Nowadays, any industry that technology takes on doesn’t stay the same for very long. Airbnb uprooted hospitality. Uber and Lyft changed transportation. Netflix not only changed entertainment, but shifted routines and enabled on-demand consumption. The list goes on.
Each time tech puts its stamp on an industry, consumer behaviors shift and their expectations go up. Now the $27 trillion residential real estate market is in the midst of its own transformation — the very industry in which many Americans will make the single largest personal transaction they may ever make in their lifetimes.
The face of this renaissance are instant buyers, known as iBuyers. Currently the “it” kid of real estate, iBuyers use computer algorithms and market projections to determine the price they are willing to pay for a property. This assumes that the property fits their “buy box,” which is defined by factors like price range, age of the home and location. Home sellers can either accept or reject an iBuyer offer. If accepted, they can sell their home for all cash relatively quick. The key output driving these types of transactions, however, is the belief that the iBuyer can then resell the property at a higher price and turn a profit.
If you live in a market like Phoenix, Las Vegas, Atlanta or Raleigh-Durham, you’re likely caught in the crosshairs of a marketing onslaught led by iBuyers. These markets are on the upswing, and have a relatively young housing stock that’s uniform in design, and therefore easily assessed and reliably profitable if purchased at the “right price” — a price an iBuyer algorithm can determine to best benefit them, and their business.
And iBuying is sweeping the industry, from the old guard to the new. See Keller Williams’ Keller Offers or online real estate databases like Zillow; iBuying is now a centerfold of their overall business strategy. And then you have the upstarts like Opendoor and Offerpad — companies that have propped themselves up with the promise of quick, all-cash sales for people who want to avoid the multi-month journey of pain and anxiety that comes with selling a home the traditional way.
Yet, even as homeowners today are more empowered than ever before, the impact of iBuyer disruption hasn’t really come at their benefit. Yes, they get the added convenience of being able to sell in an instant… but at what price?
Not only will one receive an intentionally lower offer than what they might receive on the open market (remember: iBuyers flip for profit), but they could be leaving even more money on the table than they realize.
While it’s difficult to apples-to-apples compare iBuyer offers to actual home sale prices, in July, MarketWatch’s Andrea Riquier found that an investigation into multiple transactions shows “that [iBuyer] offers would net their customers, 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.” In some cases, this can mean as much as $25,000 back to the seller’s pocket, if not more.
But that’s just one study. As the entire iBuyer business model is predicated on delivering convenience to the homeowner at a cost, coupled with the belief that they themselves can re-sell the property at a higher price, there is an inherent risk every iBuyer takes on with each property purchase: the risk that the home actually will sell at a higher price. To offset the risk, iBuyers charge a number of fees, either transparent or hidden, that are absorbed by the seller. The net cost for a transparent fee can range anywhere from 7–10%, depending on the provider.
And, while one would think that the fees associated with traditional brokerages would go away with iBuyers, as these fees have become increasingly hard to justify as consumers are more equipped than ever to self-serve their own needs in real estate, think again. With iBuyers, the standard 6% real estate commission could be considered a bargain.
In another recent study, researchers analyzed thousands of transactions of the largest iBuyers in the Phoenix market to determine just how much homeowners are giving up for the convenience offered through an instant transaction. iBuyers need to offset a number of liquidity risks that come with every home purchase — from the fact that the home simply may not resell at their desired price to other issues such as iBuyer “for sale” signs signaling empty homes for burglars and squatters to target as people become more familiar with the practice.
The person offsetting these risks is the seller, absorbing the brunt of fees as iBuyers chase their proof-of-concept with hidden costs in the form of reduced offers. All said and done, the typical cost to the seller could be as much as 13–15% of the final offer price. For a $250,000 home, someone operating through an iBuyer could be missing out on as much as $37,500 after a transaction closes. That’s a full year of private college tuition!
Going back to some of the original industries I highlighted as classic examples of technology disrupting an industry status quo, the consumer generally wins on convenience, cost and efficiency in general. But somehow, these principles haven’t taken hold in real estate quite yet.
It’s admirable, however, that we can finally see innovation in a field trying to deliver on a promise of convenience to sellers. But for the Americans who don’t need to sell a home in an instant, the money left on the table simply isn’t worth it, and the industry isn’t quite where it needs to be for a full-scale paradigm shift in tech’s role in real estate. In the near future, hopefully further competition and innovation will ultimately work in the seller’s favor… but for now, beware the iBuyer.
Or better said, let the seller beware.