A 15% "Gratuity"? - How iBuyers Can Eat Your Lunch

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Real Estate

My previous post outlined the experience of my friend Dave in selling his home to Opendoor, which is an instant buyer that purchases properties directly from homeowners in Denver.  Dave left the table with proceeds of $423,800 minus his mortgage payoff.  I believe a conventional sale, with a real estate agent and MLS exposure, would have netted him about $14,000 more.

Again, in my world, 14 grand is real money.  But to some sellers no doubt a “convenience fee” of that amount is worth what it buys.  It buys relative certainty of closing as it bypasses the hassles of showings and negotiations and failed buyer financing.

The thing is, companies operating under the iBuyer umbrella are many, and their business models vary. The larger operators include Opendoor, OfferPad, Zillow, Redfin, Knock, Realogy CataLIST, Perch, and Keller Offers.  There are many more.

Dave sold his 4-bedroom ranch for $453,800 minus “about thirty grand” in fees and concessions, he said.  The market value was apparently $464,000 because that’s exactly where Opendoor sold it, 49 days after buying it from Dave, with little or no improvement.

Based on those figures, Opendoor purchased the property at a 91.3 percent of market value. Put another way, they got an 8.7 percent discount.  Apply that percentage to a $464,000 market value and it sounds like Dave took a $40,200 beating.  But it wasn’t nearly that bad because he avoided the largest cost in selling—broker commissions. Assuming they’d have been 5.6 percent, he avoided $25,984 in expenses.  The total hit to his bottom line was again just over 14 thousand.

But Dave got off easy.  Earlier this year, CBS MarketWatch examined a set of home sales in Atlanta, where iBuyers have a strong presence.  In those sales, the average Opendoor “discount” was 12.3 percent of market value.  Another iBuyer, Offerpad, took an average discount of 18.2 percent of market value.  By comparison, my friend Dave was “lowballed” by only 8.7 percent.  And that damage, again, was largely mitigated by the absence of sale commissions. Presumably it was in Atlanta as well.

Another study was done by Collateral Analytics, which is part of the University of San Diego School of Business.  It looked at data from about 4,000 iBuyer transactions in Phoenix, Atlanta, Charlotte, and Las Vegas. You can download the study here.

The study confirms that iBuyer sellers endure lowball offers.  But the buyers also “charge sellers a ‘convenience fee’ of 6% to 9.5%, and some also charge the seller for fees typically paid by buyers at closing, adding another 1% or more.” 

Get that? Costs normally charged to the buyer are often shifted to the seller.  The smaller ones might include closing service charges, deed recording fees, and transfer taxes.  The larger ones include home inspection (typically around $400-$500 paid outside of closing) and appraisal (around $800). Are those charges shifted to the seller?  Dave's settlement sheet listed an "Opendoor Service Charge" of $29,497 with no itemization.  If any buyer costs were shifted to the seller, you can't see it on the sheet,  A $1,025 repair concession was also charged to Dave.   

The study concludes with this: “In all, the typical cost to a seller appears to be in the range of 13% to 15% depending on the iBuyer vendor. For some sellers, needing to move or requiring quick extraction of equity, this is certainly worthwhile, but what percentage of the market will want this service remains to be seen.”'

Wow, 15 percent!  In Dave’s case, a load of that size would have pulled another $29,400 out of his pocket.  Would he have done it?  I hope not.  

As the San Diego study says, much remains to be seen.  What’s possible, it seems, is that competition will drive iBuyers to bring their fees and repair concessions in line with market rates. It’s also possible they’ll lose interest and go back to Wall Street.

My advice to sellers eyeing iBuyers is this: Without a professional advocate on your side, it's imperative to know your home’s market value in advance. That isn’t always easy. Even experienced agents and investors struggle when there aren’t a lot of close comps. It is a huge part of their daily work.  Call an agent for help.  (Call me!)  Don’t just ask Zillow what your home is worth.  To paraphrase Warren Buffett, that’s like asking the barber if you need a haircut.

Secondly, prepare a “seller net” spreadsheet in advance, showing all the costs you’d pay in a conventional transaction. It will predict net proceeds based on your assumptions about sale price, repair costs, closing date, etc.  It will give you a baseline for comparison in iBuyer negotiations.  Preparing a sheet like that is routine work for a good Realtor.

In interacting with iBuyers, it would not be unduly cautious to hire a real estate agent for representation.  Considering what’s at stake, a limited-scope, reduced-rate listing agreement might look small compared to the cost of misjudging market value.  You’d still enjoy the iBuyer-related advantages of a quick, sure sale, but with an advocate on your side.  More on this on my next post.

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