Hey 98.6, It's Good to Have You Back Again

Blog Post Image
Real Estate

You can drown while crossing a stream where the average depth is one inch. It’s an old adage that applies to much of life including real estate. A stream may be shallow at the banks. But if it’s eight or ten feet in the middle, you’ll eventually need to swim or sink.

Real estate experts (me included) have written a lot about “iBuyers” -- the hedge fund-financed instant buyers that will purchase your home directly, without agents, MLS listings, on real estate contract forms approved by the Colorado Real Estate Commission.

The larger operators include Opendoor, OfferPad, Zillow, Redfin, Knock, Realogy CataLIST, Perch, and Keller Offers. They promise a fair market value price or something very close to it. Which may turn out to be true, based on broad averages. But individual results may vary wildly.

One study says iBuyers have paid—on average—98.6 percent of “AVM value.” (AVMs are Automatic Valuation Models that generate real estate values using complex algorithms. This study used an AVM from First American Mortgage Solutions.)

The study’s author is Mike DelPrete, a real estate tech strategist who happens to be based in Boulder, CO. His iBuyer Report is offered for sale online at $850 per single-use copy and $2,500 for “corporate users” with multiple readers. See a free preview here.

DelPrete looked at purchases by two major iBuyers (Opendoor and Zillow) in eight metro areas including Denver. On average, those purchases closed at 98.6 percent of AVM value. Call that a 1.4 percent discount. Applying that to the average $270,000 sale price of homes in those eight cities equates to a lowball factor of $3,800. Applying it to Denver’s average recent sold price of $490,874 suggests a gap of $6,908.

For the advantage of a relatively easy sale, a 1.4 percent penalty may not sound so bad. But low-stakes lowballing is not the only way Zillow makes money. The iBuyers charged an average of 7.5 percent in transaction fees, according to DelPrete. The corresponding percent in a conventional deal, with brokers and commissions, is typically 5.6 to 6.0 percent.

Compared to even the higher 6.0 percent, an iBuyer fee of 7.5 percent obviously boosts selling costs by 1.5 percent. For an average-priced Denver home that’s another $7,363 out of the seller's pocket. Combine that with 1.4 percent "penalty" already assessed and the total bottom line reduction is $14,271 on a $490,874 sale. That figure incidentally is very close what my friend Dave endured in selling to Opendoor, as outlined in a recent blog post.

Analyzing a few thousand real estate deals in eight cities as DelPrete did must be a daunting task. For me, a quick look at a handful of sales in Denver was pretty easy.The following three round-trip transaction pairs were done in 2019.

•   Zillow bought a home on Lansing Street in August for $390,000 and sold it in November for $395,000.

•   Zillow bought a home on Mexico Avenue in September for $490,000 and sold it in October for the same price.

•   Zillow bought a home on Franklin Street for $429,000 in June and sold it at $480,000 in October.

In each case the home condition probably didn't improve much between the buy and the sell. (Zillow just doesn’t do that.) Total up the discounts to market value and divide by three here, and the average cost to sellers was $18,666. That's in addition to the effect of higher transaction fees. Maybe even that doesn’t sound so bad. (And DelPrete says some part of the gap is due to natural price appreciation. Own a home even briefly and its value will increase a bit. Fair enough; that effect is very small.)

But suppose you were the third seller on the list above, on Franklin Street, low-balled by $51,000? I’d say that's a bit like drowning in a seemingly shallow stream. Going in, the expected cost of selling wasn't scary. But results varied. Could you have avoided that misfortune?  Are you savvy enough to closely determine your own market value? Some folks are and frankly most aren't,

The iBuyer process may look simple. But the buyers are not your friend or ally--they are a counter-party. They have no obligation to mind your interests. An experienced real estate broker by contrast is a dedicated advocate on your side. Choose wisely and it is someone with home valuation experience, with a fiduciary duty to help you. No doubt the big corporate players would love to see independent brokers go away. They may be hastening the day. And when it comes, The costs of selling will go way up. Fair market value offers may be just a fond memory, and even 98.6 percent may look good in retrospect.