This is a Re-Blog of a very timely post by Chris B. Johnson for those of us who see the forest for the trees with Zillow and their kind who are going after the i-buyers out there lurking in the shadows, looking for the cheap way to buy/sell their homes. I think it is going to happen faster than any of us thought; we will see those predators swooping in on our market-places, and we will see many take the bait. This post will give you a sense of just why it will not be a force to contend with but a very weak and annoying little insect who just wants more blood.
“iBuyers,” the new real-estate companies that buy homes directly from customers, have grabbed media attention, investor dollars and consumer acceptance. Their approach offers a seemingly modern solution to the often laborious and invasive process of selling a home.
But that convenience comes at a cost. A MarketWatch investigation of multiple transactions involving iBuyers shows that their offers would net their customers, on average, 11% less than owners who choose to sell their homes on the open market, when fees and other costs are considered, translating to tens of thousands of dollars lost. The findings also revealed considerably more uncertainty around the transactions — the scope of inspections, for instance — than the iBuyer model purports to offer consumers who are looking for ease.
This data come from a series of inquiries involving a real-estate startup called Knock. As MarketWatch has previously reported, Knock is often lumped into the category of iBuyers, but its model is quite different from theirs. Knock advances homeowners cash to buy their next home and, once the customers are settled, sells the previous home. Customers pay a fee for the overlap period.
In many cases, Knock solicits bids from such pure-play iBuyers as Offerpad and Opendoor when it’s ready to sell its customers’ homes.
In most cases, however, Knock determines it’s preferable that its agents list a property on the open market rather than accept an iBuyer offer. That means its set of customer experiences are a natural experiment: a sort of Darwin’s Galapagos for any industry observer curious about how iBuyer offers stack up to actual sales prices.
Using a combination of public-records searches, conversations with Knock customers, and data collected from the company itself, MarketWatch was able to create a data set of 26 sales. Most took place in or around Atlanta, the city where Knock started and where it, Opendoor and Offerpad have a strong presence. A few transactions took place in the Raleigh-Durham metro area in North Carolina, and a few were in Charlotte. In most cases, MarketWatch was able to match the sales price to an offer from both Opendoor and Offerpad, but in some cases only one iBuyer offer was received.
This is not “big data,” to be sure, but there are clear patterns in the information recorded. The table below shows the averages for each city. In the 35 listed comparisons — that is, a completed transaction matched to an iBuyer offer — the instant offer was higher in four cases.
Notably, not only are iBuyer offers generally lower than the ultimate sale prices, but their fees are often higher as well. Knock always charges a 6% commission for selling the existing home, but fees charged by Opendoor and Offerpad vary widely. (So do commissions across the real-estate world: If a homeowner hired a full-service brokerage he or she could expect to pay about 5% to 6%. The national average in 2018, according to industry source REALTrends, was 5%.)
Jeremy Ano used Knock to sell a house in Acworth, Ga., in suburban Atlanta, this past spring. He and his wife run a business and home school their kids, and they’d outgrown the house. But he dreaded having to clean up and get two kids and two pets out the door every time someone wanted to tour the house.
Ano, who describes himself as someone who likes to do lots of research — including an exploration of how much he could expect to fetch for his home based on recent comparables — initially reached out on his own to Zillow, Offerpad and Opendoor.
“First of all, they gave us lowball offers,” Ano told MarketWatch. “But that still didn’t solve our problem of where do we move to? We’d essentially be homeless.” He knew that in the ultra-competitive Atlanta market sellers would be unwilling to accept an offer that was contingent on his selling his own home.
Ano received an offer of $248,747 from Offerpad. Several weeks later, citing “recent market activity,” the company sent another offer, unsolicited, of $256,459. Offerpad wanted a 7.5% commission. Opendoor offered $278,300 — less an 11.5% commission. After a Knock agent listed the home, it sold for $297,749. Once Knock’s 6% fee was taken out, and a seller concession of $10,000 was granted during the inspection process, and about $7,000 was spent out of pocket on repairs, the Anos netted about $262,000.
Repairs and other prep work is where comparing offers gets hazy. The Ano home was 23 years old, and it needed a fair amount of work. While iBuyer offers are often also known as “instant offers,” they are anything but. In fact, they’re always contingent on a home inspection, which some observers believe are carried out in a way that squeezes profit from sellers.
“If you’re comparing iBuyers’ offers it’s very black-and-white,” Knock CEO and co-founder Sean Black said. “The front-end stuff is very upfront. The repairs are the gotcha.”
A home inspector with an incentive to, in Black’s words, “cover his butt,” in the eyes of the iBuyer that hired him, will almost always build a lengthier list of upgrades needed for the home to sell than a real-estate agent might in order to potentially reduce the final sales price.
Indeed, Ano said he felt nickel-and-dimed. “The kinds of repairs that they were hitting us with, I felt, were very petty. They were subtracting a large amount for petty things, and had huge fees on top of that. If I’m going to sell to an iBuyer why would I pay [what amounts to] the traditional Realtor fee?”
(Actual seller concessions are taken into account in our calculations, in determining how much each Knock customer netted, although it’s impossible to know how much any iBuyer home inspection would have cost the customer in either concessions or out-of-pocket repairs.)
It “sometimes happens, we know,” she said, that an open-market price is more attractive.
It’s worth noting that the modern real estate landscape offers consumers all kinds of models for listing homes and closing on transactions, and for some people, like the Ano family, a fast close isn’t always the best option.
With iBuyer, you get one offer, with a good Realtor you can get multiple offers and “Why wouldn’t you get multiple offers?” it drives the price up!