Understanding iBuyers: a Quick Fix for Market Price Homes

Today, we're going to talk all about iBuyers. This is your six minute guide to iBuyers. So an iBuyer is a company that pretty much buys and sells houses. If you're looking to sell your home, this is a way that you can do it that's extremely predictable and very streamlined. You enter your address and you get a cash offer in as little as 24 hours. You choose your closing date and you know for sure that that's the date that you'll close because you're not waiting to try to find a buyer, you're not negotiating, you're not going through an inspection process. It's very, very predictable and it's extremely streamlined. You might not have heard of some iBuying companies because really the oldest iBuyer only dates back to 2014. So it's a pretty new business. But some of the original iBuyers are companies like Offerpad and Open Door. At the same time though, other real estate companies that you may have heard of have gotten into the iBuying business and that includes Zillow and Redfin. So iBuyers are concentrated pretty heavily in the Southern states of the US, although they're not in every single state. If you live in a place like Georgia, North Carolina, Texas, or Arizona, you're probably getting direct mail offers from them. But if you live in the Northern half of the country, iBuyers are a bit less common. It really depends on where you live. iBuyers will often have a market or two that's in say, Indiana, Michigan, Minnesota, Wisconsin, but you kind of need to be within a major city where an iBuyer is operating and they might be the only game in town so you wouldn't be able to compare offers between two iBuyers. One reason that iBuyers are so heavily concentrated in the South is because of the way that the land was developed. You've got many more places that are sort of like large tracts of land that were developed all at one time. They have a relatively uniform housing stock. And so that's why the first iBuyers actually began in Arizona. Why Arizona? Well, it's a place where lots of development occurred all at once. And so there were huge tracts of land developments where there are houses that are all relatively uniform and relatively similar, which makes them much more predictable to buy and sell. And predictability is something that iBuyers really value because they're not looking to hold on to these homes for long. They're looking to turn them around. And so that means your sort of standard single family detached home is generally what they're looking for. Although pretty much all iBuyers will buy attached homes like condos or townhouses as well. They usually are looking for homes that are relatively recently built, probably no older than 1950s at the very oldest. But in general, houses from the 80s and 90s tend to kind of be their sweet spot. They're also not looking for anything that's really high-end or custom or unique. Because again, there's that predictability aspect that they need to know that they're going to be able to get a return on their investment. And then last, they tend to choose homes that are on relatively small lots. So no more than an acre of property surrounding the home. So how do iBuyers make money? One is just by buying and selling as many homes as they possibly can. They're not home flippers looking to put a bunch of investment into a home, turn it into something completely different. They want to buy homes that are more or less already moving ready so that they can sell them right away. The longer that an iBuyer is holding onto a home, the more money it's losing. They're also not real estate investment companies. They aren't buying homes in order to hang onto them and turn them into rentals. They're just turning around and reselling them. The other major way that iBuyers get money is by charging a convenience or service fee to people who sell their homes to the iBuyer. That generally, it varies by iBuyer, but that generally is between five and 7% of the total value or the agreed on offer price of the home. And that kind of sounds like a lot, but it's actually relatively comparable to what you'd be paying in a traditional sale, given that home sellers generally pay the listing agent and the buyer's agent commissions when they sell a home. Another thing that you might find yourself wondering when it comes to iBuyers is just, is this legit? These are all generally very new companies. They haven't been around a long time. You might not be familiar with them. Many of them are not exactly household names at this point. And so it's worth taking the time to do some homework and look them up. You can absolutely look at their websites and you'll generally find glowing testimonials from people who sold their homes to them. It was so convenient, it was so great. Everything went beautifully. But you can also look at sites like the Better Business Bureau, where on one hand, you can find that yes, most iBuyers are accredited by the BBB. But since people don't tend to go there to gush about the amazing experience they've had, you'll actually find complaints. And you might read through those, see what you think about them. But something that's kind of interesting to use the Better Business Bureau website for is to look not just at the substance of people's complaints, but also to look at when and how the company chooses to reply to them. That can tell you something about what a company is going to be like to work with. So one last thing to know about iBuyers, there's still actually a really small presence in the US real estate market. In the first quarter of 2021, homes sold to iBuyers represented just a fraction of 1% of the homes sold in the United States. To give you some perspective, in the first quarter of 2021, over 1.2 million homes were sold in the United States. During that same period, iBuyers purchased only 4,383 homes. So iBuyers are still relatively new and they're a pretty small amount of the market. But there are some people where selling to an iBuyer is just going to make the most sense, whether it's because of where you live or because of what's going on in your life. If you're looking to sell your home and you're worried about things like, will I find a buyer or will I be able to close in time? An iBuyer cuts out a whole bunch of steps in the process and makes it much more predictable. You aren't marketing your home, you aren't schlepping in and out for showings, you aren't searching for a buyer and you definitely aren't negotiating. You're getting that cash offer right up front, you're choosing your closing date and you know exactly when it's going to happen. So it's not only fairly streamlined, it's also completely predictable. You're pretty much guaranteed once you've signed on that everything is going to happen and unfold as planned. I'm Kate Wood and I'm a writer on the homes and mortgages team at NerdWallet. If you're wondering, where do I buy all these homes that iBuyers are selling? Pretty much look at any real estate listing website, you'll find them right there. And if you learned something today, go ahead and hit like and don't forget to subscribe to our channel.