How iBuying Will Impact the Real Estate Industry
Despite a cooling market, technology will continue to radically transform the real estate industry in 2019. As buyers grapple with rising mortgage rates and already-high home prices, and sellers adjust their expectations, a new trend is emerging into the national spotlight. Armed with advantages in reliability, speed and ease, iBuyer programs will be put to the test in new markets, from Boise, ID to Los Angeles, CA.
Nearly all real estate tech companies have rolled out their own version of an iBuyer program, including Opendoor, Redfin and Zillow. An iBuyer (or institutional buyer) is a type of real estate company that evaluates a home’s worth and makes an instant offer.
These instant offers often allow sellers to close in under two weeks, and the process can be done almost entirely online. After purchasing the house, the iBuyer will make any necessary repairs or renovations and then resell the home for a profit.
iBuyers cater to a subset of sellers who are willing to sell their house under market value in exchange for fast cash. To understand the iBuying phenomenon, it’s important to understand how it works, the valuation model and pricing. Also, you should understand why homeowners would choose to sell to an iBuyer.
How Does an iBuyer Calculate a Home’s Worth?
An Automated Valuation Model (AVM) is a computer program used by home appraisers to estimate a home’s value. AVMs use statistical linear and multiple regressions to predict the home’s worth based on market data. AVM takes into consideration age, historical data, transaction records, property features and similar data points to calculate an offer for the home.
Depending on the circumstances, sellers can expect to receive an offer that is 75-100% of their home’s market value. For example, if they have a $1M home and the iBuyer gives them 85% of value and charges a 7% fee, they’d end up with 16% less than selling on the open market (including the added 6% fees for agent commissions).
What’s the iBuying Process?
To initiate the iBuying process, the seller typically goes online and answers some questions about the condition of the home. For example, the RedfinNow iBuyer program asks:
How many bedrooms and bathrooms does your home have?
Have you made any improvements on your home?
Does your home have any amenities such as a pool, solar panels, gated community?
How soon do you want to sell?
After finishing the initial inquiry, iBuyers will then complete a home inspection to investigate serious issues like structural damage, mold, asbestos, oil leaks, etc. Usually, though they may impact the final valuation of the home, these problems won’t have any bearing on their ability to participate in an iBuyer program. Following the inspection, the seller will receive an offer to reject or accept. If accepted, the property sale can close in under a week.
As mentioned, iBuyers handle the process of preparing the house for the market. To resell it for maximum profit, they invest time and resources into remodeling, repairing, listing, showing, negotiating offers and waiting for the house to sell. If the seller doesn’t have the time or ability to take on these responsibilities, iBuyer might be the best option.
Why Do Sellers Choose iBuyers?
There are many reasons someone would want to sell a home fast for cash, including:
Relocation: if they’re moving to a new city and need to be on the job ASAP, they may not have time to wait around for their home to sell.
New home: if the purchase of their dream home requires the sale of their current home, they may need access to the equity tied up in their current home.
Ease of service: unlike the traditional selling process, with iBuyer, there’s no prepping the house for market, hosting open houses or worrying whether the sale will close or not.
Repairs: home repairs are expensive and time-consuming. If a seller doesn’t have cash to pay for repairs and renovations out of pocket, iBuyers will deduct this from their offer price.
Rental properties: for investors with a vacant rental that is costing them money every day it remains empty, a quick sale to an iBuyer can be very attractive.
Family circumstances: maybe the seller is going through a divorce and wants to split the assets and move on. Also, they’ve inherited a home they don’t want to live in or manage. iBuying offers the convenience of a quick cash offer.
iBuying isn’t for everyone. Often the best way to get top dollar for your home is to list it on the market, but there are many circumstances where this isn’t possible or practical. While decidedly different than the traditional real estate agent model, iBuyer is nonetheless an interesting business model and worth considering for anyone who needs to sell a home fast for cash.
iBuyers’ combined share of U.S. home sales has grown over the last few years, fueled by technology and investor capital. However, with the housing market cooling, we’ll likely see how sustainable iBuyer programs are in the long run. “If iBuying works in a bear market as well as it has in a bull market, instant offers could become a major, permanent sector within the real estate economy,” says Economist Daryl Fairweather. “If it doesn’t, a lot of money is going to sink into the sand.”