An iBuyer, or "instant buyer," is a company that will make you an offer on your home within minutes, sight unseen, based on algorithms and technology. The biggest iBuyers are Opendoor and Offerpad (Zillow used to be an iBuyer but they abruptly exited that market in 2021). iBuyers are only a small part of the real estate market in most areas of the country purchasing about 1.6% of all U.S. homes in 2021. The primary benefit of using an iBuyers is it allows you to sell quickly without staging, showings and inspections. Here's the pros and cons of working with an iBuyer.
PROS
You may get a cash offer in as little as 24 hours.
Closing can occur very quickly because it is a cash offer.
No need to stage your home for photos, allow showings or deal with inspections.
Minimal effort for sellers. With a few clicks, sellers get an offer and can sell quickly without staging, showings or waiting.
CONS
·iBuyers use algorithms to value homes. They never see the inside of your home to add value for upgrades, improvements or finishes. They don't add value for being a corner lot, near parks and trails, walkability, landscaping or desirability.
Because iBuyers purchase many properties every day, they tend to remain firm on their offer price.
·iBuyer offers are purposely below market value to compensate for the risk they take by providing you with instant liquidity. The discount to fair value (instead of market value) averages 5%.
All iBuyers charge a fee for their services. The commission fee on average is 5% of the offer.
Overall costs to sell to an iBuyer can add up to more than 10% of the market value of a home compared to 5-6% in commissions paid to a traditional agent.
What sellers gain from iBuying may not be worth what they lose financially by accepting a lower offer, paying service and premium fees, and absorbing repair costs.
·iBuyers are interested in homes in that are turn-key, a fact that differentiates iBuyer companies from fix-and-flippers. Their goal is to sell quickly and avoid additional investment.
If repairs are needed, the costs will be deducted from the final price. The iBuyer makes all decisions regarding which repairs are necessary, who performs them or the cost for each repair.
What does all of this mean for a homeowner's bottom line? Most homeowners purchase their home with a mortgage. If you purchased your home for $400,000 with 20% down, you showed up to closing with $80,000 of your own money, which is also your equity. If the value of your home remains the same and an iBuyer offers you $380,000 for your home — a 5% discount to fair value — you will lose $20,000 on the value of your home, plus pay a 5% commission (an additional $19,000). This is a higher transaction cost compared to selling on the open market for $400,000. More importantly, compare that combined $39,000 to your original down payment of $80,000 -- you will be giving up close to 50% of the equity you put into your home for the convenience of a quicker sale.
Despite all of this, an iBuyer may be the right decision for some sellers. If you have a turn-key home (meaning it doesn't need significant repairs) and you need to sell in less than 45 days, it might be worth the additional cost to consider using an iBuyer.