What to Expect When Buying a Home From an iBuyer
Eventually, iBuyers become iSellers. Here's what homebuyers should know before making a deal.
Homebuyers should still approach a purchase from an iBuyer with the same scrutiny as any other home – pay what you believe to be fair value for the property.(Getty Images)
An unwieldy process – heavy on paperwork and dependent on constant communication – homebuying may be poised for a change. That change may be coming from iBuyers.
Companies that quickly buy and sell homes, iBuyers have piqued national attention for their disruptive take on home selling. While a subject of lesser focus, homebuying is also succumbing to novel methods in the fledgling iBuyer industry, populated by Zillow, Opendoor, Offerpad and even Keller Williams.
“The common denominator in many of these companies' vision is to make homebuying as simple as buying a product on Amazon,” says Rob Barber, CEO of data firm Attom Data Solutions.
Yet, despite constant geographical expansion, the model is still in its infancy, seemingly centered at creating a desirable customer experience rather than huge profits.
Opendoor says it buys and sells 3,000 homes a month.
Offerpad’s tally is in the hundreds, says Cortney Read, the company's director of communications and outreach.
Zillow volunteered more data – it sold 414 homes in the first quarter of 2019, most of them purchased in the previous period, for $128.5 million in revenue.
This amount exceeds the acquisition, renovation and holding costs by mere $300,000. Per property, while aiming for a 2% gain, Zillow’s profit is less than $1,000, according to a letter to shareholders.
“Our goal is not to profit off of the mark-up on the house,” says Zillow President Jeremy Wacksman. “The goal is to properly assess what the house is worth and what it will take to sell the house.”
For that, iBuyers utilize data and analytics. But the Zestimate, Zillow’s assessment tool of home values, is separate from the iBuying branch, avoiding a chance to manipulate prices for profit, the company says.
While buying and selling in bulk could boost iBuyers' bottom line, the market echelon they occupy is already saturated in demand.
“IBuyers and Keller Williams as well function in a price point that is mostly for first-time buyers, maybe second step-up buyers,” says Gayln Ziegler, director of operations for Keller Offers, part of Keller Williams, which is beta-testing the model.
Some see this as a potential drawback to both iBuyers and individual homebuyers. But Wacksman considers it an advantage for home shoppers.
“We think one of the really great promises of Zillow Offers is that it is going to create more equity in the market,” Wacksman says, adding that the appeal of iBuyers' cash offers may spur sellers, who would otherwise hold off on parting with their home.
IBuyers quickly list purchased houses, adding inventory to the market, Wacksman says. Unless, of course, they sell to investors – according to Attom Data, Offerpad and Opendoor sold one in 10 houses to investors in 2018, a share that has risen by 3% every year since 2016.
But here is what a homebuyer may expect from an iBuyer today:
- Minimum renovation standards.
- Easy, digital access to homes and services.
- Adherence to tradition in representation and cost outlays.
After acquiring a home, iBuyers carry out renovations, the type that any seller would do.
“We are mostly focused on buying homes that don't have major, timely renovation work needed,” Wacksman says.
Hence, with each Zillow Offers home, Wacksman says, buyers should expect a quality standard, devoid of any major complications such as faulty plumbing or a craggy foundation.
Offerpad implements what Read describes as comprehensive repairs exceeding competitors’ practices.
“We spend more money on the home to get it in buyer-ready condition,” she says. “We go beyond just doing paint and carpet. We would do light fixtures, we would do appliances, we would do light renovation work, countertops, cabinets, landscaping.”
Because an iBuyer already invests in sprucing up a residence, a potential buyer’s chance to negotiate further repairs – although not nil – is slim. But Wacksman envisions a future when any renovations would heed a committed buyer’s druthers in a collaboration that would save time and resources.
In Opendoor’s case, a displeased buyer has a 30-day window to return the purchased residence and obtain his money back less a 3% fee.
While most homebuyers search for houses online, touring the ones they like requires coordination with the owners and, in some cases, at least a day’s notice to visit. IBuyers erase that drudgery.
Houses owned by Opendoor, Offerpad and Zillow Offers are vacant and accessible through the companies’ apps at clients’ preferred time.
“We hear over and over that buyers love looking at homes before work, on their lunch break, on their way to pick up the kids from school,” says an Opendoor spokesperson of the rationale behind the feature.
That sort of convenience also extends to a pivotal moment in the real estate transaction – making an offer. Offerpad allows buyers to digitally submit an offer that asks for little more than contact information and price. While a non-binding initiation of a more stringent procedure, this presents a major departure from the trove of paperwork needed to traditionally tender an offer.
The opportunity may appeal to buyers without agents, but most engage with an iBuyer through their real estate agent, shaping a process that bears many similarities to a regular transaction.
“We have a long history working together with agents,” says the Opendoor spokesperson. “Our goals are aligned – we want people to feel empowered to move when they are ready, not just when they have to.”
Under One Roof
Exemplifying iBuyers’ ideology of reliability and speed is the consolidation of various transactional steps. Securing a mortgage is a big one, which often trips buyers. Hence, iBuyers have rolled out their own loan services to streamline the process.
Keller Williams, Opendoor and Offerpad announced their expansion into mortgages in 2017. Zillow joined them last year.
“(It is) a key piece of the on-demand experience we put in motion with Zillow Offers and aims to transform real estate transactions by making it seamless to get financed and get into your new home, conveniently and on your own timeline,” said Greg Schwartz, president of media and marketplace for Zillow Offers, in a press release.
The company is also planning title and escrow branches, Wacksman says.
The concept of coalescing such services is not new – leading brokerages already do it. IBuyers see it as a growth opportunity, but it may be hard to realize, says Steve Murray, president and owner of residential real estate research firm REAL Trends. Large brokerages persuade only 30% of customers to use their mortgage extension, he says.
“If the iBuyers can get to that level or above, then they will be very, very successful and it will generate significant profit for them,” Murray says.
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Operating in a slew of markets, iBuyers follow local customs on what closing costs they assume as sellers, including agents’ commission.
In that regard, purchasing a home from an iBuyer diverges little from a traditional transaction. Moreover, as in any instance, there are universal matters to consider.
Making sure the price reflects the house’s fair value is one, says Karan Kaul, researcher with the Urban Institute.
Attom Data’s Barber advises: “Approach (an iBuyer) the same way you would approach buying a home in general from anybody. ... I would simply look for the home features and the neighborhood features ... and if it turned out that the home is being sold by an iBuyer ... I don’t know if that would necessarily matter to me at all."