A Robot Might Buy Your House

“Sell your home, skip the hard parts.”

That was the headline on the one-page flyer that arrived in a friend’s mailbox the other day. You may have received one.

It was from a company that offers to buy homes for cash directly from an owner. Quick close. Avoid the supposed hassle of putting it on the market.

Companies like this are called “iBuyers”. They use automated valuation models (AVMs) and other information technology to make instant (hence the “i”) cash offers to residential home owners. Funded by Wall Street and wealthy venture capitalists, these firms rely on robots to determine a house price, sight unseen.

iBuyers seek to buy at a wholesale price and then quickly resell at a profit after some minor repairs. Alternately, they might hold some houses as rental properties for a period of time.

Several heavily-funded iBuyer companies have sprung up in the last couple years but none of them operates nationwide. Each has opened in selected markets and we are just now seeing a couple of them show up in metro Denver.

While the well capitalized iBuyer companies are a new phenomenon, the concept has been around since real estate was created. In any market, there are always a few sellers that value speed and convenience over everything else. Historically, this has been 4% to 6% of the market.

Who are these sellers? It might be grown kids selling a recently deceased parent’s home in a distant state and not wanting to take the time and effort to find an agent. Or, it could be an owner with equity facing financial difficulties that has him depressed and distracted, which makes a quick, cash sale look like an attractive alternative.

This demand for quick liquidation was met in the past by local entrepreneurs in each market with access to small lines of credit that allowed them to act on these rare opportunities.

Now, the high-tech iBuyer company seeks to meet this need and to expand the market – to convince more sellers to think in terms of convenience instead of maximizing their net bottom line when selling a home.

Why should you care about any of this?

After all, it’s unlikely that you are wanting to have 10% less money in your pocket after selling to an iBuyer than you’d have by going the normal route of using a real estate agent.

HERE’S WHY: We are finding that the robots generating these offers are like human beings in one important respect – they occasionally make mistakes.

TRUE STORY: One of our agents listed a house for a seller recently and decided to see what an iBuyer would offer for the property. He was surprised when it came back at a price that was significantly over the true value of the property. Even with the iBuyer’s large “convenience fee” and the seller paying our agent’s fee, the seller would end up with more net money in her pocket than she’d likely get from a regular buyer.

The price the iBuyer was willing to pay in this case clearly exceed fair market value. Something was wrong with the algorithm relied on for determining a price on this property. Simply put, the robot screwed up.

These large iBuyer companies, however, don’t have to be right on every single transaction. They are purchasing large quantities of homes and just need to be right on a statistically significant portion of them. The relatively few mistakes they make are paid for by the majority of properties where they buy at a true wholesale price.

While the iBuyer company is a relatively new force in the marketplace, we are already adding it to our repertoire of strategies we can use to help the vast majority of regular sellers – those of you looking for full retail value on a home sale and wanting to put the maximum number of dollars in your pocket.

Knowing that the iBuyer companies will mistakenly offer more than fair market value in some cases, we will solicit iBuyer offers when putting your house on the market. We treat them like any other buyer. It is one more offer that you can consider.

Tapping into this additional buyer pool does not work with every property because iBuyer companies only buy certain types of homes. They tend to prefer houses in urban and close-in suburban areas. They also are not interested in higher price properties. They will likely stay away from properties priced in the top 25% if the market, which is currently over $600k in metro Denver.

For the right kind of property however, it makes sense to see what iBuyer will offer. Doing so is consistent with our goal of getting sellers the most net dollars in their pockets after closing.