These days, we do everything online. We shop and socialize and even see our doctors on the web. There’s no reason, then, that we wouldn’t sell our homes online – or is there? Recently, iBuyers purchase properties directly from their owners and then list and sell them for a profit. It’s a convenient service that can speed up the process for sellers, but there are a number of problems with this industry.
iBuying emerged over the last several years in the form of both exclusive iBuying companies like Opendoor and as an extension of various digital real estate platforms like Redfin, and they all operate on a simple premise. If they can entice customers to sell their homes for a lower price because it will save them time and effort and then sell those properties for more, then they turn a profit. The problem is that even moderate market fluctuation can disrupt this model process, which is why iBuying operations suspended operations at the start of the pandemic. Volatility and iBuying are incompatible.
Of course, it’s easy to write off this temporary disruption as just another economic crisis stemming from COVID-19, but really all this crisis has done is reveal some of the system’s underlying flaws. Though these systems could potentially bounce back when the market stabilizes, many speculators think they may not survive until that happens.
While iBuying is suspended, it’s worth considering that these novel platforms aren’t the only option for homeowners trying to sell their homes quickly. Rather than work with an iBuying company that will lowball clients while charging exorbitant fees, homeowners could work with a local cash home buying company that essentially does the same thing. Cash buying services are generally tied into the local community, but they offer higher payments while still moving quickly – essentially, they allow homeowners to liquidate their property without substantially underpaying them.
The fact that cash buyers can stay in business without substantially undercutting homeowners while iBuyers can’t may seem confusing, but there are several factors at play here. The first has to do with how real estate prices are determined. iBuyers use general market data to price houses. They may look at similar properties in the neighborhood, but they may not actually visit the home.
The pricing process isn’t the only thing that differs between iBuyers and local cash home buying companies. Though it helps that cash buyers are intimately familiar with the area in the same way a local realtor might be, the bigger difference is that cash buyers are largely small businesses. They aren’t tech companies that expect to make millions in profit in a given year. Of course, they need to make money by buying and selling homes, too, but they aren’t playing the same sort of aggressive strategy.
Beware The Fees
Perhaps the most notable way that iBuyers take advantage of homeowners who are attempting to liquidate their properties quickly is through the final fees. In the iBuying model, the company first lowballs the seller and then cuts that offer down yet again by adding on anywhere from 7% to 11% more in service and closing fees depending on the company. By the time everything is added up, sellers are taking as much as $30k-$50k less than their home’s value for the sake of convenience, and that’s just not a good deal. Barring extreme circumstances, the ability to skip the cleanup and repairs process involved in ordinary sales isn’t worth that kind of loss – and it raises the question, why do sellers go this route?
At the end of the day, it’s about convenience. These services have a high customer satisfaction rate, but that may just be because sellers don’t do much research. They don’t look at the difference between previous offers and the final sale price. When working with a cash buyer, though, sellers don’t take the same sort of financial loss.
Will iBuyers survive the current recession? It’s too soon to say. The industry’s current struggles, however, could be just the indicator the industry and sellers alike need to see that iBuying is too risky. There are better ways to sell a home – the current crisis is simply a lens revealing those deeper issues.