“I” (Instant) Buyers – A Tale of Two Sellers

We’ve written recently about iBuyer companies.

iBuyers are well-funded venture capital companies that buy homes for cash, mostly at wholesale prices directly from an owner and resell the property at retail value on the open market for a profit.

They are called “iBuyers” because they make cash offers almost “instantly” using AI (computer algorithms) to arrive at an offering price. Their value proposition to a potential seller is ease, convenience and certainty of closing. That convenience comes, however, often at the expense of a disproportionate amount of a seller’s equity.

How much? What is the real cost?

Two recent, real life examples show the cost can be substantial. Sellers can find an agent to facilitate a normal sale and often put substantially more money in their pockets. And a really good agent can make that normal sale reasonably easy and convenient.

Both of the case studies shown below were homes in Highlands Ranch and they occurred within the last four months. (First Quarter 2019)

Seller No. 1:

This seller got an instant cash offer at $465,000 from an iBuyer company. From that price, the iBuyer would deduct a $33,000 “service fee” along with a $6,000 concession from the seller to cover the cost of needed carpet and paint. Bottom line, the seller would get $426,000.

Seller No. 1 accepted this offer and the iBuyer quickly resold the property at market value. Here are how the numbers worked out:

Again, the net to the seller was $426,000 from selling to the iBuyer company. The iBuyer installed carpet and painted the interior of the home and put the property on the open market in the MLS and received $495,000. Deducting the cost for carpet and paint and the commission paid to sell the home, the iBuyer company netted $475,000, with a very healthy company profit.

Seller No 1 could have found an agent that would have managed the process of getting the paint and carpet done and sold the house at a minimum of $495,000 in the MLS. As shown in the last column of the table above, the seller could have walked away from closing with $458,000, which is $32,000 more than Seller No. 1 actually received by selling to the iBuyer.

Cost to seller of the convenience of the iBuyer alternative was at least $32,000.

Seller No. 2:

This seller solicited an iBuyer offer but did not take it. Instead, she found an agent and sold the home on the open market. Here is how this scenario played out:

Seller No. 2 would have netted $476,000 after paying the iBuyer the service charge of $34,000. Instead, the seller found an agent and sold on the open market for $585,000. After deducting for the typical commission, the seller walked away with $548,000 … $72,000 more than if the seller had taken the offer proposed by the iBuyer.

The iBuyer alternative has some limited application to a very small percentage of home sellers that want to accept a wholesale price for their properties. For most home owners, however, a regular sale at retail price using a skilled agent will be quite easy and convenient … and immensely more profitable.