The real estate market is evolving, with millennial buyers now comprising the most active demographics of home buyers for the sixth consecutive year, according to research from the National Association of Realtors®. These buyers are often attracted to the character and price of older homes being sold by downsizing baby boomers, creating opportunity for home flippers. Flippers can buy these older homes, update them to give a modern touch with amenities millennial buyers want, and sell for a profit.
However, with the increased evolution in the market and the flipping business, as well as advances in the technological tools underpinning real estate platforms, a new trend is also emerging–the iBuyer.
iBuyers use an algorithm, leveraging technology and a “proprietary valuation model” to assess market value for a property, and then make the offer directly to the homeowner. If the offer is accepted, the iBuyer then takes possession and re-sells the home. The iBuyer movement grew out of the need for a departure from the arduous process associated with a typical real estate transaction. iBuying allows the consumer to have a home buying process that is “simple, instant, and hassle-free,” according to a mission statement from iBuyer OpenDoor.
There are several benefits of iBuying, such as flexible close dates, allowing the seller to choose when they want to vacate, generally within 10 to 60 days, and transactions are conducted in cash. For a seller, iBuying presents a convenient option to sell their house.
However, while iBuying may seem like a “magic solution” to a consumer’s real estate woes, your clients should be advised that there are hidden costs to doing business this way. Here are just a few:
• What is often marketed by iBuyers as an “instant offer” ends up typically being not so instant. Offers are contingent on completion of a home inspection, and according to Forbes, 9 out of 10 people who show their home to an iBuyer end up using a traditional agent.
• According to MarketWatch, sellers actually earn 11% less through iBuyers for their homes than selling on the open market;
• Most iBuyers have a fee-based model, which charges sellers 6-8% of the purchase price depending on how long they estimate the property will take to sell.
• There can also be other “closing fees” and “transaction costs,” such as repairs, that can come into play in an iBuying situation and be deducted from the seller’s profits.
This is not to say that iBuying isn’t a good option for selling homes, but, as with any major financial decision, it’s important for buyers to do their research first and be sure they’re aware of all of the costs and details they’ll be facing to determine which direction is the right one for them.
Sellers may be confused as to how iBuying differs from house flipping. Here are a few general points to consider:
• Flippers make their profits from buying properties low and selling high. To do this, they typically target distressed properties that they renovate to sell for market value or above.
• iBuyers focus more on homes in good condition that they can purchase and re-sell at market value. They only make minimal cosmetic changes to the property to help it sell faster, and profit from charging the seller fees for the convenience of their service.
Overall, iBuyer and flipper companies both are in similar parts of the real estate market but target a different type of property and a different customer. iBuyers prefer to be thought of as a “financing vehicle” rather than a flipper, as they essentially lend a line of credit to the homeowner, using the sale of the home as collateral. iBuyers allow customers to “trade-in” their old home for a new one, using their financing as a bridge to purchase their next house while their previous one is pending sale.
Flippers, by contrast, make their money by buying and renovating previously “unsellable” or otherwise undesirable properties for top dollar, keeping the profits to fuel new projects. This approach can be a particularly valuable avenue for first-time homebuyers who would like a home with character, and the latest in style and modern touches, but for an affordable price. A “hybrid” flipper company, such as House Buyers of America, is able to combine the technology and speed of an iBuyer with the operational capacity to conduct major renovation projects on the homes it purchases to deliver the best of both worlds to the market.
The increase in technological tools and algorithms has complicated the real estate process in some ways, however, with these innovations have come increased options and avenues for consumers to achieve their homeownership goals. When it comes to deciding which avenue is best for your clients, whether it be iBuying or purchasing a flip house in a more traditional real estate transaction, it typically comes down to their goals, timeframe, and financial situation. If they are in a time crunch to sell, value the convenience of having the process handled for them, and have the extra cash to pay for this service, iBuying may be their route. However, iBuying is not without its risks and extra costs, which buyers should be sure they are aware of up-front. If, however, your client is more focused on purchasing a home that has modern updates for a reasonable price and they aren’t looking to move at a breakneck pace to get there, a flip may be just what they are looking for.
Either way, it’s an exciting time to be in the real estate industry. As the field moves toward finding that happy medium between the traditional model and iBuyer approaches, future evolution and growth potential is virtually limitless.
About the Author
Nick Ron is a professional real estate investor and the founder and CEO of House Buyers of America Inc., a fast-growing, award-winning residential real estate investment company. Since 2001, House Buyers of America deploys a direct approach that cuts out the middle man to buy its clients’ homes fast, in as-is condition, and through a hassle-free process, to disrupt the traditional real estate agent model. For more information, visit www.housebuyersofamerica.com/buy to view the features and functionality of the House Buyers of America’s newly launched web portal.