."
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