The property line: don’t be fooled by the myths about iBuyers
IBuyers is one of the few real innovations to hit the real estate industry in recent years. Yet consumers haven’t fully embraced them due to misconceptions about how iBuyers work and the types of issues they solve for sellers and buyers.
An iBuyer (for “instant buyer”) is a business that uses technology to make an automated bid on a home. After buying the house, the business fixes what is broken, does cosmetic repairs, and sells it. Buyers promote themselves as a fast and convenient way to sell.
Myths have multiplied around iBuyers: they pay too little, inflate home prices and channel owner-occupied homes to investors. Some of these myths have an element of truth. Here’s what’s really going on with iBuyers.
MYTH 1: LOWBALL OWNER BUYERS
In a TikTok that went viral in September, a real estate agent suggested that an iBuyer was manipulating home prices. In his hypothesis, the scheme was a two-step process. The first step was to bring down the prices of the sellers of houses.
But iBuyers don’t pay much less than the market price, said Mike DelPrete, real estate technology strategist and researcher-in-residence at the University of Colorado at Boulder. “The biggest potential misconception is that the iBuyers are going to rip you off, and they are going to make you a lowball offer and leave you money on the table,” he said via voice memo.
This misunderstanding may stem from the belief that iBuyers are the same as homemade fins. There is a difference. Pinball machines buy properties that need a lot of work to bring them up for sale. They buy low, spend a lot on renovations, and make a profit on the difference between the amount invested and the sale price. But iBuyers buy properties that are in good condition, typically do minor repairs, and make a large chunk of their profits from the fees they charge sellers. (The price, if any, an iBuyer pays is the accepted offer less renovation costs.)
DelPrete researched the prices paid by iBuyers. In 2019, iBuyers were paying around 98.5% of estimated market value; sometimes in 2021, they were paying too much. In contrast, domestic fins often pay around 70% of their value.
Yes, iBuyers often pay less than what buyers would get by listing conventionally. But not much less, and some sellers think iBuyers are worth the financial compromise for a quick sale and the convenience of not opening the house to a parade of strangers.
MYTH 2: BUYERS ARE THE REASON WHY HOUSES ARE EXPENSIVE
As the TikToker described it, the second step in “price manipulation” would be for the Buyer to pay too much for a house after underpaying dozens of other houses in a neighborhood. The theory is that this would set a precedent for higher prices that appraisers and subsequent buyers would follow.
This assumption ignores human nature: when you buy a home, you ignore the price paid by the only buyer who overpaid. You will pay attention to prices that correspond to fair market value.
Deliberately overpaying homes would be a disastrous strategy. In fact, Zillow Offers, the iBuying division of the company, admits that it has unwittingly overpaid for homes, based on flawed 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 closed Zillow offerings.
Mariya Letdin, associate professor of real estate at Florida State University, said by email that she was seeing “some ideas circulating. One is the fear that big technologies will use their information advantage to take advantage of individual sellers. Another is that somehow iBuyers will drive up house prices. None of these are supported by evidence.
For iBuyers to artificially push prices to high levels, they would have to control a large part of the market, and they rarely do. According to DelPrete research, iBuyers made up 1.6% of US homes purchased in the third quarter of 2021, or about 28,000. However, buyers are busier in some markets than others. They bought 10.8% of homes bought in the Phoenix metro area in the third quarter.
MYTH 3: BUYERS SELL A LOT OF HOUSES TO OWNERS
There is some truth to this belief, so it is more of an exaggeration than a myth. Most (not all) iBuyers sell part of their inventory to institutional investors who lease the homes.
Take advantage of Zillow offers. After it closed, Bloomberg reported that Zillow planned to sell 7,000 homes to private investors such as real estate investment trusts or REITs. One reviewer tweeted: “I strongly suspect that selling 7,000 homes to institutional investors will hurt consumers (especially after dramatically increasing prices in key markets).
It’s a bummer that the mass sale to business owners excludes 7,000 potential owner-occupiers, but the evidence that Zillow raised prices for anyone but Zillow is weak. Of the remaining three biggest iBuyers, two say they sell to investors and one says no.
A spokesperson for Offerpad said in an email that the company typically sells 10-20% of its homes to institutional investors. Opendoor’s real estate manager, Kerry Melcher, did not give any percentages but said in an email: “Some of the houses that we buy are sold to REITs; the vast majority are returned to the market and go to ordinary consumers.
RedfinNow says this is an exception. “We haven’t sold a single home to a REIT,” says Jason Aleem, vice president of RedfinNow.
VALUE OF A BUYER’S OFFER
Buyers don’t mess around, they’re not responsible for soaring home prices, and they sell most of their inventory to homeowners and only some to homeowners. They are not an evil force in the housing market, but what are they for?
They can help sellers set asking prices. It’s one thing to post an online estimate of your home’s value when you’re bored. Receiving an offer to buy from iBuyer is another. “This makes those estimates real,” Aleem says. He explains that getting an iBuyer offer can set a base asking price even if you ultimately decide not to take it and go with a traditional housing listing instead.
ANOTHER ADVANTAGE: NO LIFE IN THE LIMBO
More specifically, selling to an iBuyer appeals to homeowners who value convenience, need to sell quickly, and want to be sure the buyer will complete the deal and not collapse.
I Buyers are particularly attractive to sellers who hate showing their homes to potential buyers. If you’ve ever sold a house, you know the drill: you keep a house tidy, then you have to go somewhere while strangers roam the place and judge your housekeeping skills.
The hassles are even worse if you have young children or pets or both, as their messes are messier, their smells are more fragrant, and you have to plan to find a place to take them during the screening.
With an iBuyer, there are no pitches, round-trip negotiations, buyer contingencies, or last minute changes to closing dates.
The convenience and speed that iBuyers offer means they’re here to stay. They won’t serve more than a small subset of home sellers, but they will occupy a niche, especially in growing Sunbelt towns with large new and similar home developments with similar values.
Understanding what iBuyers do and what situations they may face adds to your toolkit whether you’re selling or buying.
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This article originally appeared on the NerdWallet personal finance website. Holden Lewis is a writer at NerdWallet. Email: hlewis@nerdwallet.com. Twitter: @HoldenL
RELATED LINKS:
NerdWallet: What is an iBuyer? https://bit.ly/nerdwallet-understanding-ibuyers
NerdWallet: Offerpad review https://bit.ly/nerdwallet-offerpad-review
NerdWallet: Opendoor review https://bit.ly/nerdwallet-opendoor-what-to-know
NerdWallet: RefinNow review https://bit.ly/nerdwallet-redfinnow-review
