Is iBuying the Next Trend in Real Estate?

Question: What do you think about the iBuying trend in real estate? Have you seen an impact in Arlington?

Answer: iBuying offers homeowners a way to sell their home quickly without going to market, using a price generated by an Automated Valuation Model (AVM) like Zillow’s Zestimates. The big players are Opendoor, Offerpad, and Zillow but recently some well-known brokerages have joined the party including Redfin and Keller Williams.

At this time, none of the main players are offering iBuying in Arlington or the DC Metro. Currently, the largest iBuying market in the country is Phoenix with about 6% of transactions going through an iBuyer (half of those are with Opendoor).

How It Works

The process of iBuying is similar for each company and looks something like this:

  1. Homeowner submits a request for an offer and provides some basic information about their home (bedrooms, square footage, etc)
  2. iBuyer makes an initial offer on the home based on their AVM pricing algorithm
  3. If the owner likes the price, the iBuyer conducts a property inspection to determine condition and cost of repairs
  4. iBuyer makes a final offer given the property condition
  5. Owner can accept and close usually within 10-14 days

Advantages

  • Sell quickly
  • Sell as-is
  • No showings
  • No repairs or improvements
  • No contingencies that cause contract to void
  • No cost to get an offer

Disadvantages

  • Sale price likely below market value
  • “Service fees” usually range from 7-10% of the sale price, well above most commissions when using an agent
  • Still pay your normal closing costs (taxes, title fees, etc)
  • iBuyers not operating in most metro areas

When Does An iBuyer Make Sense?

There are all sorts of reasons a homeowner may value speed and convenience over price so iBuying exists for that market, but it should remain only a small percentage of the overall real estate transaction market. iBuying won’t always be the best option for somebody looking for speed and convenience, but with no cost and little effort to get an offer, it makes sense to at least see what an iBuyer is willing to pay.

If you’re in a market where iBuying exists (or when it eventually comes to Arlington), why wouldn’t you request an instant offer from an iBuyer and compare it to what your real estate agent thinks you can get on market? I know a broker in Texas who got more for his house from an iBuyer than he could get on the market because the AVM pricing algorithm over-valued his house.

Will iBuying Last?

I’m not sure how iBuyers will survive an economic downturn when they’re sitting on a huge amount of inventory that’s worth less than they paid for it. It’s a great business model in a hot market, but potentially devastating when the market turns.

Another flaw I see in the current model is that homeowners (like the broker in Texas I mentioned earlier) can take advantage of the process. An owner who does their homework, meeting with agents and getting iBuyer offers, will most likely only choose the iBuyer if they’re over-paying. That’s great for owners who can take advantage of it, but I’m not sure how that can be a sustainable business model.

An additional drawback is that iBuyers generally charge a fee of 7-10% of the purchase price, which is mostly attributed to the risks associated with buying based on an algorithm and a basic property inspection. If iBuyers can figure out how to reduce risk enough to cut this fee in half and sustain themselves through downturns, things will get interesting for the real estate industry. There have always been brokers and investors who specialize in “buy now” or instant offer programs, but what makes iBuying unique is the implementation of technology to determine pricing and to make the process more convenient, as well as the scale of operations. I think the longer-term solution is something that blends the convenience and scale of a well-funded tech company with the market knowledge of a local agent.

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