What Are iBuyers, and Can They Really Drive Up Real Estate Prices?

iBuyers offer convenience and fast cash. But how are they affecting the traditional buying and selling model?

By Terri Williams | Published Nov 17, 2021 4:03 PM

iBuyers

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If you keep up with current affairs, you probably caught wind of the uproar over a viral TikTok video in which a real estate agent accused the iBuyer business model of being used to manipulate real estate prices.

In essence, he argued that companies like Redfin and Opendoor—and up until a few weeks ago, Zillow—are buying up homes and selling them for much more, which leads to overall higher housing prices.

It’s an intriguing theory—actually an alarming theory if you’re currently searching for a home—but is it true? We’ll delve into the world of iBuyers to help you understand how they work, and examine the claims about their impact on the housing market.

What is an iBuyer?

“An iBuyer, also known as instant buyer, is a company that purchases homes directly from owners,” explains Tyler Forte, CEO of Felix Homes in Nashville, Tennessee. And there’s a reason they’re known as instant buyers. Forte says they can make cash offers, and usually can close in as little as 14 days.

“Once an iBuyer owns the home, they typically choose to do minor home upgrades such as giving the home a fresh coat of paint or replacing old carpet.” And after these upgrades are complete, he says, they will re-list the home and sell it for a higher price to make a profit.

So, how do they determine the price? “The iBuyer company will take your property data and compare it with the neighboring home properties,” explains Brady Bridges, a realtor at Reside Real Estate in Fort Worth, Texas. But don’t confuse this with a house flipper purchasing abandoned homes about to cave in. iBuyers tend to prefer newer homes in good condition that are located in desirable neighborhoods.

RELATED: Putting Your Home on the Market? Make These 10 Fixes First

iBuyers have a distinct advantage.

iBuyers

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One advantage posed by an iBuyer is the convenience they offer sellers. “An owner can avoid showings, which is one of the most annoying parts of the traditional listing process,” Forte says. There’s no need to clean and stage the house, and find somewhere to go while the home is being shown.

And according to Bridges, there’s no law requiring a home inspection when selling to an iBuyer, compared to the compulsory home inspection in a conventional selling system. “This helps you save a good amount of money, labor, and time,” he says. “But with mutual understanding, a home inspection might take place only if your iBuyer company is interested.” If the inspection reveals any problems, you won’t have to fix it, although the offer will reflect the estimated cost of repairs.

In addition, it’s hard to compete with quick cash offers from an iBuyer company like Opendoor. Compared to a conventional selling process, which can take months, an offer from an iBuyer is obviously appealing, especially to sellers who want to close faster, or need to move in a hurry.

Fast sale to an iBuyer will cost you.

iBuyers

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However, this quick process is not without its disadvantages. According to Forte, many iBuyers advertise that they purchase homes at market prices, but this isn’t always the case. “In my experience, iBuyers will purchase homes for 5 to 7 percent below what the market would bring,” he explains. “Most iBuyers will then charge an additional service fee ranging from 5 to 7 percent.”

His view is shared by Kristen Jones, broker/owner at RE/MAX Around Atlanta, who says that iBuyers tend to make offers below market value and then charge fees that are comparable—if not higher—than the commission paid to a real estate broker. The offer could also be reduced to cover any repairs following an iBuyer inspection. “But at this point, sellers are often too far into the process to reverse course. They may have found a house to purchase, or started packing,” Jones explains. At this point, they feel it’s too late to turn back.

Supply chain issues, along with the shortage in workforce are adding to the expense in purchasing, renovating and reselling properties, which all drives the up cost of the iBuyer business model.” So it may be convenient to sell to an iBuyer, but Jones warns that the cost could be thousands of dollars more than the traditional selling process.

Purchasing a home from an iBuyer has pros and cons, too.

We’ve discussed how iBuyers affect sellers, but how does this business model impact buyers?

When working with iBuyers, convenience is also an advantage to those looking to purchase a home. “For example, when purchasing an owner-occupied home, you need to schedule a tour which must be approved by the owner,” Tyler says. And if that time is not acceptable, the owner will decline your request. But Tyler says an iBuyer home is always vacant so it can be shown at any time.

It’s also convenient in other ways. “Starting from property details through the offer to closing, everything is done online during the purchase period of a home through iBuyers,” Bridges explains. “There is no locomotive cost or labor for you, and due to using digital technology, many steps of the buying process could be skipped.” Many buyers may appreciate the lack of face-to-face interaction.

On the other hand, not all buyers consider working with a realtor as stressful or time-consuming. “A good real estate agent works closely with their clients to make sure their needs and goals are met on time,” says Heath Clendenning, an agent at Highland Premier in Los Angeles.

Also, iBuyers can cause problems for buyers, especially in a seller’s market. “A major con to buyers in the marketplace is that they are missing out on the opportunity to purchase a home because they cannot compete with these instant offer/all cash buyers,” Jones says. iBuyers can also purchase multiple homes at a time, which limits supply—and forces buyers to come to them. Also, iBuyers can set their own prices. This eliminates the negotiation process that typically takes place between conventional sellers and buyers.

RELATED: 11 Essential Cleaning Chores to Complete Before Showing Your House

Is iBuying big enough to truly influence the real estate market?

iBuyers

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So, is the iBuyer model really making a dent in the market? Bridges thinks so. “iBuying is booming right now in almost every major region and looks to stay on the market system for a long time,” he says, noting that simplicity and direct cash is attracting more sellers than predicted. “And within the next few years, we may face a short-term banishment of the current deal closing system.”

In fact, Bridges says he has already noticed many real estate teams in several areas that are now hybrids or have fully transitioned to iBuyers. He predicts there are more real estate agents and teams looking to follow suit.

However, Clendenning believes human interactions like negotiations, appraisals, and instructions are still needed for now. “Real estate agents collaborate with their clients to understand their goals and needs and do their best to meet those,” he says. “There are still a lot of variables and situations that software and algorithms can’t address.”

Forte believes that iBuyers are having an impact, but not necessarily the anticipated one. “In many cases, iBuyers are re-listing homes for 10 percent-plus compared to the price they purchased it,” he says. “However, the homes that iBuyers re-list tend to sit on the market for a longer period of time.” Sure enough, Zillow is winding down its own iBuying service, Zillow Offers, due to “unpredictability in forecasting home prices.”