The Dangers of iBuyers

    How often have you been driving to the local grocery store and see a sign, either in your neighborhood or at the parking lot to the store itself, advertising a company that will buy homes for cash?  These are not new concepts, and we have started seeing these types of advertisements more and more over the last few years, but something is looming in the distance that is more troubling to the Real Estate consumer which many people have yet to consider as a real threat.

    The iBuyer is an online company that makes an offer on a home immediately upon receiving a request from the home seller.  Often they will ask that an appraiser or similarly qualified person inspect the property, but at the end of the process, the iBuyer gives the homeowner an offer to sell their home then and there.  This offer is different from the more traditional model where the homeowner would identify a price they would like to list their home and then either with or without the assistance of a Realtor advertise the house on the open market.

    So why are these instant offers dangerous to the seller?  The keywords in the description were “open market,” the iBuyer has no competition as they are the only one able to make an offer on the home at the time the homeowner is soliciting for a price.  The homeowner has no comparison other than theoretical values of what the house might sell for, and they decide to either take the money offered now or wait an indeterminant period to get a different amount of money.  People are naturally risking adverse and will more often than not choose the safe, known option over any unknown option with risk, no matter if the safe choice is the best option for them.

    But how do we know this option is not the best option for them.  First, it will not always be the worst option.  At times there will be a seller who for specific reasons needs to sell their home as fast as possible and the price of the sale is secondary to the time they use to sell the house.  In these cases, this could be a good option.  In any case, where the dollar value of the sale is relevant the homeowner needs to consider the same principle that governs current Real Estate investors.

    Most Real Estate investors in our local market are looking for a 20% profit on any transaction to cover carrying costs and make a net gain.  You can’t blame them; they are in business.  An investor purchases a home that needs repair at a reduced rate and then does the needed repairs at a cost that is cheaper for him than it would have been for most other people because of their position and connections then turns around and sells the home as quickly as possible.  So the price offered to the original owner needs to be low enough that the combined price of the initial sale, plus the repairs, plus the companies 20% does not exceed the price they sold the house minus any commissions offered to the Selling agent.

    There is another option, however.  The iBuyer could sell the home at an inflated price so that they will draw in their 20% +Repairs +Purchase +Commission.  The way the iBuyer can raise the price is because they can afford to keep the home longer than the original seller.  The iBuyer is not paying a mortgage so their costs to hold the property are considerably lower, and they can leave a house on the market longer waiting for a buyer who will pay more.  The original seller would often competitively market their home so it would sell in a reasonable period.

    For those of you keeping score, the iBuyer model has at this point kept the seller from receiving a competitive bid on their home, pocketed 17% more profit than the broker model, and left homes vacant longer than necessary.

    My fear is that people will only look at their individual situation and not collectively see the damage to the broader Real Estate market that this new model can cause and when the sizeable well-funded office buildings with expensive TV Ads of these companies start showing up in mass people won’t realize that these companies should have left this money alone and in their home equity.

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