Pat Hune, Broker, 1st Southwest Realty, May 2019
Most people have heard or seen the commercials from iBuyers like OpenDoor, Offerpad and others. What is an iBuyer? It is a company that offers instant cash for your house with no repairs. They offer to buy your house in a matter of minutes for a price determined by some type of a valuation model. If you are in agreement with the price you can close in a matter of days. You may be able to rent the house back (for an extra fee of course). This may seem like the iBuyer is doing the seller a favor. There is an old saying if something sounds too good to be true it probably is too good to be true. There has to be a catch and there is. These buyers are basically house flippers in sheep’s clothing. They are not your friends. They want to steal your equity in exchange for a fast sale.
The nice realtor you talk to from the iBuyer brokerage is not the person buying the house. The actual buyer is an investor or investment company. They are doing this to make money off of you. The iBuyer will charge a commission/service fee plus additional money to cover their risk they are taking to provide you instant equity. These charges can be 12%, or more, of the offer price. But wait! There’s more!
Once the seller agrees to the price the iBuyer will bring in a bunch of inspectors. These inspectors will pick out every tiny flaw and reduce the price accordingly. So instead of getting the original the price less the fees charged by the iBuyer the actual amount will be much, much lower.
Why would a seller do this? Personally I cannot figure out a good reason to give up thousands of dollars of equity to sell a house quickly. If the house is in Tempe, Chandler, Scottsdale and other hot markets the house will sell quickly regardless of the condition if the price is right. But I can understand the need to move quickly due to a financial hardship, job change, life crisis or other event. If you are thinking about accepting the iBuyer offer please call or text me at 480-703-1976 to get a second opinion. I can respond quickly and may save you thousands of dollars. If you don’t believe me check out the article below recently published in Forbes Magazine.
According to Chase Martin’s article in Forbes selling to an iBuyer is very hard on the seller’s bottom line. Chase said “So what does this really mean for the homeowner’s bottom line? Most homeowners purchase their home with a mortgage. If you purchased your home for $400,000 with 20% down, you showed up to closing with $80,000 of your own money, which is also your equity. If the value of your home remains the same and an iBuyer offers you $380,000 for your home — a 5% discount to fair value — you will lose $20,000 on the value of your home, plus pay a 5% commission (an additional $19,000). This is a higher transaction cost compared to selling on the open market for $400,000. More importantly, compare that combined $39,000 to your original down payment of $80,000 — you will be giving up close to 50% of the equity you put into your home partly for the convenience of a quicker sale. Does the added cost make sense for the consumer? And this example does not include the repair deduction. Zillow (who has since exited the iBuyer business due to very high losses) explained that 90% of sellers who talked to its Instant Offers platform decided against the iBuyer offer and chose a traditional agent instead. If 9 out of 10 consumers pass, the pricing can’t be that compelling. Choice is good. However your home is generally your largest asset, so you definitely want to consult an expert before “iSelling.” That would be me.
Chase is right. Giving up $20,000 or $30,000 in equity does not make sense. It doesn’t cost you a penny to call or text me at 480-703-1976 for a market analysis and to discuss your options. I will work to help you get your home sold so you get the most money in your pocket versus putting it in an iBuyer’s pocket. I have investors I work with who are looking for distressed properties. It is highly likely I can get your a lot more money than you will get from an iBuyer. However you will never know unless you ask for a second opinion. But I digress.
The original point of this article is to talk about buying from the iBuyer who is now an iSeller. I recently helped a buyer purchase a home from an iSeller and it was not pleasant. Basically they put lipstick on a pig. (No offense to the pig lovers out there.) They paint, put in new carpet and appliances and do some other minimal repairs. This is despite the fact the iSeller made the original seller give them a deep discount for a laundry list of repairs. The iSeller will never do a majority of the inspection items. This is the exact opposite of flippers. Granted there are some bad flippers out there who may do shoddy work but most flippers do major renovations and the needed maintenance and repairs. The iSeller will provide a seller disclosure but with a lot of caveats because they have only owned the home for a few weeks. One would think they would have to disclose to the new buyer all the flaws they found. As of today there is no requirement for a seller to disclose the findings on an inspection they did when buying the home. To provide the unsuspecting buyer some recourse most of the iSellers offer a 30 day money back guarantee. If the buyer is not happy after the purchase has been completed they can give the house back to the iSeller. Of course the fine print says certain conditions apply to make this as difficult as possible.
My buyer made a full priced cash offer, contingent on appraisal and inspection but with no concessions towards closing costs. The home inspector found a litany of issues. The contractor estimated the repairs would cost in excess of $40,000. The buyer offered to continue with the purchase if the iSeller would reduce the price by $10,000. The seller refused to do anything but treat the termites. In this case the buyer had to have a four bedroom house in north Tempe in a specific school district. This house was the only one she could afford. She decided to continue with the purchase. So far the buyer has spent in excess of $15,000 and still has much to do.
Another issue is the iSeller typically allows potential buyers to go into the house unaccompanied by a realtor. This often results in the buyer being represented by the iSeller. This is referred to as dual agency. Dual agency means the realtor has limits on what they can and cannot disclose other than material facts. Do NOT do this! You need someone representing YOUR interests. The iSeller is there to make as much money as possible. They are not your friends. They will not disclose needed repairs. The iSeller realtor will not tell you what repairs the seller may be willing to do because dual agency prevents this. And they will do nothing to help the buyer cover the repair expenses. Bottom line be very careful before buying a house sold by an iSeller.