You’ve seen their ads on TV, Instagram and FaceBook promising you that its the easiest way to sell your home with no showings, you choose the date to move and you can even get a free local move. Sound to good to be true? This is not a simple yes or no question so lets explore these new iBuyer models.
A wave of different business models disrupting the traditional real estate model also happened to the real estate industry in 2005-2006 when there was low inventory. We again have low inventory however it isn’t as low as it was back then. I liken this new round of startups to the dotcom days of the late 90’s where everyone was trying to figure out how to sell things online and disrupt the bricks and mortar with clicks.
There are billions of dollars in commissions and much more in homeowner’s equity at stake so it’s not surprising that Corporate America and Silicon Valley are trying to get their share.
The big players in the iBuyer segment are OpenDoor, OfferPad, Knock and Zillow. Their value proposition is that they will make the home selling process easy, saving you money without the hassle of showing your home. They do this with an instant offer on your property as long as its worth $500,000 or less.
Sounds pretty cool!
Begs the question though…Is this good for home sellers or good for the iBuyer?
OpenDoor is the most known and is by far the biggest so let’s take a closer look at them, however all of the iBuyers follow this model. A quick pull of data from the Multiple Listing Service (MLS) in Phoenix, AZ shows they currently have 450 active listings in the MLS ranging in price from $114,000 to $495,000 and they’ve sold 2,081 properties in 2018. That accounts for 3% of the homes sold in the Phoenix MLS this year.
OpenDoor is a Silicon Valley based startup that is heavily funded and currently in 10 markets. Their business model is to purchase homes from sellers that don’t want to put up with the hassle of getting their home ready to sell, showing it to buyers and navigating the sales and closing process. They make an offer on your home and you choose a closing date convenient for you, close escrow and move on to your next destination. They promise a quick, simple, painless and stress free moving process for Homeowner/Sellers of homes under $500,000.
DO NOT mistake iBuyers for Traditional Real Estate Agents and Brokers. They aren’t even close to being the same as their is absolutely no fiduciary involved. OpenDoor and the rest of the iBuyers are in business to not only make money in fees they want some of your equity as well. Unlike Traditional Real Estate Brokers they are not representing you as a client, you’re on your own unless you hire a real estate agent to represent you. Since the iBuyers like OpenDoor aren’t representing your best interests I think it’s important to take a closer look at their transactions and fees to determine whether this is a win for you, the consumer, or a win for Corporate America, Silicon Valley and iBuyers.
I looked at several OpenDoor transactions in Gilbert and Chandler to see what they paid for the homes they bought from these homeowners and what they resold them for. I saw a consistent pattern of OpenDoor purchasing homes for $20,000 to $26,000 less than what they turned around and sold them for in the $200,000 to $300,000 range. This means the home seller gave away $20,0000 to $26,000 of their equity. That’s a large chunk of change to give up! To be fair I did not look at every sale just randomly clicked on listings to see what the delta was in Gilbert and Chandler.
Just like a Traditional Real Estate Agent/Broker, OpenDoor also charges fees to the homeowner when purchasing the home from you however they do not represent you and have no fiduciary responsibility to you. Their lowest fee is 6% then additional fees that range up to a total of 12% based on risk are added. According to some reports the average of these fees is 8% of the purchase price. Once the price is agreed to OpenDoor does what amounts to an inspection and then will require a credit for those repairs or a price reduction. In one example I saw they charged 9.5% in fees with an additional credit of $4,000 towards repairs on a home they bought for $210,000.
Let’s take a deeper dive into the real costs to do business with OpenDoor. In our example below we contend that the consumer could have sold their home for $264,000 with a traditional agent/brokerage. OpenDoor purchased this home for $243,600 from the homeowner/consumer then placed it in the Realtor MLS and re-sold the home for $264,000 on the open market.
We’ll assume no credits for repairs in the example as that can be varied. Our understanding is that IF OpenDoor needs to paint, replace carpet or do normal repairs this is put into the repair credit.
OpenDoor Traditional Realtor
Sales Price $243,600 $264,000
Traditional 3% Listing Fee $0 $7,920
OpenDoor Experience Fee (2.5%) $6,090 $0
Buyer Broker Charge (3%) $7,308 $7,920
Holding Cost Fee (1.5%) $3,654 $0
Market Risk Fee (2.5%) $6,090 $0
Total Fees $23,142 (9.5%) $15,840 (6%)
Credits for repairs $0 $0
Lost Equity to OpenDoor $20,400 $0
Estimated cash to seller at closing $220,458 $248,160
In this example we used the OpenDoor fee structure from a contract on a home we saw which charged these exact same fees totaling 9.5%. We then applied the fee structure to a sale we found in the MLS. That homeowner/seller lost $20,400 in equity by selling to OpenDoor for $243,600 when their home was really worth $264,000 on the open market.
Even if you just used a total fee of 6% ($14,616) like a Traditional Real Estate Agent/Broker the homeowner/seller would walk away with $228,984 in estimated cash at closing which is still $19,176 less than what they would have made by going the traditional route. That is a lot of money to give away…
Our conclusion: The consumer loses by selling to an iBuyer
By selling to OpenDoor or ANY of these iBuyers you as a Homeowner/Seller lose the ability to place your home on the open market. You’re limited to only 1 buyer giving you THEIR opinion of value which results in a lower sales price and less cash in your pocket. Even if you went to all of the iBuyers you’re still not exposing it to the open market. Most importantly you as a consumer should understand that they have no agency or fiduciary responsibility to you. You are not a Client you are a Customer. There is a HUGE difference between a Client whom you owe fiduciary responsibility to and a Customer. By not having someone represent your best interests you are relying on a company that has no obligation to do so.
The iBuyers and OpenDoor’s real business model is to get your home for the lowest possible price so they can resell it for a profit. That is the truth. They also want to sell you additional services in the future like mortgages and insurance.
By selling to these iBuyers you are easily giving upwards of $20,000 away of your hard earned equity. If you sell a relative's home from afar or just need to move quickly MAYBE I could see why giving away $20,000 could be worth it. However if you don’t have those constraints why do that? Why not hire a real estate broker so you have fiduciary representation and YOU get all that hard earned equity? It will be interesting to see how this business model progresses over the next 18-24 months.
As aways we welcome your questions, comments and are here for any of your real estate needs…