What is an iBuyer in Real Estate?

How Do iBuyers Work?

An iBuyer service lets you sell your home online and as-is. You won’t need to have your home listed on the market by a real estate agent, and you also won’t need to make any repairs to the home. To sell your home to an iBuyer, you will first need to enter details about your home. This includes your address, condition, and size. Some iBuyer services also allow you to upload photos of your home. An important advantage of selling a home to iBuyers is that you can sell a house as-is. This means that you do not have to invest in home repairs before selling your house.

While iBuyer does stand for instant buyer, you might not receive a cash offer for your home instantly. It can take a day or two for the iBuyer company to calculate how much your home is worth and to present a cash offer. Once you have received an offer, you can either accept it or reject it. You aren’t forced to accept the first iBuyer offer that you receive. In fact, some specialized real estate websites allow you to receive and compare multiple iBuyer offers at once. While some iBuyer companies allow you to negotiate the cash price, not all iBuyers do. iBuyer offers can be non-negotiable, and they often expire after a few days.

With an iBuyer, you won’t need to have your home listed, marketed, or staged. While a computer algorithm might come up with a value for your home, your home sale is still handled with a human. iBuyer companies usually assign a specialist or agent to work with you throughout the iBuyer sale process. Even so, a large amount of the selling process will be done digitally. Instead of needing to have open houses and potential buyers roaming through your home, all that’s needed might be an in-person inspection by the iBuyer. If you accept their offer, the iBuyer will send in a home inspector to check to see what kind of repairs are needed. The costs of repairs will be deducted from your offer. You won’t need to have the repairs done yourself, as the iBuyer company will handle the repairs. Once a home inspection is completed, you'll receive a finalized offer with the adjusted price.

The general steps to selling your home to a iBuyer company are:

1. Enter details about your home. This includes your home’s address, size, and condition. You will also want to point out anything that might add value to your home, such as recent renovations or unique features. This will usually only take a few minutes to complete and submit. You may also want to take pictures or even a video walkthrough to attach to your submission.
2. Wait for an offer. It can take a few minutes to a few days to receive an initial cash offer from your iBuyer company. Some iBuyers, such as Zillow, even have listed cash offers already available when you search for your home in certain cities. Cash offers by iBuyers are first calculated usually with an algorithm based on comparable properties. A human then reviews the offer, with the price possibly being adjusted based on your home’s specific characteristics and attached photos.
3. Once you have received an offer, you can either accept it or walk away. You’re not obligated to accept any cash offer that you receive. If you feel that their offer is too low, you may be able to negotiate the offer with your assigned specialist or agent. Offers are usually only valid for a few days. If an offer does expire, you might be able to renew your offer, but your cash offer price might be different.
4. If you do accept the iBuyer’s initial offer, the offer price isn’t set in stone yet. An in-person home inspection will be conducted either by one of the iBuyer’s employees or by an estimator. They will look to see what repairs might be needed and to gauge the condition of the home. If any repairs are needed, the estimated cost of these repairs will be deducted from your offer price. Some iBuyer companies allow you to have these repairs done out-of-pocket too.
5. If you agree to the estimated repair costs and the finalized offer price, you can choose a closing date that works best for you. Some iBuyers allow a closing date in as little as 10 days. Other iBuyers have features that allow you to stay in the home for a few more days, or provide free moving services. You’ll receive your money in cash a few days after closing.

iBuyer Companies

Some of the largest iBuyer companies in the United States include Opendoor, Zillow, Redfin, and Offerpad. Other companies and real estate brokerages that offer iBuyer programs include HomeLight, Orchard, EasyKnock, We Buy Ugly Houses, HomeVestors, Homeward, ExpressOffers by eXp Realty, Keller Offers by Keller Williams Realty, and RealSure by Realogy.

Opendoor

Service Charge: 5%

Time to Get an Offer: In Minutes

Opendoor is one of the largest iBuyers in the United States and operates in over 20 markets. With Opendoor, you can get a cash offer for your home in just a few minutes. After a home inspection, which can be done by a video walkthrough, any repairs that are identified as necessary will be deducted from the offer. You can walk away from the offer at any time without any penalties, as long as it is before the closing date.

Like other iBuyers, Opendoor makes money mainly through a service fee that they charge based on the home’s sale price. The maximum service fee that Opendoor charges is 5%. This fee covers real estate commissions that you would otherwise need to pay yourself on a normal home sale. Repairs and closing costs are separate and are not included in this service fee.

There are some requirements in order to be able to sell your home to Opendoor. For example, Opendoor doesn't buy mobile homes, homes in flood zones, foreclosed homes, and condos and duplexes in some markets. To value a home, Opendoor uses comparative market analysis (CMA) to come up with a rough market value. This is then adjusted by your home’s characteristics, such as age, size, condition, and things such as unique features. An offer is then made, which also takes into account local market trends and conditions.

Where Does Opendoor Operate?

You can only sell your home to Opendoor in the following markets:

Zillow

Service Charge: 8.5%

Time to Get an Offer: Instantly with Zestimate, Two Days with Zillow Offers

Zillow currently operates in 25 cities as a iBuyer through Zillow Offers. It can take a few days to receive an offer, which is calculated using both algorithms and by humans. Zillow’s offers are non-negotiable. In some cities, Zillow even uses their Zestimate to provide an instant cash offer. Once you search for your home on Zillow, you can then sell your home to Zillow for your home's Zestimate value.

Zillow says that their Zestimate’s median error rate is 1.9%, which means that their Zestimate offer would be around 1.9% of the true market value. Selling your home directly to Zillow for 1.9% less might be worth it if you need a quick and easy home sale.Besides Zestimates, Zillow Offers claim that they offer market value, with the average Zillow Offer being just 0.22% less than what the home would normally sell for.

Zillow’s service charge is usually around 8.5%, but in some cases, it can even be higher than 10%. As an example of Zillow's pricing and fees, Zillow charges about 6% to cover selling costs, such as real estate commissions. Another 2.5% is a Zillow service charge, which Zillow describes as a convenience charge for the iBuyer service. This makes up for roughly 8.5% for selling your home directly to Zillow, excluding closing costs. Along with Zillow cash offers being just slightly below the home’s fair market value, selling to Zillow can mean that you’ll take home roughly 3% less than if you would have sold the home traditionally. This makes up for the convenience and speed that Zillow provides.

The cities that Zillow currently operates in, along with their Zestimate instant cash offers, include:

Redfin

Service Charge: 5% to 13%

Time to Get an Offer: One Day

Redfin’s iBuyer service, called RedfinNow, is available in 20 markets in the United States. It takes one day to receive an offer, which will then expire after five days. If you do accept Refin's cash offer, you can have a closing date in as soon as 10 days, or as long as 90 days. RedfinNow’s service charge ranges from 5% to 13%, and will depend on your property and location. If you’re looking for the convenience of not having to worry about renovations, but you’re not in a hurry to sell your home, Redfin’s Concierge Service takes care of home renovations and home staging for a 2.5% listing fee.

These are the 20 markets that RedfinNow operates in:

Offerpad

Service Charge: 5%

Time to Get an Offer: One Day

Offerpad operates in a more limited number of markets, but they do offer a variety of options alongside their iBuyer service. Offerpad charges a service fee of 5%, and you can get an offer in 24 hours or less. This service fee covers real estate commissions, which means that you won't need to worry about paying more. You can also choose to list your home with Offerpad and have a back-up cash offer just in case, for real estate commissions of 6%.

Offerpad's cash offers expire after four days, but they can be renewed with a new offer. Offerpaid requires a home inspection to be done within 15 days of accepting their cash offer. If repairs are needed, you can either make the repairs yourself, or the estimated cost of the repairs can be deducted from your proceeds.

One feature that Offerpad provides is their Extended Stay program. You can stay in your home for up to 3 days after closing for free, but you will need to make a security deposit. Offerpad also pays for a professional moving company to move you to your new home if it is within 50 miles.

Cities that Offerpad operates include:

HomeLight

Service Charge: 1.5% to 4.0%

Time to Get an Offer: One Day

With HomeLight, you can either choose to sell your home directly to HomeLight through their HomeLight Trade-In service, or connect with their network of cash buyers and investors with HomeLight Simple Sale.

HomeLight’s Trade-In service involves HomeLight buying and selling your home, while you get the cash to buy a new home. By trading-in your old home, you can get cash to make a strong cash offer on your new home. HomeLight Trade-In is only available in four states: California, Colorado, Texas, and Florida. In return, you'll need to pay HomeLight a service fee based on how long HomeLight needs to own the home before it is sold. This can be as little as 1.5% for the first two months to as high as 4.0% for the first two months, with an additional 1% per month. The fee is lower if you use HomeLight Home Loans, while the fee is higher if you use another lender.

Do iBuyers Make Fair Market Offers?

iBuyers generally try to make a cash offer that is as close to the home’s fair market value as possible. That’s because iBuyers make money based on the fees that they charge, rather than buying low and selling high. These fees are taken out of the offer price, meaning that your net proceeds from the home sale is your cash offer minus fees and closing costs.

Example of an iBuyer Sale

iBuyer cash offers are usually around a few percentage points of what the home would have otherwise sold for if it was listed traditionally by a real estate agent. For example, let’s say that the market value of your home is $500,000. If you want to sell your home directly to Opendoor or Offerpad, then they might offer you a cash offer of around $500,000 as well. Both Opendoor and Offerpad charge a service fee of 5%. Seller closing costs might amount to 1%, and repair costs might be around 1% as well. What would be your net proceeds from this iBuyer sale?

• Cash Offer: $500,000
• Service Fee (5%) = $25,000
• Closing Costs (1%) = $5,000
• Repairs (1%) = $5,000

After subtracting Opendoor’s service fee, closing costs, and repair costs from the cash offer, the net proceeds from this home sale would be $470,000. If you were to sell your home with a real estate agent, then the closing costs and repair costs would largely be the same. Opendoor’s 5% service fee is also similar to the average real estate commission in the United States, which is around 5% to 6%. However, what would be different would be the selling price of the home. Listing your home on the open market might fetch a higher selling price, possibly even over the fair market value of your home. By selling with an iBuyer, you’re getting a guaranteed price, but that also means that there’s no possibility for a bidding war or any higher offers.

How Do iBuyers Make Money?

iBuyers make money based on a service fee that they charge. Rather than buying homes for a low price, renovating them, and then selling the home for a higher price, iBuyers buy homes for market value, but pocket the service fee. This means that iBuyers are more about buying and selling a large volume of homes for a small profit margin. That is why iBuyers typically only buy homes that are in good condition and don’t need expensive or lengthy repairs. They want to buy and sell the home quickly for a fast turnaround, without owning the home for a long period of time. That’s because owning the home means that they’ll need to pay property tax, utilities, and the cost of financing the property.

Some of the largest iBuyers in the United States, such as Opendoor, Zillow, and Redfin, are publicly traded companies, which gives us a glimpse at their financials. For example, let's look at Zillow's results for 2019. In 2019, Zillow Offers bought 6,511 homes and sold 4,313 homes. During the fourth quarter of 2019, Zillow Offers bought 1,787 homes and sold 1,902 homes. While Zillow Offer's revenue for 2019 was $1.4 billion, and revenue for Q4 of 2019 was $603.2 million, not all of that was profit. In fact, Zillow Offers made a loss on average.

The average price that they bought a home for was $286,168, and the average price that they sold a home for was $317,155. This gives a gross profit of $30,987 per home. However, there are other costs to their iBuyer service, such as repairs and real estate commissions. On average, renovation costs were $14,860 per home, selling costs were $13,736, while holding and interest costs were $8,798.

Stats for the average Zillow Offer home:

• Sold for $317,155
• Bought for $286,168
• Renovation costs of $14,860
• Selling costs of $13,736
• Holding and interest costs of $8,798

After subtracting all of the various costs, Zillow Offers on average lost $6,407 per iBuyer home that they bought and sold. How does Zillow expect to make money if they are losing money now? They can cut costs, such as the cost of renovations and repairs. They also make money through their other products and services, such as home mortgages. Based on their Q4 2019 shareholder letter, Zillow expects to eventually make a 4% to 5% profit margin. That means that for a $300,000 iBuyer home, they would make around $15,000.

Why Use an iBuyer?

The main advantages to using an iBuyer real estate service include:

• Sell your home quickly
• No open houses or house tours
• Don’t need to worry about repairs
• Choose your own closing date to fit your moving schedule
• Guaranteed cash offer

The disadvantages of an iBuyer include:

• iBuyer offer might be below market value
• Not listing your home means that there’s no chance of getting a higher public offer
• iBuyer service fees and charges can be more than average real estate commissions
• iBuyers won’t buy some homes in some areas, such as mobile homes and condos
• iBuyers might not operate in your local market or city