Should You Sell Your Home to a Startup?
Startups like Knock, OfferPad and Opendoor aim to change the homebuying process.
The concept is great for some sellers, but is it right for you?(Getty Images)
Selling a home isn't for the faint of heart. Many sellers choose to repaint or hire a home stager to prepare and present their property in the best way possible. Then there's the stress of cleaning up for last-minute showings, waiting for an offer and hoping the inspection or mortgage underwriting process doesn't scare away the prospective buyer.
"The real estate transaction process can be really painful to some people," says Mike DelPrete, an independent strategic advisor and consultant in real estate tech. "People want more certainty." They don't want to worry about painting and other home repair or improvement projects or search for a real estate agent, he explains. "They want to snap their fingers and get their house sold."
Several real estate startups (also known as iBuyers) aim to lessen these pain points by simplifying and expediting the selling process and eliminating the time-consuming process of showing a house. OfferPad and Opendoor buy homes for cash on the seller's preferred time frame. Opendoor's closings can occur within three to 60 days and OfferPad's closings are within five to 90 days, depending on the seller's preference. Conversely, a traditional buyer seeking mortgage financing might need a month or more to close. What's more, all three companies will fix up the property if needed and resell it for a small profit. And Knock will buy the home outright or offer a guaranteed price if it can't sell your home within six weeks.
Opendoor launched in Phoenix in 2015, and operates in Dallas-Fort Worth and Las Vegas with plans to launch in other markets. Meanwhile, OfferPad was introduced in the summer of 2015. OfferPad currently buys homes in Phoenix, Las Vegas, Salt Lake City, Orlando and Tampa, Florida, and has plans to open in more markets later this year. Knock debuted in Atlanta last July and plans to expand to other markets.
All three companies offer a cash price online based on what it estimates the house to be worth based on current market conditions. "We pull all the publicly available information, ask what you've done to the house, what condition it's in to get a better understanding of where the market value lies," explains Sean Black, co-founder and CEO of Knock. "We get you what we think is the market price for the house. We give you a narrow range and schedule a home consult to verify the exact price," Black adds.
The offer price may or may not be as much as you could get on the open market but the trade-off is a quicker closing and more certainty, since the startup assumes holding costs and market risks. The concept is especially appealing for sellers who have already moved out of their homes or need to move immediately so they're not carrying costs on two properties.
Unlike house flippers, who often do elaborate renovations on a tight time frame and resell at a huge markup, DelPrete says that iBuyers tend to get a smaller profit margin and make more modest changes but buy and sell a larger volume of homes. "The [profit] margin that we look to make is what would have been paid to other third parties [like the seller's real estate agent]," explains Jerry Coleman, who is OfferPad's co-founder and co-CEO along with Brian Blair.
While startups aim to streamline the experience for home sellers, they're also trying to improve the homebuying experience. Some buyers worry that house flippers may have cut corners to save time or money, but Opendoor and Knock require that all homes have gone through an inspection checklist and offer a home warranty. Opendoor also includes a guarantee where it will buy back the home if the buyer is unhappy within the first 30 days after purchase. Still, transaction costs make it more expensive for homebuyers to return a home versus smaller purchases.
Another benefit to prospective homebuyers: Since the homes are already vacant, buyers can unlock the doors using the Opendoor app instead of first scheduling a tour with a real estate agent. "Our homes are self-service, on demand seven days a week," says Eric Wu, CEO and co-founder of Opendoor. "People will visit the house every single day to plan their home. They're making sure that this is the home of their dreams and we enable that." OfferPad also has some homes that buyers can tour remotely or by requesting a code.
In addition to these three major startups, DelPrete expects other players to enter the online real estate space in the U.S. and abroad. In recent months, online real estate brokerage Redfin recently began testing a product called Redfin Now, which lets the company buy homes directly from consumers, and Zillow is piloting a product called Instant Offers that connects home sellers with investors. OfferPad will participate in the Instant Offer pilot program in Las Vegas and Orlando.
"You'll continue to see innovations from these companies to make it easier for people to buy and sell houses," DelPrete says. "The real estate industry can't ignore this. It's a loud and clear message that a lot of consumers find the current process painful." Even if only a small percent of U.S. homes are bought and sold through iBuyers, it's still billions of dollars worth of transactions, DelPrete says.