By now, we’ve all heard an advertisement for one of the companies offering to buy your home for cash and choose your closing date, right? The concept of iBuyers has been around for a while now but just over the last few years they’ve hit the mainstream market in a whole new way. So let’s talk about their general business model, the pros and cons, and how to set yourself up for success if this approach is appealing to you.
Business Model
In theory, iBuyers’ goals are pretty similar to an investor looking to fix-n-flip a place. What are the most important tenets to succeed with a business model like this? Purchase the property for enough under market value to account for the work needed to be done to the property prior to reselling it. This means these companies will only take on projects with minimal work necessary, usually primarily cosmetic. The reason is their experience has proven that if they take on bigger projects, the inevitable costs are going to climb as more issues are uncovered.
Money Saved On Commissions?
Many people are under the impression that by selling directly to one of these companies, they will avoid the commissions that an agent would charge and end up with a similar bottom line to an FSBO. While these companies don’t charge commission, they do charge a percentage of the price labeled as various “fees” that oftentimes meet or exceed the “typical” commission of roughly 6%.
What Does All This Mean?
For the sake of ease, let’s look at an example of a home worth $500K in today’s market that was recently inherited by two siblings. Sibling #1 lives overseas and wants the proceeds as quickly as possible. Sibling #2 lives nearby and wants to maximize the value by doing some work to the house and listing it with a traditional agent but doesn’t have much money to put into the remodel. Let’s say that the house needs $20K of work but will then likely draw multiple offers which will drive up the price.
A typical iBuyer will send a representative to see the house after Sibling #1 has filled out a form on their website (hint – don’t do this without talking to me!). They will walk through the house, come up with a “fair offer” of roughly 85-90% of the true value. For this example we’ll give them the benefit of the doubt and say they’ll offer 90% or $450K. Then they will come through again and create a list of necessary repairs. We’ll use the $20K to get to a price of $430K. They will add their various fees to be paid by the seller which I have seen to be anywhere from 5-7%. Again, we’ll use the lesser amount and call it 5% ($21,750) which would put the bottom line for the seller at $413,250.
Now Sibling #2 doesn’t think this is enough and is willing to put in the time to get more for the home. They call their favorite KW agent to come through the house. They confirm that the house is indeed worth $500K as-is but if the seller is willing to invest $20K, which will raise the value to $530K. Since the seller doesn’t have much liquid cash, their KW agent tells them about a program available to them by working with this agent that will pay for the repairs and help manage the project. The cost necessary for these improvements will be recouped at closing from the proceeds of the sale. To strengthen their argument with Sibling #1, the agent puts together a net sheet using these numbers. $530K sales price - $20K in repair costs – 6% commissions ($31,800) which puts their bottom line at $478,200.
With a difference of $64,950 in proceeds, which one would you choose? Don’t get me wrong, there is definitely some work required to create the second scenario but I’m very familiar with this process and do it all the time! And if someone REALLY needs to sell quickly to get their cash out, I have local investors who are all too eager to step in and buyout the sellers with money equal to what they would get from the iBuyer AND actually let you choose your own closing date!
Synopsis
The truth is I have nothing against these iBuyer companies. They can be a great option in certain situations and I have helped clients sell to them in the past with a good experience. That being said, the worst thing you can do is to start clicking buttons at 1 AM when you’re “just curious” how much they would pay for your home. As soon as you do that, you remove the possibility of your agent being able to represent you in the transaction and serve as your fiduciary while you’re dealing with these companies. So call your agent (me!) as I am happy to get you some comparable numbers so we can discuss what will be best for you.
