IBuyers is one of the few true innovations to hit the real estate industry in recent years. But consumers haven’t fully embraced them because of misconceptions about how iBuyers work and what problems they solve for sellers and buyers.
An iBuyer (for “Instant Buyer”) is a company that offers automated home offers using technology and real estate data. After the company buys the house, it fixes the damage and makes cosmetic repairs and sells it. IBuyers market themselves as a quick and convenient way to sell.
Myths have grown around iBuyers: that they charge very little, increase home values and deliver owner-occupied homes to investors. Some of these legends have a grain of truth. Here’s what’s really happening at iBuyers.
Myth 1: iBuyers are low-ball homeowners
In a Tiki Talk that went viral in September, a real estate agent suggested that iBuyer was manipulating home prices. In his hypothesis, the program was a two-stage process. The first step involves low-balling home sellers.
But iBuyers don’t pay significantly less than market value, said Mike Delprete, a real estate technology strategist and scholar at the University of Colorado at Boulder. “The biggest misconception that can happen is that iBuyers are going to rip you off, and they’re going to lowball you and you’re leaving money on the table,” Delprete told personal finance website NerdWallet.
This misunderstanding may stem from the belief that iBuyers are synonymous with home flippers. There is a difference. Flippers buy properties that need a lot of work to get them in a salable condition. You buy low, spend more on renovations and make a profit on the difference between the investment amount and the selling price. But iBuyers buy properties that are in good shape, often make minor repairs, and make more money than they charge sellers. (Ultimately, the price an iBuyer pays is an acceptable discount minus renewal costs.)
DelPrete investigated the prices paid by iBuyers. In the year In 2019, iBuyers were paying about 98.5% of estimated market value. Sometimes they overcharged in 2021. In contrast, houseboats usually cost about 70% of the price.
Yes, iBuyers typically pay less than listing buyers. But none the less, and some sellers believe that iBuyers are worth the money for a quick sale and not opening the house to a line of guests.
Myth 2: iBuyers are the reason houses are expensive.
According to the TikToker, the second step of the “price gouging” involved iBuyer overpaying for one home after paying for dozens of other homes in the neighborhood. This, in theory, sets the stage for higher prices that appraisers and subsequent buyers will follow.
This hypothesis ignores human nature: when buying a house, they ignore the price paid by the single buyer who overpaid. They pay attention to prices that match the actual market value.
Deliberately paying for a house is a terrible strategy. In fact, Zillow Overs, the company’s iBuying division, has admitted to paying too much for homes without knowing it based on inaccurate predictions of future prices. Zillow lost hundreds of millions of dollars in the third quarter of 2021, laid off a quarter of its workforce and shuttered Zillow’s offerings.
Maria Letdin, associate professor of real estate at Florida State University, told NerdWallet, “I see a few ideas floating around. One is the fear that big tech will use their informational advantage over individual sellers. The other is that iBuyers are somehow driving up home prices. None of these are supported by evidence. .
For iBuyers to artificially push prices up, they need to control a large portion of the market, and they rarely do. According to Delpret research, iBuyers accounted for 1.6%, or about 28,000, of all U.S. homes purchased in the third quarter. IBuyers are busier in some markets than others. 10.8% of homes purchased in the Phoenix metro area in the third quarter.
Myth 3: iBuyers sell more homes to landlords
There is some truth to this belief, so it is more of an exaggeration than a myth. Most (but not all) iBuyers sell a portion of their inventory to institutional investors who rent the homes.
Take Zillow’s offers. After the closing, Bloomberg reports that Zillow plans to sell 7,000 homes to corporate investors as real estate investment trusts, or REITs. “I strongly doubt selling 7k homes to institutional investors will hurt consumers (especially after driving up prices in key markets),” tweeted one critic.
It’s hard to shut down 7,000 potential owners of a wholesale sale to corporate landlords, but evidence that Zillow has raised prices for anyone but Zillow is weak. Of the remaining three largest iBuyers, two said they would sell to investors and one said they would not.
An Offerpad spokesperson told NerdWallet via email that the company typically sells 10% to 20% of its homes to institutional investors. Kerry Melcher, Opendoor’s head of real estate, did not give a percentage but said in an email: “Some of the homes we buy are resold to REITs, most of them go back on the market and go to everyday buyers.”
RedfinNow says it’s an exception. “We’ve never sold a house to a REIT,” said Jason Allem, vice president of RedfinNow.
The price of the iBuyer offer
IBuyers don’t lowball, aren’t responsible for runaway home prices, and sell most of their inventory to owner-occupiers and some to owner-occupiers. They are not a diabolical force in the housing market, but what good do they do?
They can help home sellers set an asking price. It’s one thing to look up the value of your home online when you’re bored. Accepting an iBuyer purchase offer is another.
“It makes these assumptions a reality,” explains Alem. “Getting an iBuyer offer can establish a starting price even if you ultimately decide not to take it and instead opt for a traditional home listing.”
Another benefit: no living in limbo
More importantly, selling to eBay will appeal to homeowners who value convenience, want to sell quickly, and want to be sure that the buyer will make the transaction and not lose.
IBuyers is especially attractive to sellers who hate showing their homes to buyers. If you sell a house, you know the drill: You expect a clean house, and then strangers walk around the place and judge your housekeeping skills.
If you have small children or pets or both, the worry is even worse, because their waste is messy, their smell is even stronger and it requires finding a place to take them during the event.
With iBuyer, there are no shows, no back-and-forth negotiations, no buyer emergencies or last-minute changes to closing dates.
The convenience and speed offered by iBuyers means they are here to stay. They don’t serve more than a small number of home sellers, but they do take their place, especially in growing Sunbelt cities with large new and similar homes of similar value.
Understanding what iBuyers do — and what situations you can fix — adds to your real estate toolbox, whether you’re selling or buying.
This article originally appeared on the Nerd Wallet personal finance website.