What does Using an iBuyer Really Cost You?
“Selling my home was easy and painless!” said no one ever. This is what has led to the Phoenix area being a testing bed for the business model known as the iBuyer.
There is no person who has ever tried to sell a house traditionally that doesn’t know that it can be a real pain and can take a lot of time. That is going to be the main selling point of using iBuyers like Offerpad, Opendoor, and Zillow. They save you time and they save you headache, but what is this convenience really costing you?
Since the numbers that we can compare really don’t have a set average to draw on, we are going to look at an actual sale that went through an iBuyer. One of our agents was involved in this transaction and we can break down the numbers pretty accurately based on market conditions as of the publishing date of this article. Here we can give a solid comparison of what you can get from a good realtor versus an iBuyer for each major step of the process.
Valuing Your Home - iBuyer
If you choose to go to an iBuyer, the first step you will take is filling out their online form so they can do a quick market valuation from their proprietary software on your home. They will use this to gauge their first offer, which is often based on the lowest comparables in the area, and then take 5%-10% off this valuation and this will be their first cash offer. In this case the market value they used for this home was $280,000 and they offered $266,000, 5% below their initial valuation.
Valuing Your Home - Realtor
It is in the best interest of the realtor to get top (but accurate) dollar for your home, so it is wise to pick a realtor with experience and one that knows the area well. To value your home they will take accurate comparables including amenities, present upgrades, square footage, etc. In this case our agent was able to value the home initially at $285,000 and with update suggestions, that would have cost around $1,500 to the seller, that could have brought the value up to $295,000 before listing the home.
This is an initial difference of $29,000 between the iBuyer and the realtor.
The Real Offer from the iBuyer
What most sellers don’t know is that the initial offer from the iBuyer isn’t the real offer, that comes after they pay a visit to your home and do an inspection. It is their job to find absolutely everything wrong with the home to help drive down their offer, and this can result in another 2%-10% drop, depending on the state of the property. In the case of this home their offer dropped by another 2% from their initial valuation making their real cash offer $260,000.
This now makes the difference between the iBuyer and the realtor $35,000.
The realtor is already looking pretty good right? But let’s look at some of the downsides of using a realtor and why iBuyers exist in the first place.
Say we go the route of updating your home to get the valuation up to $295,000, great! Except you had to pay $1,500 of your own money and delay listing your home for probably several weeks. You also had contractors tramping all over your house the entire time.
Then you must prepare the home for showings and maybe an open house, this leaves no room for laziness in keeping your home in presentation condition. Your home must be pristine the entire time if you want to expedite getting offers and maintain that top dollar valuation. There is typically no pets or young children allowed during showings and you are on the timeline of the prospective buyers which can feel rather intrusive and annoying.
There is the risk of hiring an inexperienced realtor and that can heavily affect how much your home is initially valued prior to an appraisal. You also run the risk of your home being on the market for a long time (this usually only happens if the realtor isn’t doing their job). Or the realtor can be a poor negotiator.
With that out of the way, let’s move onto the next steps in the process.
Getting An Appraisal
This step is negated by an iBuyer and they use their own proprietary software to generate a valuation on your home.
An appraisal is typically a fee that is incurred by the buyer, and if your realtor did their job right, the home’s price should vary little between the realtor’s initial valuation and the appraisers. The variance is typically less than 1%.
Negotiating the Sale
With an iBuyer, negotiation just doesn’t happen, it is a take it or leave it offer.
With an experienced realtor you should have several offers that will help get you to the price you want. This is also the reason your realtor encourages you to do everything you can to update the property to appeal to buyers, so you can demand top dollar on your home. If the negotiation goes a little south and the best offer you get is $290,000 on a $295,000 valuation, then you invested $1,500 to get a $5,000 bump in home value, and you still have a decent amount of room to negotiate if you have to. Then again you can get a bid war between buyers and get over asking price, this can be more on the luck side but the realtor’s skill does play a role here.
Once the dust settles and you and the prospective buyer come to an agreed price then you move on to the next step, closing costs.
In the example that we have, the total fees from the iBuyer came in at about 7% of their cash offer. So, of their $260,000 cash offer you will pay $18,200 in closing fees. Leaving you with $241,800 in your pocket.
In this case let’s be conservative and say that the agreed selling price for this home was $290,000. The realtor fees that will be paid by you, the seller, will be right at 6%, this means you pay realtors a total of $17,400. Then we subtract the $1,500 on updates and that leaves you with $271,100 in your pocket.
If the difference in total money in your pocket is so pronounced, why would you ever want to sell your home to an iBuyer? But they exist for a reason: convenience.
Why You Might Want to use an iBuyer
The value proposition that iBuyers offer can be summed up in that one word, convenience, but it can be broken down into four main points:
- You don’t have to show your home.
- You can sell your home with no updates or repairs.
- You can close on the home quickly.
- The sale of the home is completely on your timeline.
When it is put that way, it doesn’t sound like much of an offering if you are interested in getting maximum return on your home, but there are those that this option would be the best one. For example, if you lived in a distressed property and the cost of getting the home market ready could be too risky. Throwing $100,000 at a home to try and get a net return of $30,000 can be a steep proposition and the returns really might not line up with the effort or risk.
You may have a home value that is rather low and the profit margins of selling traditionally vs an iBuyer are negligible.
You could be short on time and the headaches of selling the house traditionally are not worth it to you. Which was the case in the example we’ve used.
In the vast majority of cases, selling your home through a good realtor is a FAR better option if you are looking to make more money. In our example using a realtor the total cost to you would be around 6.5% of the home’s value or $18,900. Using an iBuyer cost this person 16.7% of their home’s value, or $48,200, which is $29,300 more than our realtor example.
A 10% convenience fee is high in our opinion, so unless you are in is a situation that would warrant using an iBuyer, we highly recommend that you use a realtor. Don’t let misinformed convenience cost you thousands, if not hundreds of thousands of dollars.