What are iBuyers in real estate?

by | Oct 19, 2021 | Buying, Real Estate Glossary, Selling

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iBuyers are a new category of real estate company that purchases homes directly from homeowners. The term iBuyer is short for “instant buyer” because they use automated valuation models (AVMs) to generate offers faster than typical buyers. 

Although iBuyers offer the chance of a quick and painless closing, there are drawbacks as well. iBuyers are picky about which homes they will buy, they may not offer full market value, and they often charge substantial fees in exchange for the ease of a fast closing.

Home sellers should consider their options carefully before deciding whether selling to an iBuyer is right for them. This guide answers some of the most common questions sellers ask us about iBuyers so you can walk into your next home sale with eyes wide open.

How does selling to an iBuyer work?

Despite the name, “instant” buyers will typically not give you a full, legally binding offer immediately. It’s typically a two-step process. First, you answer an online questionnaire that includes basic information about your property in order to determine if your home is eligible and (if it is) receive a preliminary offer. If you decide to move forward once you’ve received your preliminary offer, the iBuyer will typically send a representative to your home to do a more thorough evaluation of the property before submitting a final offer. 

Although it isn’t truly instant, you can expect an offer in as little as 24 hours with an iBuyer, and that’s without the inconvenience of showings and open houses.

Because iBuyers offer cash, the process of closing is typically more straightforward than with a financed offer. There are fewer contingencies that could cause the deal to fall apart once you’re under contract. Some iBuyers also offer flexible closing timelines, where you can keep living in your house for days or weeks after your closing date, reducing the stress of a sudden move.

How much does it cost to sell to an iBuyer?

iBuyers are great for people who need to sell fast, but what about sellers who want to maximize their proceeds? This is where iBuyers are often a worse choice than selling on the open market.

The financial disadvantages of selling to an iBuyer boil down to three things:

  • Higher fees: Each iBuyer has their own service fee structure, with some charging as much as 13% of your sale price in fees. These fees have come down over time to as little as 5%, but sellers should know that there are ways to save far more than that. For example, Trelora offers full service listings for a fraction of the cost, which would save a seller of a $500,000 home about $7,000 compared to even the lowest iBuyer fees. 
  • Lower offers (usually): iBuyers usually offer less than your home would sell for on the open market. One of the ways they make money is by reselling your home for more, and unlike fix-and-flippers, they typically don’t do much remodeling before they sell. That means they are hoping to purchase homes for less than they are worth from sellers who are willing to trade some equity for the convenience of a quick sale. Since iBuyers are working hard to compete with one another and gain market share, they will sometimes offer prices close to or even above market value in places where they expect prices to rise quickly.
  • Lack of competition: In a competitive market, every seller wants a bidding war. Multiple interested parties will drive the price up and ultimately increase your proceeds. When you sell to an iBuyer, you’re selling your home off-market, so you will lose the upside of this kind of competitive dynamic. 

Are there risks with selling to an iBuyer?

Your home is likely to be your most valuable asset. That means that getting your home sale right is extremely important. 

There are some risks with selling your home to an iBuyer, especially if you do so without an agent representing you. Remember, iBuyers are large companies that buy hundreds or thousands of homes per year, and negotiating your home sale is a zero-sum proposition. If they make more, you make less. 

If you wouldn’t represent yourself in court or treat yourself if you got sick, you should think twice about going into an important financial transaction against a large corporation without having a trusted ally in your corner. That’s why we always recommend that even if you sell to an iBuyer, you work with an experienced real estate agent as your advocate. 

It’s also important to consider that because iBuyers are taking a large financial risk by buying a home worth hundreds of thousands of dollars in exchange for a relatively small profit, they can turn on a dime. In 2020, during the covid pandemic, iBuyers stopped buying overnight and some even cancelled already-signed contracts with sellers. Just this week, Zillow abruptly stopped buying homes for the remainder of the year, again demonstrating that iBuying is still subject to boom-and-bust cycles as the model matures.

At Trelora, we represent hundreds of sellers every year as they consider whether an iBuyer is best for them. And unlike the iBuyer, who is your adversary in a negotiation, our agents have a fiduciary duty to work in your best interest. 

Which iBuyers should I consider?

The first company to pioneer the iBuyer model is Opendoor. Founded in 2014 and based in San Francisco, Opendoor has bought more homes using the iBuyer model than any other company. However, they are far from the only iBuyer in business. 

Offerpad and Knock are two other recently-founded and well-funded companies who offer a similar model to Opendoor. 

Additionally, established brands Zillow, Redfin, and Keller Williams have all begun to offer iBuying services to some sellers in select markets. 

If you live in a growing metro area, especially in the West and South, there is a good chance that one of these iBuyers operates in your area.

Although iBuying is becoming more popular, it still represents only about 1% of all homes sold.

How does buying a home from an iBuyer work? 

If you’re in the market to buy real estate, you may wonder what it’s like to purchase a home from an iBuyer. In most ways, buying from an iBuyer is very similar to buying a home directly from an individual seller. Most people will work with a buyer’s agent to find the right home for them, including homes listed by iBuyers and homes listed by owner-occupants.

The one major perk to buying a home from an iBuyer is that by the time they are selling, the home is always unoccupied. That means it can be easier to get in to view the home than it might be with another home. You may even be able to use the iBuyer’s app to open the door on your own without a showing agent. 

Although easy access is appealing, when buying a home you are making a choice that will last years or even a lifetime — make sure you take the time to find the right home for you and your family, not just the one that is easiest to open for a showing.

What’s in it for them? How do iBuyers make money?

With all the benefits of selling to an iBuyer, you may wonder how they make money with such a high-cost business model. The short answer is that they don’t, at least not yet. These companies have raised capital to be able to purchase homes, and although they aren’t yet making money from it, they are hopeful that they will in the future when (they hope) selling to them becomes the de facto way to sell your home.

With that said, there are three ways that iBuyers are recouping some of the costs of buying and reselling your home.

First, they charge fees. Just like traditional real estate agents, they make most of their money from the closing costs from the transaction itself. They often charge even higher fees than the already-high 6% that most agents charge. With iBuyers, you are paying a premium for a less stressful sale, but you should consider whether there are ways to pay less in commission and net more, like working with Trelora to sell.

Second, they hope the home value grows. Since they will own your home for anywhere from a few weeks to a few months before they sell it, they are hoping the home will appreciate in the meantime to their benefit. In the current real estate market, iBuyers have benefitted from unusual levels of price appreciation, but this trend is likely temporary.

Third, they may attach other services like Title and Escrow. You typically have more flexibility than it may seem when it comes to choosing providers for these services, so don’t be afraid to assert your options and make sure you’re getting the best possible deal and the best possible services for every part of the real estate transaction. 

Should I sell my home to an iBuyer?

There is no one-size fits all solution to selling your home. If you have a relatively recently-built, single family home in a moderate price range and in a growing metropolitan area, selling to an iBuyer may be a good fit for you. 

The main benefit is timing, so if you need to move quickly it’s wise to consider iBuyers — solicit as many instant offers as you can get to find the best deal for you. 

With that said, if your goal is to maximize your proceeds, there are other options that may be a better fit for you than selling to an iBuyer. Other innovative companies like Trelora exist to make your open-market transaction simpler and more affordable, and will most often lead to you taking home more money from your sale.

You should also know that working with an iBuyer doesn’t prevent you from hiring an agent — it’s always in your best interest to have an advocate on your side. The landscape of real estate is growing more complex, and agents who have experience working on deals with iBuyers will have useful guidance to help optimize your experience, and your bottom line.

If your home is a condo, is older, is in need of repair, or is at a luxury price point, it’s unlikely that iBuyer offers will be an option for you at all. Look at other ways to simplify your sale and optimize your proceeds.

Want to know what the best option is for your specific situation? Book a free, no commitment listing consultation today. We’ll come with any iBuyer offers you’re eligible for, plus a comprehensive analysis of the local real estate market so you can walk into your sale with every option available.

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The information contained in this blog is for general information purposes only, and while believed to be accurate, Trelora assumes no legal responsibility for accuracy. Information provided within should not relied upon as legal advice. Please consult with your local advisors for independent information regarding availability and applicability in your market.